Cova Series Trust
Supplement dated May 1, 1998
to Prospectus dated May 1, 1998
This Supplement contains information relating only to those Portfolios of Cova
Series Trust (the "Trust") managed by Van Kampen American Capital Investment
Advisory Corp. ("VKAC"). Additional information concerning the Trust and all of
its Portfolios, including those managed by VKAC, is contained in the Prospectus.
Shares of the Portfolios managed by VKAC are no longer offered for sale.
Cross-references contained in this Supplement refer to headings in the
Prospectus unless noted otherwise.
PURCHASERS SHOULD BE AWARE THAT AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE
THAT THE MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
THE HIGH YIELD PORTFOLIO MAY INVEST A SUBSTANTIAL PORTION OF ITS ASSETS IN LOWER
GRADE CORPORATE DEBT SECURITIES COMMONLY KNOWN AS "JUNK BONDS." INVESTORS SHOULD
BE AWARE THAT SUCH INVESTMENTS INVOLVE A SIGNIFICANT DEGREE OF RISK. SEE "RISK
FACTORS - SPECIAL RISKS OF HIGH YIELD INVESTING" IN THE PROSPECTUS.
PORTFOLIOS MANAGED BY VKAC
Cova Investment Advisory Corporation, the Trust's investment adviser
("Adviser"), has engaged VKAC as a sub-adviser, to make investment decisions and
place orders for the following Portfolios:
Money Market Portfolio
Quality Income Portfolio
High Yield Portfolio
Stock Index Portfolio
VKAC Growth and Income Portfolio
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(for one share of each Portfolio outstanding throughout the period)
The following schedule presents financial highlights for one share of each of
the Portfolios throughout the periods indicated. The financial highlights have
been audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1997 presented below, and their report thereon
appears in the Portfolios' related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in the
Prospectus.
FINANCIAL HIGHLIGHTS
For Shares Held Throughout the Periods Indicated
MONEY MARKET PORTFOLIO
July 1, 1991
(Commencement
of Investment
Year Ended December 31 Operations) to
1997 1996 1995 1994 1993 1992 December 31, 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
........ ........ ........ ....... ........ ........ ...............
Income from Investment Operations
Net investment income 0.055 0.053 0.059 0.041 0.032 0.038 0.027
Net realized and unrealized gains (losses) _ _ _ _ _ _ _ _ _ _ _ _ _ _
........ ........ ........ ....... ........ ........ ...............
Total from investment operations 0.055 0.053 0.059 0.041 0.032 0.038 0.027
........ ........ ........ ....... ........ ........ ...............
Distributions
Dividends from net investment income (0.055) (0.053) (0.059) (0.041) (0.032) (0.038) (0.027)
Distributions from net realized gains _ _ _ _ _ _ _ _ _ _ - - _ _
Distributions in excess of net
investment income _ _ _ _ _ _ _ _ _ _ - - _ _
Return of capital distributions _ _ _ _ _ _ _ _ _ _ - - _ _
........ ........ ........ ....... ........ ........ ...............
Total distributions (0.055) (0.053) (0.059) (0.041) (0.032) (0.038) (0.027)
........ ........ ........ ....... ........ ........ ...............
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
........ ........ ........ ....... ........ ........ ...............
Total Return 5.49% 5.42% 6.01% 4.23% 3.24% 3.88% 2.75%*
........ ........ ........ ....... ........ ........ ...............
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $22.0 $31.0 $34.4 $75.9 $ 6.6 $ 4.0 $ 5.4
Ratios to Average Net Assets (1):
Operating Expenses 0.10% 0.11% 0.11% 0.10% 0.10% 0.10% 0.09%**
Interest Expense - - - - - - - - - - - - - -
Net investment income 5.49% 5.31% 5.68% 4.37% 3.23% 3.63% 5.11%**
Portfolio Turnover Rate N/A N/A N/A N/A N/A N/A N/A
Average Commission Rate Paid (2) N/A N/A N/A N/A N/A N/A N/A
(1) If certain expenses had not been
reimbursed by the Adviser, total return
would have been lower and the ratios
would have been as follows:
Ratio of Operating Expenses to Average Net Assets:0.68% 0.74% 0.64% 0.68% 0.86% 1.30% 1.11%**
Ratio of Net Investment Income to
Average Net Assets: 4.91% 4.68% 5.25% 3.79% 2.47% 2.43% 4.10%**
(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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<FN>
* Non-Annualized ** Annualized N/A Not Applicable
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
QUALITY INCOME PORTFOLIO
12/11/89
(Commencement
of Investment
Year Ended December 31 Operations) to
1997 1996 1995 1994 1993 1992 1991 1990 12/31/89
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.690 $10.871 $9.815 $10.886 $10.699 $10.618 $9.969 $9.930 $10.000
....... ...... ....... ........ ....... ........ ...... ....... .............
Income from Investment Operations
Net investment income 0.737 0.651 0.667 0.603 0.641 0.696 0.753 0.713 0.043
Net realized and unrealized gains (losses) 0.199 (0.359) 1.056 (1.071) 0.518 0.081 0.649 0.039 (0.070)
....... ...... ....... ........ ....... ........ ...... ....... .............
Total from investment operations 0.936 0.292 1.723 (0.468) 1.159 0.777 1.402 0.752 (0.027)
....... ...... ....... ........ ....... ........ ...... ....... .............
Distributions
Dividends from net investment income (0.726) (0.471) (0.667) (0.603) (0.641) (0.696) (0.753) (0.713) (0.043)
Distributions from net realized gains _ _ (0.002) _ _ _ _ (0.331) _ _ _ _ _ _ _ _
Distributions in excess of net
investment income _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Return of capital distributions _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
....... ...... ....... ........ ....... ........ ...... ....... .............
Total distributions (0.726) (0.473) (0.667) (0.603) (0.972) (0.696) (0.753) (0.713) (0.043)
....... ...... ....... ........ ....... ........ ...... ....... .............
Net Asset Value, End of Period $10.900 $10.690 $10.871 $ 9.815 $10.886 $10.699 $10.618 $ 9.969 $ 9.930
....... ...... ....... ........ ....... ........ ...... ....... .............
Total Return 9.08% 2.82% 17.99% (4.33%) 11.04% 7.61% 14.71% 7.99% (0.27%)*
....... ...... ....... ........ ....... ........ ...... ....... .............
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $49.8 $51.3 $41.4 $33.9 $51.1 $24.1 $ 6.8 $ 6.1 $ 2.5
Ratios to Average Net Assets (1):
Operating Expenses 0.60% 0.60% 0.60% 0.59% 0.60% 0.60% 0.60% 0.74% 0.70%**
Interest Expense 0.06% - - - - - - - - - - - - - - - -
Net investment income 6.41% 6.06% 6.42% 5.69% 5.82% 6.87% 7.45% 7.64% 7.83%**
Portfolio Turnover Rate 308.0% 320.3% 219.5% 177.6% 318.4% 231.9% 12.9% 59.3% 0.0%
Average Commission Rate Paid (2) N/A N/A N/A N/A N/A N/A N/A N/A N/A
(1) If certain expenses had not been
reimbursed by the Adviser, total return
would have been lower and the ratios
would have been as follows:
Ratio of Operating Expenses to
Average Net Assets: 0.70% 0.71% 0.75% 0.68% 0.70% 0.88% 1.10% 1.53% 9.15%**
Ratio of Net Investment Income to
Average Net Assets: 6.31% 5.95% 6.27% 5.60% 5.73% 6.59% 6.96% 6.85% (0.62%)**
(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.
