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. 20 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 21 [X]
(Check appropriate box or boxes.)
COVA SERIES TRUST
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(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
Lorry J. Stensrud
President and Chief Executive Officer
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:
___ 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)
_X_ 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.
Title of Securities Being Registered:
Investment Company Shares
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CROSS REFERENCE SHEET
(required by Rule 495)
Item No. Location
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PART A
Item 1. Front and Back Cover Pages............. Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments,
Risks and Performance.................. Risk/Return Summary; Performance
Item 3. Risk/Return Summary: Fee Table......... Not Applicable
Item 4. Investment Objectives, Principal
Investment Strategies, and Related
Risks.................................. Description of the Portfolios
Item 5. Management's Discussion of Fund
Performance............................ Not Applicable
Item 6. Management, Organization, and
Capital Structure...................... Management of the Trust
Item 7. Shareholder Information................ Portfolio Shares
Item 8. Distribution Arrangements.............. Portfolio Shares
Item 9. Financial Highlight Information........ Financial Highlights
PART B
Item 10. Cover Page and Table of Contents....... Cover Page and Table of Contents
Item 11. Fund History........................... The Trust
Item 12. Description of the Fund and Its
Investments and Risks.................. Investment Strategies and Risks
Item 13. Management of the Fund................. Management of the Trust
Item 14. Control Persons and Principal
Holders of Securities.................. Substantial Shareholders
Item 15. Investment Advisory and Other
Services............................... Investment Advisory Agreement
Item 16. Brokerage Allocations and Other
Practices.............................. Portfolio Transactions
Item 17. Capital Stock and Other
Securities............................. The Trust
Item 18. Purchase, Redemption and
Pricing of Shares...................... Net Asset Value; Portfolio Shares
Item 19. Taxation of the Fund................... Tax Status
Item 20. Underwriters........................... Not Applicable
Item 21. Calculation of Performance Data........ Performance Data
Item 22. Financial Statements................... Financial Statements
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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 seventeen Portfolios of Cova Series Trust.
Several versions of the Prospectus will be created from this Registration
Statement. The distribution system for each version of the Prospectus is
different. All versions of the Prospectus will be filed with the Commission
pursuant to Rule 497 under the Securities Act of 1933.
The Registrant undertakes to update this Explanatory Note, as needed, each time
a Post-Effective Amendment is filed.
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PART A
COVA SERIES TRUST
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
The Portfolios of Cova Series Trust ("Trust") are:
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Quality Bond Portfolio Developing Growth Portfolio
Small Cap Stock Portfolio Lord Abbett Growth and Income Portfolio
Large Cap Stock Portfolio Balanced Portfolio
Select Equity Portfolio Small Cap Equity Portfolio
International Equity Portfolio Equity Income Portfolio
Emerging Markets Equity Portfolio Growth & Income Equity Portfolio
Bond Debenture Portfolio Riggs Stock Portfolio
Mid-Cap Value Portfolio Riggs Small Company Stock Portfolio
Large Cap Research Portfolio
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The Securities and Exchange Commission has not approved or disapproved these
securities nor has it determined that this Prospectus is accurate or complete.
It is a criminal offense to state otherwise.
The date of this Prospectus is May 1, 1999.
TABLE OF CONTENTS
PAGE
[TO BE INSERTED HERE]
SUMMARY
The Trust and the Portfolios
All of the Portfolios described in this document are series of Cova Series Trust
("Trust"), an open-end management investment company. Investment companies (or
"mutual funds") pool the money of a number of different investors and buy many
different securities. Pooling allows the investors to spread the risk of loss of
their investments over more securities than they could if they invested their
money alone.