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Non-Annualized ** Annualized N/A Not Applicable
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
STOCK INDEX PORTFOLIO
November 1, 1991
(Commencement
of Investment
Year Ended December 31 Operations) to
1997 1996 1995 1994 1993 1992 December 31, 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $16.126 $13.844 $10.587 $11.115 $10.552 $10.572 $10.000
........ ........ ........ ....... ........ ........ ...............
Income from Investment Operations
Net investment income 0.273 0.286 0.260 0.311 0.205 0.172 0.038
Net realized and unrealized gains (losses) 5.018 2.797 3.637 (0.337) 0.726 0.477 0.534
........ ........ ........ ....... ........ ........ ...............
Total from investment operations 5.291 3.083 3.897 (0.026) 0.931 0.649 0.572
........ ........ ........ ....... ........ ........ ...............
Distributions
Dividends from net investment income (0.268) (0.284) (0.260) (0.311) (0.205) (0.210) - -
Distributions from net realized gains (0.079) (0.517) (0.380) (0.185) (0.163) (0.459) _ _
Distributions in excess of net
investment income _ _ _ _ _ _ _ _ _ _ _ _ _ _
Return of capital distributions _ _ _ _ _ _ (0.006) _ _ _ _ _ _
........ ........ ........ ....... ........ ........ ...............
Total distributions (0.347) (0.801) (0.640) (0.502) (0.368) (0.669) _ _
........ ........ ........ ....... ........ ........ ...............
Net Asset Value, End of Period $21.070 $16.126 $13.844 $10.587 $11.115 $10.552 $10.572
........ ........ ........ ....... ........ ........ ...............
Total Return 32.91% 22.48% 36.87% (0.11%) 8.84% 6.22% 5.70%*
........ ........ ........ ....... ........ ........ ...............
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $90.4 $86.6 $86.0 $36.8 $91.3 $35.0 $ 6.8
Ratios to Average Net Assets (1):
Operating Expenses 0.60% 0.60% 0.61% 0.58% 0.60% 0.59% 0.40%**
Interest Expense 0.02% - - - - - - - - - - - -
Net investment income 1.32% 1.77% 2.41% 2.23% 2.29% 2.54% 3.02%**
Portfolio Turnover Rate 27.2% 1.3% 3.9% 47.1% 44.1% 85.7% - -
Average Commission Rate Paid (2) $0.0324 $0.0333 N/A N/A N/A N/A N/A
(1) If certain expenses had not been
reimbursed by the Adviser, total return
would have been lower and the ratios
would have been as follows:
Ratio of Operating Expenses to Average Net Assets:0.69% 0.67% 0.78% 0.80% 0.74% 1.21% 1.84%**
Ratio of Net Investment Income to
Average Net Assets: 1.23% 1.70% 2.24% 2.01% 2.15% 1.92% 1.58%**
(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.
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Non-Annualized ** Annualized N/A Not Applicable
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
VKAC GROWTH AND INCOME PORTFOLIO
May 1, 1992
(Commencement
of Investment
Year Ended December 31 Operations) to
1997 1996 1995 1994 1993 December 31, 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.986 $12.512 $10.306 $11.170 $10.282 $10.000
........ ......... ........ ........ ....... ..................
Income from Investment Operations
Net investment income 0.212 0.243 0.224 0.331 0.182 0.125
Net realized and unrealized gains (losses) 3.265 2.007 3.089 (0.864) 1.371 0.444
........ ......... ........ ........ ....... ..................
Total from investment operations 3.477 2.250 3.313 (0.533) 1.553 0.569
........ ......... ........ ........ ....... ..................
Distributions
Dividends from net investment income (0.211) (0.241) (0.232) (0.323) (0.182) (0.125)
Distributions from net realized gains (0.200) (0.535) (0.875) (0.008) (0.483) (0.162)
Distributions in excess of net
investment income _ _ _ _ _ _ _ _ _ _ _ _
Return of capital distributions _ _ _ _ _ _ _ _ _ _ _ _
........ ......... ........ ........ ....... ..................
Total distributions (0.411) (0.776) (1.107) (0.331) (0.665) (0.287)
........ ......... ........ ........ ....... ..................
Net Asset Value, End of Period $17.052 $13.986 $12.512 $10.306 $11.170 $10.282
........ ......... ........ ........ ....... ..................
Total Return 24.98% 18.18% 32.24% (4.54%) 15.01% 5.67%*
........ ......... ........ ........ ....... ..................
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $47.8 $31.6 $19.7 $10.9 $ 6.5 $ 2.6
Ratios to Average Net Assets (1):
Operating Expenses 0.70% 0.70% 0.69% 0.70% 0.69% 0.70%**
Interest Expense - - - - - - - - - - - -
Net investment income 1.36% 1.99% 2.05% 3.47% 1.84% 2.27%**
Portfolio Turnover Rate 94.5% 113.0% 180.1% 326.0% 135.9% 99.9%
Average Commission Rate Paid (2) $0.0548 $0.0566 N/A N/A N/A N/A
(1) If certain expenses had not been
reimbursed by the Adviser, total return
would have been lower and the ratios
would have been as follows:
Ratio of Operating Expenses to Average Net Assets:0.88% 1.02% 1.19% 1.49% 2.05% 3.69%**
Ratio of Net Investment Income to
Average Net Assets: 1.18% 1.67% 1.55% 2.68% 0.47% (0.73)%**
(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.
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Non-Annualized ** Annualized N/A Not Applicable
</FN>
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
HIGH YIELD PORTFOLIO
12/11/89
(Commencement
of Investment
Year Ended December 31 Operations) to
1997 1996 1995 1994 1993 1992 1991 1990 12/31/89
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.626 $10.446 $9.823 $11.287 $10.445 $10.410 $9.073 $9.974 $10.000
....... ...... ....... ........ ....... ........ ...... ....... .............
Income from Investment Operations
Net investment income 0.922 0.952 0.949 0.978 1.028 1.250 1.124 1.085 0.053
Net realized and unrealized gains (losses) 0.281 0.187 0.621 (1.464) 1.170 0.658 1.337 (0.901) (0.026)
....... ...... ....... ........ ....... ........ ...... ....... .............
Total from investment operations 1.203 1.139 1.570 (0.486) 2.198 1.908 2.461 0.184 0.027
....... ...... ....... ........ ....... ........ ...... ....... .............
Distributions
Dividends from net investment income (0.930) (0.954) (0.947) (0.978) (1.028) (1.250) (1.124) (1.085) (0.053)
Distributions from net realized gains _ _ _ _ _ _ _ _ (0.328) (0.623) _ _ _ _ _ _
Distributions in excess of net
investment income _ _ (0.005) _ _ _ _ _ _ _ _ _ _ _ _ _ _
Return of capital distributions _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
....... ...... ....... ........ ....... ........ ...... ....... .............
Total distributions (0.930) (0.959) (0.947) (0.978) (1.356) (1.873) (1.124) (1.085) (0.053)
....... ...... ....... ........ ....... ........ ...... ....... .............
Net Asset Value, End of Period $10.899 $10.626 $10.446 $ 9.823 $11.287 $10.445 $10.410 $ 9.073 $ 9.974
....... ...... ....... ........ ....... ........ ...... ....... .............
Total Return 11.54% 11.29% 16.69% (4.52)% 21.98% 19.12% 28.31% 1.86% 0.23%*
....... ...... ....... ........ ....... ........ ...... ....... .............