Although the Portfolios are structured the same as mutual funds, they are not
offered or sold directly to the public. Unless you are an insurance company, you
may only invest in the Portfolios through a variable annuity contract or
variable life insurance policy (collectively, the "Contract"), which you
purchase from an insurance company. The insurance company becomes the legal
shareholder in the Portfolio. You (the holder of the Contract) are not a
shareholder in the Trust, but have a beneficial interest in it. Although you do
not have the same rights as if you were a direct shareholder, you are given many
similar rights, such as voting rights under rules of the Securities and Exchange
Commission that apply to registered investment companies. Within limitations
described in the Contract, owners may allocate the amounts under the Contracts
for ultimate investment in the various Portfolios of the Trust. See the
prospectus which accompanies this Prospectus for a description of (a) the
Contract, (b) the Portfolios of the Trust that are available under that Contract
and (c) the relationship between increases or decreases in the net asset value
of Trust shares (and any dividends and distributions on such shares) and the
benefits provided under that Contract.
The Contracts may be sold by banks. An investment in a Portfolio of the Trust
through a Contract is not a deposit of a bank and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Some of the Portfolios have names and investment objectives that are very
similar to certain publicly available mutual funds that are managed by the same
money managers. These Portfolios are not those publicly available mutual funds
and will not have the same performance. Different performance will result from
such factors as different implementation of investment policies, different cash
flows into and out of the Portfolios, different fees, and different sizes.
Cova Investment Advisory Corporation ("Adviser") is the investment adviser for
each Portfolio. The day to day decisions about the investment of assets is made
by one or more Portfolio Managers who work for a Sub-Adviser appointed by the
Adviser for each Portfolio.
The Sub-Advisers for the Portfolios are:
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SUB-ADVISER NAME OF PORTFOLIO
J.P. Morgan Investment Management, Inc. Quality Bond Portfolio
Small Cap Stock Portfolio
Large Cap Stock Portfolio
Select Equity Portfolio
International Equity Portfolio
Emerging Markets Equity Portfolio
Lord, Abbett & Co. Bond Debenture Portfolio
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
Mississippi Valley Advisors Inc. Balanced Portfolio
Small Cap Equity Portfolio
Equity Income Portfolio
Growth & Income Equity Portfolio
Trust Division of Riggs Bank N.A. Riggs Stock Portfolio
Riggs Small Company Stock Portfolio
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RISK/RETURN SUMMARY
Investment Objectives
Portfolios Managed by J.P. Morgan Investment Management Inc.
The Quality Bond Portfolio seeks to provide a high total return consistent
with moderate risk of capital and maintenance of liquidity.
The Small Cap Stock Portfolio seeks to provide a high total return from a
portfolio of equity securities of small companies.
The Large Cap Stock Portfolio seeks to provide long-term growth of capital
and income.
The Select Equity Portfolio seeks to provide long-term growth of capital
and income.
The International Equity Portfolio seeks to provide a high total return
from a portfolio of equity securities of foreign corporations.
The Emerging Markets Equity Portfolio seeks to achieve a high total return
from a portfolio of equity securities of companies in emerging markets.
Portfolios Managed by Lord, Abbett & Co.
The Bond Debenture Portfolio seeks to provide high current income and the
opportunity for capital appreciation to produce a high total return through a
professionally-managed portfolio consisting primarily of convertible and
discount debt securities, many of which are lower rated.
The Mid-Cap Value Portfolio seeks capital appreciation through investments,
primarily in equity securities, which are believed to be undervalued in the
marketplace.
The Large Cap Research Portfolio seeks growth of capital and growth of
income consistent with reasonable risk. Production of current income is a
secondary consideration.
The Developing Growth Portfolio seeks long-term growth of capital through a
diversified and actively-managed portfolio consisting of developing growth
companies, many of which are traded over the counter.
The Lord Abbett Growth and Income Portfolio seeks to achieve long-term
growth of capital and income without excessive fluctuation in market value.
Portfolios Managed by Mississippi Valley Advisors Inc.
The Balanced Portfolio seeks to maximize total return through a combination
of growth of capital and current income consistent with the preservation of
capital.