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $33.3 $41.1 $36.5 $19.7 $18.8 $ 5.4 $ 3.8 $ 2.9 $ 2.5
Ratios to Average Net Assets (1):
Operating Expenses 0.85% 0.85% 0.86% 0.86% 0.84% 0.87% 0.86% 1.01% 0.95%**
Interest Expense 0.02% - - - - - - - - - - - - - - - -
Net investment income 8.13% 8.89% 9.50% 9.48% 8.97% 11.67% 11.31% 11.43% 9.67%**
Portfolio Turnover Rate 109.4% 117.3% 118.9% 200.1% 213.1% 157.4% 147.6% 28.3% 0.0%
Average Commission Rate Paid (2) N/A N/A N/A N/A N/A N/A N/A N/A N/A
(1) If certain expenses had not been
reimbursed by the Adviser, total return
would have been lower and the ratios
would have been as follows:
Ratio of Operating Expenses to
Average Net Assets: 0.99% 1.04% 1.09% 1.16% 1.38% 1.79% 1.91% 2.42% 9.42%**
Ratio of Net Investment Income to
Average Net Assets: 7.99% 8.70% 9.27% 9.18% 8.43% 10.75% 10.25% 10.01% 1.19%**
(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.
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Non-Annualized ** Annualized N/A Not Applicable
</FN>
</TABLE>
See Notes to Financial Statements
INVESTMENT OBJECTIVES AND POLICIES OF
THE PORTFOLIOS MANAGED BY VKAC
Money Market Portfolio.
The investment objective of the Money Market Portfolio is to provide high
current income consistent with the preservation of capital and liquidity through
investment in a broad range of money market instruments that will mature within
12 months of the date of purchase.
Investment Program
The Money Market Portfolio seeks to achieve its objective by investing only in
the following securities and instruments: (a) obligations of or guaranteed by
the U.S. government, its agencies or instrumentalities ("U.S. Government
Securities"); (b) obligations of banks subject to U.S. government regulation as
well as such other bank obligations as are insured by a U.S. government agency
("Bank Obligations"); (c) commercial paper (including variable amount master
demand notes); and (d) debt obligations (other than commercial paper) of
corporate issuers.
U.S. Government Securities include Treasury Bills, Notes and Bonds issued by the
U.S. government and backed by the full faith and credit of the U.S. government,
as well as securities issued or guaranteed as to principal and interest by
agencies and instrumentalities of the U.S. government. Bank Obligations include
certificates of deposit and bankers' acceptances of domestic banks (or
Euro-dollar obligations of foreign branches of those domestic banks) subject to
U.S. government regulation and time deposits of federal and state banks whose
accounts are insured by a government agency as well as the accounts themselves.
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
The Portfolio may lend portfolio securities. The Portfolio may also enter into
repurchase agreements but only if the underlying securities are either
Government securities or First Tier Securities (see "Investment Quality" and
"Portfolio Maturity", below). The Portfolio may purchase and sell securities on
a "when issued" and "delayed delivery" basis. The Portfolio may borrow up to 10%
of its net assets in order to pay for redemptions when liquidation of portfolio
securities is considered disadvantageous or inconvenient and may pledge up to
10% of its net assets to secure borrowings. The Portfolio may invest up to 10%
of its net assets in restricted securities. A more complete description of these
investments and transactions is contained under "Investment Practices".
The Portfolio may also invest in Floating Rate Securities. Floating Rate
Securities provide for automatic adjustment of the interest rate whenever some
specified interest rate index changes. The interest rate on Floating Rate
Securities is ordinarily determined by reference to or is a percentage of a
bank's prime rate, the 90-day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an index of short-term
interest rates, or some other objective measure. Floating Rate Securities often
include a demand feature which entitles the holder to sell the securities to the
issuer at par. In many cases, the demand feature can be exercised at any time on
seven days' notice; in other cases, the demand feature is exercisable at any
time on 30 days' notice or on similar notice at intervals of not more than one
year. With respect to Floating Rate Securities, the financial institution
issuing the instrument is considered the issuer. However, where the securities
are backed by an irrevocable letter of credit or by insurance, without which the
securities would not qualify for purchase under the Portfolio's quality
restrictions, the issuer of the letter of credit will be considered the issuer
of the securities.
Although the securities in which the Portfolio invests are of high quality and
the transactions which it enters into entail low risk, there is still the
possibility of loss of principal. Corporate issuers may default on their
obligations. Repurchase agreements may be deemed to be collateralized loans and
the Portfolio could experience delay and expenses in liquidating collateral in
the event of the failure of the repurchasing party to honor its agreement to
repurchase. Agencies or instrumentalities of the U.S. government could also
default on their securities which may not be guaranteed by or be backed by the
full faith and credit of the U.S. government.
Investment Quality
(a) Eligible Securities
The Money Market Portfolio will invest only in United States dollar-denominated
instruments which, at the time of acquisition, are determined to be eligible
securities ("Eligible Securities") by the Sub-Adviser and which are determined
by the Sub-Adviser to present minimal credit risks.
An Eligible Security is any security that has a remaining maturity of less than
one year and (i) which is rated in one of the two highest rating categories for
short-term debt obligations by any two nationally recognized statistical rating
organizations ("NRSROs") that have issued a rating with respect to a security or
class of debt obligations of an issuer, or if only one NRSRO has issued a
rating, that NRSRO ("Requisite NRSROs"); or (ii) has a security that has been
issued by an issuer that has outstanding short-term debt obligations (or
security within that class) that are comparable in priority and security with
the security ("CPS Security") which is rated, or the issuer of which is rated,
by the Requisite NRSROs in one of the two highest rating categories for
short-term debt obligations. An unrated security may also be an Eligible
Security if it is determined by the Sub-Adviser to be of comparable quality
("Comparable Quality Security") to either a First Tier Security or Second Tier
Security, as those terms are defined below.
A First Tier Security is an Eligible Security that (i) is itself rated, has a
CPS Security rated or the issuer of which security is rated by the Requisite
NRSROs in the highest rating category for short-term debt obligations or (ii) is
a Comparable Quality Security which is determined by the Sub-Adviser to be of
comparable quality to a First Tier Security.
A Second Tier Security is (i) an Eligible Security that is itself rated, has a
CPS Security rated or the issuer of which security is rated by the Requisite
NRSROs in the second highest rating category for short-term debt obligations,
(ii) an instrument that has been rated in the highest rating category for
short-term debt obligations by one NRSRO and has been rated in the second
highest rating category for short-term debt obligations by one or more other
NRSROs or (iii) a Comparable Quality Security which is determined by the
Sub-Adviser to be of comparable quality to a Second Tier Security.
b) Guidelines for Purchasing Eligible Securities
The Sub-Adviser, on behalf of the Money Market Portfolio, may (i) acquire any
First Tier Security that, at the time of acquisition, has received the highest
rating from any two NRSROs; (ii) acquire any Second Tier Security that, at the
time of acquisition, has received the second highest rating from any two NRSROs;
and (iii) acquire any First Tier Security or any Second Tier Security that at
time of purchase is rated by a single NRSRO, or any Comparable Quality Security,
subject to approval by the Board of Trustees of the Trust.
Portfolio Maturity
The Money Market Portfolio may not purchase any instrument, other than a
Government security, with a remaining maturity of greater than one year. A
Government security is any security issued or guaranteed as to principal or
interest by the United States, or by a person controlled or supervised by and
acting as an instrumentality of the Government of the United States, or any
certificate of deposit for any of the above.
The Money Market Portfolio maintains a dollar-weighted average portfolio
maturity of ninety (90) days or less. The Portfolio determines the maturity of
portfolio investments in accordance with Rule 2a-7, a valuation and pricing rule
under the Investment Company Act of 1940, as amended.
Quality Income Portfolio.
The investment objective of the Quality Income Portfolio is to seek a high level
of current income, consistent with safety of principal, by investing in
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.
The Sub-Adviser will use the Lehman Brothers Government/Corporate Bond Index as
a benchmark against which it will gauge the performance of the Portfolio and
determine risk measurement. The Lehman Brothers Government/Corporate Bond Index
is comprised of all publicly issued, non-convertible, domestic debt of the U.S.
Government or any agency thereof, quasi-Federal corporation, or corporate debt
guaranteed by the U.S. Government and all publicly issued, fixed-rate,
non-convertible, domestic debt of the four major corporate classifications:
industrial, utility, financial and Yankee bond. Only notes and bonds with a
minimum outstanding principal amount of $50,000,000 and a minimum maturity of
one year are included. Bonds included must have a rating of at least Baa by
Moody's Investors Service, Inc. ("Moody's"), BBB by Standard & Poor's
Corporation ("S&P") or in the case of bank bonds not rated by either Moody's or
S&P, BBB by Fitch Investors Service, Inc.
Depending on market conditions and subject to the special diversification
provisions imposed on the Portfolio (see "Risk Factors"), the Portfolio may
invest a substantial portion of its assets in Government National Mortgage
Association ("GNMA") Certificates of the modified pass-through type. These GNMA
Certificates are debt securities issued by a mortgage holder (such as a mortgage
banker) and represent an interest in a pool of mortgages insured by the Federal
Housing Administration or the Farmers Home Administration or guaranteed by the
Veterans Administration. GNMA guarantees the timely payment of monthly
installments of principal and interest on the GNMA Certificates. These
guarantees are backed by the full faith and credit of the U.S. government.
To the extent the Portfolio acquires GNMA Certificates at par or at discount,
the GNMA Certificates offer a high degree of safety of the principal investment
because of the GNMA guarantee. If the Portfolio buys GNMA Certificates at a
premium, however, mortgage foreclosures and repayments of principal by
mortgagors (which may be made at any time without penalty) may result in some
loss of the Portfolio's principal investment to the extent of the premium paid.
To avoid loss of this premium and of any gain in value of its GNMA Certificates
resulting from a decrease in interest rates generally, the Portfolio may sell
its GNMA Certificates which are selling at a substantial premium. This practice
may increase the Portfolio's portfolio turnover rate. A more complete
description of GNMA Certificates is contained in the Statement of Additional
Information.
The Portfolio, subject to the limitations on investments as described in "Risk
Factors", may invest in other obligations issued or guaranteed by the U.S.
government or by its agencies or instrumentalities. These instruments may be
either direct obligations of the Treasury (such as U.S. Treasury Notes, Bills or
Bonds) or securities issued or guaranteed by government agencies or
instrumentalities. Of the obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government, some are backed by the full faith and
credit of the U.S. government (such as Maritime Administration Title XI Ship
Financing Bonds) and others are backed only by the rights of the issuer to
borrow from the U.S. Treasury (such as Federal Home Loan Bank Bonds and Federal
National Mortgage Association Bonds).
The Portfolio may also invest in one or more of the following:
(1) Marketable straight-debt securities of domestic issuers, and of foreign
issuers (payable in U.S. dollars) rated at the time of purchase within the
four highest grades assigned by Moody's (Aaa, Aa, A or Baa) or by S&P (AAA,
AA, A or BBB);
(2) Commercial paper rated at time of purchase Prime-3 by Moody's or A-3 by
S&P;
(3) Bank obligations (including repurchase agreements and those denominated in
Eurodollars) of banks having total assets in excess of $1 billion; and
(4) Mortgage pass-through certificates and collateralized mortgage obligations.
Securities rated Baa or BBB may have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds. For a further description of the above investments and the ratings
used, see "Appendix - Description of Corporate Bond Ratings" in the Prospectus
and "Description of Securities Ratings - Commercial Paper Ratings" in the
Statement of Additional Information.
The Portfolio may invest up to 35% of its assets in securities of foreign
issuers. These investments will be marketable straight-debt securities of
foreign issuers payable in U.S. dollars and rated at the time of purchase within
the four highest grades assigned by Moody's or by S&P. Investments in foreign
securities present certain risks not ordinarily found in investments in
securities of U.S. issuers. See "Risk Factors - Special Considerations Relating
to Foreign Securities."
The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase agreements,
reverse repurchase agreements and may sell securities short. The Portfolio may
purchase and sell securities on a "when issued" and "delayed delivery" basis.
The Portfolio may invest in restricted securities. A more complete description
of these investments and transactions is contained under "Investment Practices."
If the Sub-Adviser deems it appropriate to seek to partially hedge the
Portfolio's assets against market value changes, the Portfolio may enter into
various hedging transactions, such as futures contracts, financial index futures
contracts, and the related put or call options contracts on futures contracts.
Hedging is a means of offsetting, or neutralizing, the price movement of an
investment by making another investment, the price of which should tend to move
in the opposite direction from that of the original investment. See "Investment
Practices - Strategic Transactions" and the Statement of Additional Information
for a more complete description of these transactions.
The Portfolio will be affected by general changes in interest rates resulting in
increases or decreases in the value of the Portfolio securities. Market prices
of debt securities tend to rise when interest rates fall and market prices tend
to fall when interest rates rise. Repurchase agreements may be deemed to be
collateralized loans and the Portfolio could experience delay and expenses in
liquidating such collateral in the event of the failure of the repurchasing
party to honor its agreement to repurchase. Agencies or instrumentalities of the
U.S. government could also default on their securities which may not be
guaranteed by or be backed by the full faith and credit of the U.S. government.
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
High Yield Portfolio.
The investment objective of the High Yield Portfolio is the maximization of
total investment return through income and capital appreciation.
The High Yield Portfolio will pursue its investment objective by investing in a
portfolio substantially consisting of medium and lower grade domestic corporate
debt securities. The Portfolio may also invest up to 35% of its assets in
foreign government and foreign corporate debt securities of similar quality. The
Portfolio may also, from time to time, invest in cash or cash equivalents due to
market conditions or for other defensive purposes.
Lower grade corporate debt securities are commonly known as "junk bonds" and
involve a significant degree of risk. See "Risk Factors - Special Risks of High
Yield Investing."
Medium grade corporate securities are generally regarded as having adequate, but
not outstanding, capacity to pay interest and repay principal. Medium grade
securities are obligations that are rated A and Baa by Moody's or A and BBB by
S&P, or which are not rated by either Moody's or S&P but are considered by the
Sub-Adviser to be of comparable quality. Securities rated Baa or BBB may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Lower grade
corporate securities are those that are rated Ba or B by Moody's or BB or B by
S&P, or which are unrated or considered by the Sub-Adviser to be of comparable
quality. If the Sub-Adviser deems it appropriate, the Portfolio may invest in
domestic corporate debt securities of a higher quality. For a further
description of these ratings, see "Appendix - Description of Corporate Bond
Ratings."
Many issuers of medium and lower grade securities choose not to have a rating
assigned to their obligations by one of the rating agencies. Therefore, the
Portfolio's assets may at times consist of a high proportion of unrated
securities. The Portfolio will purchase only those unrated securities which the
Sub-Adviser believes are comparable to rated securities that qualify for
purchase by the Portfolio pursuant to criteria established by the Board of
Trustees. Although the Portfolio will invest primarily in medium and lower grade
securities, from time to time the Portfolio may also invest in higher grade
securities if the Sub-Adviser considers it appropriate, as when the difference
in return between different grades of securities is very narrow, when the
Sub-Adviser expects interest rates to increase, or when the availability of
medium and lower grade securities is limited. These investments may result in a
lower current income than if the Portfolio were fully invested in medium and
lower grade securities.
The Portfolio may invest up to 35% of its assets in foreign government and
foreign corporate debt securities of similar quality. Investments in foreign
securities present certain risks not ordinarily found in investments in
securities of U.S. issuers. See "Risk Factors - Special Considerations Relating
to Foreign Securities."
If the Sub-Adviser deems it appropriate to seek to partially hedge the
Portfolio's assets against market value changes resulting from changes in
interest rates or (with respect to the foreign securities which the Portfolio
invests in) currency fluctuations, the Portfolio may also enter into various
hedging transactions, such as futures contracts, financial index futures
contracts, and related put or call options contracts on these contracts and
foreign currency contracts. In addition, if the Sub-Adviser deems it
appropriate, the Portfolio may enter into other hedging transactions, such as
forward foreign currency contracts, currency futures contracts, and related
options contracts in order to protect the U.S. dollar equivalent values of those
foreign securities in which the Portfolio invests against declines resulting
from currency value fluctuations.
Hedging is a means of offsetting, or neutralizing, the price movement of an
investment by making another investment, the price of which should tend to move
in the opposite direction from that of the original investment. See "Investment
Practices - Strategic Transactions" and the Statement of Additional Information
for a more complete discussion of these transactions.
The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase agreements
and reverse repurchase agreements. Repurchase agreements may be deemed to be
collateralized loans and the Portfolio could experience delay and expenses in
liquidating such collateral in the event of the failure of the repurchasing
party to honor its agreement to repurchase. The Portfolio may invest in
restricted securities. The Portfolio may purchase and sell securities on a "when
issued" and "delayed delivery" basis. A more complete description of these
investments and transactions is contained under "Investment Practices."
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
Asset Composition
At December 31, 1997, the High Yield Portfolio was invested in bonds rated by
Moody's as follows:
Percentage of Total Bond
Moody's Ratings Investments in the Portfolio
- --------------------------------------------------------------------------------
B 68.4%
Ba 24.3%
Aaa 2.3%
Not Rated 5.0%
Stock Index Portfolio.
Investment Objective
The investment objective of the Stock Index Portfolio is to achieve investment
results that approximate the aggregate price and yield performance of the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index" or the
"Index").
The S&P 500 Index represents more than 70% of the total market value of all
publicly-traded common stocks, and is widely viewed among investors as a good
representative of the aggregate performance of publicly-traded common stocks.
"Standard & Poor's ", "S&P ", "S&P 500 ", "Standard & Poor's 500", and "500" are
trademarks of McGraw-Hill Inc. and have been licensed for use by Cova Life. The
Stock Index Portfolio is not sponsored, endorsed, sold or promoted by Standard &
Poor's Corporation ("S&P") and S&P makes no representation or warranty, express
or implied, to the owners of the Stock Index Portfolio or any member of the
public regarding the advisability of investing in securities generally or in the
Stock Index Portfolio particularly or the ability of the S&P 500 Index to track
general stock market performance. S&P's only relationship to Cova Life is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to Cova Life
or the Stock Index Portfolio. S&P has no obligation to take the needs of Cova
Life or the owners of the Stock Index Portfolio into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the Stock Index Portfolio or the timing of the issuance or sale of the Stock
Index Portfolio or in the determination or calculation of the equation by which
the Stock Index Portfolio is to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
Stock Index Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY COVA LIFE, OWNERS OF THE STOCK INDEX PORTFOLIO,
OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Investment Policies
The Stock Index Portfolio is not managed according to traditional methods of
"active" investment management, which involve the buying and selling of
securities based upon economic, financial and market analysis and investment
judgment. Instead, the Portfolio, utilizing a "passive" or "indexing" investment
approach, attempts to duplicate the investment performance of the respective
index through statistical procedures.
The Sub-Adviser believes that the "indexing" approach described above is an
effective method of substantially duplicating percentage changes in the S&P 500
Index. It is a reasonable expectation that the correlation between the
performance of the Portfolio and that of the Index will be approximately 98%; a
figure of 100% would indicate perfect correlation. Perfect correlation would be
achieved when the net asset value per share of the Portfolio increases and
decreases in exact proportion to changes in the Index. The Board of Trustees of
the Trust will review the correlation between the Portfolio and the Index on a
quarterly basis. See the Statement of Additional Information for a description
of the monitoring procedures established by the Board.
In pursuing its investment objective, the Portfolio will invest in no fewer than
100 stocks with the majority of the Portfolio consisting of those stocks having
the largest weightings in the Index. The Sub-Adviser will select stocks for the
Portfolio after taking into account their individual weights in the Index and
the weights in the Index of the industry groups to which they belong.
Although the Portfolio will attempt to remain fully invested in common stocks,
it may also invest in certain short-term fixed income securities such as cash
reserves.
As described further below under "Implementation of Policies", the Portfolio may
also enter into stock index futures contracts and options on stock indexes and
stock index futures contracts for various reasons including to hedge against
changes in security prices. Hedging is a means of offsetting, or neutralizing,
the price movement of an investment by making another investment, the price of
which should tend to move in the opposite direction from that of the original
investment. See the Statement of Additional Information for a more complete
description of hedging and for a discussion of the risks involved therein.
Implementation of Policies
The S&P 500 Index is composed of 500 common stocks which are chosen by S&P to be
included in the unmanaged Index. Market value, liquidity and industry
representation are considered in the selection process. The inclusion of a stock
in the S&P 500 Index in no way implies that S&P believes the stock to be an
attractive investment. The 500 securities, 95% of which trade on the New York
Stock Exchange, represent approximately 75% of the market value of all U.S.
common stocks. Each stock in the S&P 500 Index is weighted by its market value:
its market price per share times the number of shares outstanding.
Because of the market-value weighting, the 50 largest companies in the S&P 500
Index currently account for approximately 50% of the Index. Typically, companies
included in the S&P 500 Index are the largest and most dominant firms in their
respective industries. As of December 31, 1997, the five largest companies in
the Index were: General Electric, Coca Cola, Microsoft, Exxon and Merck & Co.
The largest industry categories were Integrated Oil, Pharmaceuticals, Regional
Banks, Healthcare and Telephone.
Although the Portfolio will normally seek to remain substantially fully invested
in common stocks, the Portfolio may invest temporarily in certain short-term
fixed income securities. Such securities may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder redemptions. These
securities include: obligations of the United States government and its agencies
or instrumentalities; commercial paper, bank certificates of deposit and
bankers' acceptances; and repurchase agreements and reverse repurchase
agreements collateralized by these securities. Repurchase agreements may be
deemed to be collateralized loans and the Portfolio could experience delay and
expenses in liquidating such collateral in the event of the failure of the
repurchasing party to honor its agreement to repurchase.
The Portfolio will employ a combination of an indexing strategy known as
"sampling" and stock index futures contracts and options. Sampling is a method
that is used to attempt to replicate the return of the Index without having to
purchase a weighted portfolio containing all 500 stocks in the Index. This
process selects stocks for the Portfolio so that various industry weightings,
market capitalizations and fundamental characteristics (e.g. price to book,
price to earnings, debt to asset ratios and dividend yields) match those of the
Index. The use of sampling involves certain risks with respect to the ability of
the Portfolio to achieve the desired correlation with the Index. (See "Risk
Factors - Stock Index Portfolio - Sampling", below).
As indicated above, the Portfolio may utilize stock index futures contracts and
options on stock indexes and stock index futures contracts. Specifically, the
Portfolio may enter into futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit.
Stock index futures contracts and options may be used for several reasons: to
maintain cash reserves while remaining fully invested, to facilitate trading, to
reduce transaction costs, to hedge against changes in securities prices, or to
seek higher investment returns when a futures contract is priced more
attractively than the underlying equity security or the Index.
The Portfolio may lend its investment securities to qualified institutional
investors for the purpose of realizing additional income. Loans of securities by
the Portfolio will be collateralized by cash or securities issued or guaranteed
by the U.S. government or its agencies. The collateral will equal at least 100%
of the current market value of the loaned securities. The Portfolio may borrow
money from a bank but only for temporary or emergency purposes. The Portfolio
may borrow money up to one-third of the value of its total assets taken at
current value. The Portfolio would borrow money only to meet redemption requests
prior to the settlement of securities already sold or in the process of being
sold by the Portfolio. To the extent that the Portfolio borrows money prior to
selling securities, the Portfolio may be leveraged; at such times, the Portfolio
may appreciate or depreciate in value more rapidly than the Index. The Portfolio
may purchase and sell securities on a "when issued" and "delayed delivery"
basis. The Portfolio may invest in restricted securities and may sell securities
short. See "Investment Practices" for a description of these investments and
transactions.
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
Risk Factors - Stock Index Portfolio
Futures Contracts and Options
The primary risks associated with the use of futures contracts and options are:
(i) imperfect correlation between the change in market value of the stocks held
by the Portfolio and the prices of futures contracts and options; and (ii)
possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures position when desired. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose behavior is expected to resemble that of the Portfolio's underlying
securities. The risk that the Portfolio will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. See the Statement of
Additional Information for a more complete discussion of the risks involved with
respect to investment in stock index futures contracts and options on stock
indexes and stock index futures contracts.
Market Risk
As the Portfolio invests primarily in common stocks, the Portfolio is subject to
market risk - i.e. the possibility that common stock prices will decline over
short or even extended periods. The U.S. stock market tends to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline.
To illustrate the volatility of stock prices, the following table sets forth the
extremes for stock market returns as well as the average return for the period
from 1926 to 1997, as measured by the S&P 500 Index:
U.S. Stock Market Returns (1926-1997)
Over Various Time Horizons
One Five Ten Twenty
Year Years Years Years
- --------------------------------------------------------------------------------
Best 53.99% 23.92% 20.06% 16.86%
Worst (43.34)% (12.47)% (0.89)% 3.11%
Average 12.96% 10.54% 10.89% 10.93%
As shown, from 1926 to 1997, common stocks, as measured by the S&P 500 Index,
have provided an average annual total return (capital appreciation plus dividend
income) of 12.96%. While this average return can be used as a guide for setting
reasonable expectations for future stock market returns, it may not be useful
for forecasting future returns in any particular period, as stock returns are
quite volatile from year to year.
Sampling
The use of the sampling technique may, particularly under certain market
conditions, result in a lower correlation between the Portfolio and the Index
than if the Portfolio owned all 500 stocks in the Index. The sampling technique,
when employed successfully, is effective primarily due to the existence of
long-term correlations between groups of stocks and whole industry sectors
within the Index. Sampling, by definition, creates a bias toward the purchase by
the Portfolio of the stocks of larger capitalization companies. As a result, the
Portfolio can be negatively impacted by the use of sampling in a market where
the stocks of smaller capitalization companies are outperforming those of larger
capitalization companies. When this happens, it may result in the Portfolio
underperforming the Index and not achieving its anticipated degree of
correlation with the Index. The Sub-Adviser will actively monitor the
effectiveness of its sampling technique and will undertake corrective actions
should the use of the sampling technique result in underperformance or
undercorrelation with respect to the Index. Such corrective actions may include,
but not necessarily be limited to, increasing the number of companies
represented in the Portfolio to incorporate more secondary issues. As described
under "Investment Policies" above, the Board of Trustees of the Trust reviews
the correlation between the Portfolio and the Index on a quarterly basis. The
Board has adopted monitoring procedures which require, among other things, that
the Sub-Adviser notify the Board in the event that the correlation between the
performance of the Portfolio and that of the Index falls below 95%.
VKAC Growth and Income Portfolio.
The investment objective of the VKAC Growth and Income Portfolio is to seek
long-term growth of both capital and income by investing in a portfolio of
common stocks which are considered by the Sub-Adviser to have potential for
capital appreciation and dividend growth. The Portfolio may also invest up to
35% of its assets in common stocks which are considered by the Sub-Adviser to
have potential for capital appreciation but which are issued by foreign
corporations.
The Portfolio seeks to achieve its objective by investing primarily in a
diversified portfolio of dividend paying common stocks of large established
companies which are considered by the Sub-Adviser to have potential for both
capital appreciation and dividend growth. The Portfolio's stocks are actively
traded in U.S. domestic markets, primarily on national securities exchanges, and
are selected principally on the basis of fundamental investment values as
determined by the Sub-Adviser. The Portfolio's investments are usually viewed by
the Sub-Adviser as having comparatively low price-earning ratios and anticipated
higher dividends than the S&P 500 average and, at the time of purchase, are
considered by the Sub-Adviser to be undervalued in the marketplace.
The Portfolio may invest up to 35% of its assets in dividend paying common
stocks of large established companies which are considered by the Sub-Adviser to
have potential for both capital appreciation and dividend growth but which are
issued by foreign corporations of the same type as the U.S. securities described
above. There is no current intention that these investments will exceed 20% of
the Portfolio's assets. Investments in foreign securities present certain risks
not ordinarily found in investments in securities of U.S. issuers. See "Risk
Factors - Special Considerations Relating to Foreign Securities".
If the Sub-Adviser deems it appropriate to seek to partially hedge the
Portfolio's assets against market value changes resulting from changes in
interest rates or (with respect to the foreign securities which the Portfolio
invests in) currency fluctuations, the Portfolio may enter into various hedging
transactions, such as futures contracts, financial index futures contracts, and
related put or call options contracts on these contracts and foreign currency
contracts. In addition, if the Sub-Adviser deems it appropriate, the Portfolio
may enter into other hedging transactions, such as forward foreign currency
contracts, currency futures contracts, and related options contracts in order to
protect the U.S. dollar equivalent values of those foreign securities in which
the Portfolio invests against declines resulting from currency value
fluctuations. Hedging is a means of offsetting, or neutralizing, the price
movement of an investment by making another investment, the price of which
should tend to move in the opposite direction from that of the original
investment. See "Investment Practices - Strategic Transactions" and the
Statement of Additional Information for a more complete description of these
transactions.
The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase agreements,
reverse repurchase agreements and may sell securities short. The Portfolio may
also invest in restricted securities. The Portfolio may purchase and sell
securities on a "when issued" and "delayed delivery" basis. A more complete
description of these investments and transactions is contained under "Investment
Practices".
See "Risk Factors - Tax Considerations" for a discussion of special
diversification standards which the Portfolio will meet.
As the Portfolio invests primarily in common stocks, the Portfolio is subject to
market risk - i.e. the possibility that common stock prices will decline over
short or even extended periods. Stock markets tend to be cyclical, with periods
when stock prices generally rise and periods when prices generally decline.
INVESTMENT PRACTICES
In connection with the investment policies of the Portfolios described above,
the Portfolios may engage in certain investment practices subject to the
limitations set forth below. These investments entail risks. These practices are
more fully described in the Prospectus. The information contained below relates
only to specific limitations concerning these practices with respect to the
Portfolios managed by VKAC.
Repurchase Agreements. The Money Market Portfolio may not invest in repurchase
agreements which mature in more than seven days. There are additional
limitations and restrictions relating to the ability of the Money Market
Portfolio to invest in repurchase agreements which have been adopted by the
Board of Trustees of the Trust and which relate primarily to investment quality
and diversification.
Restricted and Illiquid Securities. The Portfolios may each invest up to 10% of
their respective net assets in securities the disposition of which is subject to
substantial legal or contractual restrictions on resale and securities that are
not readily marketable.
Reverse Repurchase Agreements and Borrowings. Each of the Quality Income, High
Yield, VKAC Growth and Income and Stock Index Portfolios is permitted to borrow
money up to one-third of the value of its total assets taken at current value.
The Money Market Portfolio may borrow up to 10% of its total assets. Borrowing
by these Portfolios may be only from banks as a temporary measure for
extraordinary or emergency purposes and not for investment leverage.
As a matter of operating policy, the Money Market Portfolio, the Quality Income
Portfolio, the Stock Index Portfolio and the VKAC Growth and Income Portfolio
will not borrow more than 10% of their net asset value when borrowing is for any
general purpose and 25% of their net asset value when borrowing is a temporary
measure to facilitate redemptions.
RISK FACTORS
Special Considerations Relating to Foreign Securities
All of the Portfolios may invest in foreign securities. The Stock Index
Portfolio, however, may only invest in foreign securities which are issued by
companies in the S & P 500 Index. The Stock Index Portfolio may also invest in
American Depositary Receipts ("ADRs") for foreign securities. ADRs are
dollar-denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States. The VKAC Growth
and Income Portfolio, High Yield Portfolio and Quality Income Portfolio may
invest up to 35% in foreign securities. However, the Trust has no current
intention that these investments will exceed 20% of a Portfolio's assets.
Special Risks of High Yield Investing
The High Yield Portfolio intends to invest a substantial portion of its assets
in medium and lower grade corporate debt securities. The Prospectus describes
the risks attendant to investing in such securities. (See "Special Risks of High
Yield Investing" in the Prospectus.)
PORTFOLIO TURNOVER RATES
Money Market Portfolio and Quality Income Portfolio
Although the Money Market and Quality Income Portfolios are not subject to
specific restrictions on portfolio turnover, they generally do not seek profits
by short-term trading. However, they may dispose of a portfolio security prior
to its maturity where disposition seems advisable because of a revised credit
evaluation of the issuer or other considerations. Because brokerage commissions
are not customarily charged on the investments invested in by each of the two
Portfolios, a high turnover rate should not affect the net asset value.
High Yield Portfolio
The Portfolio will not generally engage in trading of securities for the purpose
of realizing short-term profits, but it will adjust its portfolio as it deems
advisable in view of prevailing or anticipated market conditions to accomplish
its investment objective. For example, the Portfolio may sell securities in
anticipation of a movement in interest rates or to avoid loss of premiums paid
and unrealized capital gains earned on GNMA Certificates selling at a
substantial premium. Frequency of portfolio turnover will not be a limiting
factor if VKAC considers it advantageous to purchase or sell securities. The
Portfolio anticipates that its portfolio turnover rate will normally be less
than 200%, and may be significantly less in a period of stable or rising
interest rates. For the years ended December 31, 1997 and 1996, the portfolio
turnover rates for the High Yield Portfolio were 109% and 117%, respectively. A
high rate of portfolio turnover involves correspondingly higher brokerage
commissions and transaction expenses than a lower rate, which expenses must be
borne by the Portfolio and its shareholders.
Stock Index Portfolio
Although the Portfolio generally seeks to invest for the long term, the
Portfolio retains the right to sell securities irrespective of how long they
have been held. However, because of the "passive" investment management approach
of the Portfolio, the portfolio turnover rate is expected to be under 50%, a
generally lower turnover rate than for most other investment companies. A
portfolio turnover rate of 50% would occur if one-half of the Portfolio's
securities were sold within one year. Ordinarily, securities will be sold from
the Portfolio only to reflect certain administrative changes in the Index
(including mergers or changes in the composition of the Index) or to accommodate
cash flows into and out of the Portfolio while maintaining the similarity of the
Portfolio to the Index. For the years ended December 31, 1997 and 1996, the
portfolio turnover rates for the Stock Index Portfolio were 27% and 1%,
respectively.
VKAC Growth and Income Portfolio
The Portfolio will not generally engage in trading of securities for the purpose
of realizing short-term profits, but it will adjust its portfolio as it deems
advisable in view of prevailing or anticipated market conditions to accomplish
the Portfolio's investment objectives. For example, the Portfolio may sell
portfolio securities in anticipation of a movement in interest rates. Other than
for tax purposes, frequency of portfolio turnover will not be a limiting factor
if the Portfolio considers it advantageous to purchase or sell securities. The
Portfolio anticipates that its annual portfolio turnover rate will normally be
less than 200%. A high rate of portfolio turnover involves correspondingly
higher brokerage commissions and transaction expenses than a lower rate, which
expenses must be borne by the Portfolio and its shareholders. For the years
ended December 31, 1997 and 1996, the portfolio turnover rates for the Growth
and Income Portfolio were 95% and 113%, respectively.
MANAGEMENT OF THE TRUST
Adviser
As full compensation for its services under the Investment Advisory Agreement,
the Trust will pay the Adviser a monthly fee at the following annual rates shown
in the table below based on the average daily net assets of each Portfolio:
Average Daily
Portfolio Net Assets % Per Annum
- --------- ---------- -----------
Money Market First $500 million .50%
Over $500 million .40%
Quality Income First $500 million .50%
Over $500 million .45%
High Yield First $500 million .75%
Over $500 million .65%
VKAC Growth First $500 million .60%
and Income Over $500 million .50%
Stock Index _____________ .50%
The advisory fee of .750 of 1% to be deducted on the first $500 million of
assets of the High Yield Portfolio is higher than fees paid by many other
investment companies with similar investment objectives.
Portfolio Management
For the year ended December 31, 1997, the Adviser was paid advisory fees as
follows: $261,037, with respect to the Quality Income Portfolio, $290,717, with
respect to the High Yield Portfolio, $403,448, with respect to the Stock Index
Portfolio, and $250,012, with respect to the VKAC Growth and Income Portfolio.
The Adviser waived its advisory fees of $230,006, with respect to the Money
Market Portfolio.
Expenses of the Trust
For the year ended December 31, 1997, the expenses, taking into account the
waivers and expense assumptions, borne by the Quality Income Portfolio amounted
to $347,154 or .60% of its average net assets on an annualized basis; the net
expenses borne by the High Yield Portfolio amounted to $335,693 or .85% of its
average net assets on an annualized basis; the net expenses borne by the Money
Market Portfolio amounted to $46,001 or .10% of its average net assets on an
annualized basis; the net expenses borne by the Stock Index Portfolio amounted
to $501,235 or .60% of its average net assets on an annualized basis; and the
net expenses borne by the VKAC Growth and Income Portfolio amounted to $291,681
or .70% of its average net assets on an annualized basis.
Cova Life and/or the Adviser may at their discretion, but are not obligated to,
assume all or any portion of Trust expenses. For the year ended December 31,
1997, Cova Life and the Adviser together assumed expenses of $52,630 with
respect to the Quality Income Portfolio; $53,876 with respect to the High Yield
Portfolio; $267,166 with respect to the Money Market Portfolio; $73,922 with
respect to the Stock Index Portfolio; and $73,632 with respect to the VKAC
Growth and Income Portfolio.
Sub-Adviser
Van Kampen American Capital Investment Advisory Corp. ("VKAC"), One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. VKAC, formerly known as Van Kampen
Merritt Investment Advisory Corp., served as the investment adviser to the Trust
from its commencement of operations until May 1, 1996. VKAC is the Sub-Adviser
for the Quality Income, High Yield, Stock Index, Money Market and VKAC Growth
and Income Portfolios of the Trust. VKAC is an indirect subsidiary of Morgan
Stanley, Dean Witter, Discover & Co.
Van Kampen American Capital, Inc. is a diversified asset management company with
more than two million retail investor accounts and nearly $50 billion under
management or supervision. Van Kampen American Capital, Inc.'s over 40 open-end
and 38 closed-end funds and more than 2,700 unit investment trusts are
distributed by financial advisers nationwide. In connection with advising the
Trust, VKAC utilizes at its own expense credit analysis and research services
provided by its affiliate, McCarthy, Crisanti & Maffei, Inc.
Pete Papageorgakis has been a member of VKAC since 1992 and is currently the
Portfolio Manager for the Stock Index Portfolio of the Trust. Additionally, he
serves as a Portfolio Analyst for Institutional Accounts and is responsible for
both equity and corporate bond securities. Prior to his current duties, he
assisted in the management of the Van Kampen Merritt Growth & Income Fund, the
VKAC Growth and Income Portfolio of the Trust, the Van Kampen Merritt Utility
Fund and the Van Kampen Merritt Balanced Fund. Mr. Papageorgakis received his
B.S. degree, Summa Cum Laude, in Finance from the University of Illinois at
Urbana-Champaign. He is currently working towards receiving his Chartered
Financial Analyst (CFA) designation, having successfully completed the CFA Level
II Exam.
James A. Gilligan is the Portfolio Manager for the VKAC Growth and Income
Portfolio of the Trust. Mr. Gilligan is also the Portfolio Manager for the
American Capital Equity Income Fund and American Capital Growth & Income Fund.
Mr. Gilligan has eleven years investment experience. Prior to joining VKAC in
1985, as Securities Analyst, he was an Auditor, Credit Analyst, and Financial
Analyst for Gulf Oil Corporation. Mr. Gilligan holds a BS in Business
Administration from Miami University and an MBA from the University of
Pittsburgh. He is a Chartered Financial Analyst and Certified Public Accountant.
Reid J. Hill is the Portfolio Manager for the Money Market Portfolio of the
Trust. Mr. Hill is also the Portfolio Manager for the Van Kampen American
Capital Tax Free Money Fund and the Van Kampen Series Trust Money Market Fund.
Mr. Hill has four years of experience in the taxable and tax free fixed income
sector. Mr. Hill is also responsible for the management of the short term cash
for the entire complex of Van Kampen funds. Mr. Hill received his B.S. degree in
Finance and Marketing from Bradley University.
Kelly Gilbert is the Portfolio Manager for the Quality Income Portfolio of the
Trust. Ms. Gilbert is Assistant Vice President of Van Kampen American Capital
Investment Advisory Corporation. She has been a member of Van Kampen American
Capital Investment Advisory Corp. since 1995. She has eight years of experience
in the taxable fixed income sector. Currently, she is the Associate Portfolio
Manager for the Van Kampen American Capital Strategic Income Fund, Associate
Portfolio Manager for the U.S. Government Fund and the Portfolio Manager for Van
Kampen Series Trust Quality Income Fund. In addition, Ms. Gilbert helps manage
the assets of the OakRe Life Insurance Portfolio, formerly known as Xerox
Financial Services Life Insurance. Ms. Gilbert received her B.A. in Economics
from the University of Illinois at Chicago.
Robert J. Hickey is the Portfolio Manager for the High Yield Portfolio of the
Trust. Mr. Hickey is Vice President of VKAC. He has been a member of VKAC since
1989. He has ten years of experience in the taxable and tax free fixed income
sector. Currently, he is the Portfolio Manager for the Van Kampen American
Capital Strategic Income Fund, the Van Kampen High Yield Fund and the Van Kampen
Series Trust High Yield Fund. In addition, Mr. Hickey manages the assets of the
OakRe Life Insurance portfolio, formerly known as Xerox Financial Services Life
Insurance. Previous experience includes managing the Van Kampen Adjustable Rate
U.S. Government Fund, the Van Kampen Money Market Fund, and the Van Kampen Tax
Free Money Fund. Mr. Hickey received his B.A. in Economics and International
Affairs from the University of Wisconsin at Madison, and his M.B.A. with a
specialization in Finance from the Kellogg Graduate School of Management at
Northwestern University.
Sub-Advisory Fees
Under the terms of the Sub-Advisory Agreement, the Adviser shall pay to VKAC, as
full compensation for services rendered under the Sub-Advisory Agreement with
respect to the Portfolios, monthly fees at the following annual rates shown in
the table below based on the average daily net assets of each Portfolio.
Average Daily Sub-Advisory
Portfolio Net Assets Fee
- --------- ---------- ---
Money Market First $500 million .25%
Over $500 million .15%
Quality Income First $500 million .25%
Over $500 million .20%
High Yield First $500 million .50%
Over $500 million .40%
VKAC Growth First $500 million .35%
and Income Over $500 million .25%
Stock Index _____________ .25%
Net Asset Values
The Money Market Portfolio values its securities on the basis of amortized cost,
which means that securities are valued at their acquisition cost to reflect a
constant amortized rate to maturity of any premium or discount, rather than at
current market value. Calculations are made to compare the amortized cost
valuation of the securities with current market values. Money market valuations
are obtained by using market quotations provided by market makers, estimates of
market values, or values obtained from published yield data of money market
instruments. If a deviation of 1/2 of 1% or more were to occur between the net
asset value calculated by reference to market values and the Portfolio's $1.00
per share net asset value, or if there were any other deviation which the
Trustees believe would result in a material dilution to shareholders, the
Trustees would promptly consider what action, if any, should be initiated. Other
assets are valued at fair value as determined in good faith by the Trustees.
FUND PERFORMANCE
Inception dates for the Portfolios depicted below are: 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 VKAC 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.
Average Annual Total Return
for the Periods Ended 12/31/97
Portfolio Performance
Since
Portfolio 1 year 5 years Inception
- --------------------------------------------------------------------------------
VKAC Growth and Income 24.98% 16.48% 15.45%
Money Market 5.49% 4.87% 4.77%
Quality Income 9.08% 7.05% 8.17%
High Yield 11.54% 11.03% 12.83%
Stock Index 32.91% 19.36% 18.71%
<TABLE>
<CAPTION>
PERFORMANCE RECAP
As of December 31, 1997
Performance
10 Yrs or
Portfolio Type 1 Yr 5 Yrs Since Inception
- ------------------------------------------------------------------------------------------------------------------------------------
Managed by Van Kampen American
Capital Investment Advisory Corp.
<S> <C> <C> <C>
VKAC Growth and Income Existing Portfolio 24.98% 16.48% 15.45%
Money Market Existing Portfolio 5.49% 4.87% 4.77%
Quality Income Existing Portfolio 9.08% 7.05% 8.17%
High Yield Existing Portfolio 11.54% 11.03% 12.83%
Stock Index Existing Portfolio 32.91% 19.36% 18.71%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Inception dates for the following Existing Portfolios depicted above are:
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 VKAC 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.
CL-4045 (5/98)