The Small Cap Equity Portfolio seeks capital appreciation. Current income
is an incidental consideration in the selection of portfolio securities.
The Equity Income Portfolio seeks to provide an above-average level of
income consistent with long-term capital appreciation.
The Growth & Income Equity Portfolio seeks to provide long-term capital
growth, with income as a secondary consideration.
Portfolios Managed by the Trust Division of Riggs Bank N.A.
The Riggs Stock Portfolio seeks to provide growth of capital and income.
The Riggs Small Company Stock Portfolio seeks to provide long-term capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS OF EACH PORTFOLIO
Quality Bond Portfolio
Principal Investment Strategies
The Portfolio will invest at least 65% of its assets in bonds under normal
circumstances.
The Sub-Adviser actively manages the Portfolio in pursuit of its investment
objective investing in broad sectors of the fixed income market. These sectors
include:
U.S. Government and agency securities
corporate securities
private placements
asset backed securities
mortgage related securities
The Portfolio may invest up to 25% of its assets in foreign securities.
The Portfolio will normally invest at least 65% of its total assets in
investment grade debt securities.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Investing in fixed income securities" and "Prepayment
risk."
Small Cap Stock Portfolio
Principal Investment Strategies
The Portfolio invests primarily in the common stock of small U.S. companies
included in the Russell 2000 Index.
At lest 65% of the Portfolio's net assets will normally be invested in
common stocks and other securities with equity characteristics.
The Sub-Adviser uses fundamental research, systematic stock valuation and a
disciplined portfolio construction process to seek to enhance the Portfolio's
total return relative to that of the U.S. small company universe.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Equity Investing"; "Investing in less mature
companies, smaller companies and companies with special situations" and "Growth
investing."
Large Cap Stock Portfolio
Principal Investment Strategies
The Portfolio will be an actively managed portfolio of medium- to large-cap
equity securities that seeks to outperform the total return of the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"), consistent with reasonable
investment risk.
The Portfolio invests primarily in dividend-paying common stock but it may
also invest in other equity securities.
As a guideline, the Sub-Adviser seeks to achieve gross income for the
Portfolio equal to at least 75% of the dividend income generated on the stocks
included in the S&P 500.
The Portfolio will be highly diversified and will typically hold
approximately 300 stocks. The Sub-Adviser may emphasize securities that it
believes to be undervalued.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Equity investing;" "Investing in larger companies;"
"Investing in less mature companies, smaller companies and companies with
special situations;" and "Value investing."
Select Equity Portfolio
Principal Investment Strategies
The Portfolio will be an actively managed portfolio of selected equity
securities that seeks to outperform the total return of the S&P 500, consistent
with reasonable investment risk.
The Portfolio invests primarily in dividend-paying common stock but it may
also invest in other equity securities.
Under normal circumstances, the Portfolio will be fully invested in the
stock of large- and medium-sized companies primarily included in the S&P 500.
As a guideline, the Sub-Adviser seeks to achieve gross income for the
Portfolio equal to at least 75% of the dividend income generated on the stocks
included in the S&P 500.
The Portfolio will be highly diversified and will typically hold between 60
and 90 stocks. The Sub-Adviser may emphasize securities that it believes to be
undervalued.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:", "Equity investing;" "Investing in large companies;"
and "Value investing."
International Equity Portfolio
Principal Investment Strategies
The Sub-Adviser will actively manage the Portfolio which will be comprised
of non-U.S. securities that seeks to outperform the Morgan Stanley Capital
International Europe, Australia and Far East Index (the "EAFE Index").
The Sub-Adviser intends to keep the Portfolio essentially fully invested
with at least 65% of the value of its total assets in equity securities of
foreign issuers.
The Portfolio's primary equity investments are the common stocks of
established companies based in developed countries outside the United States.
Such investments will be made in at least three foreign countries.
The Portfolio may invest in the securities of issuers located in developing
countries.
Principal Risks
The risks described after the following captions under "Principal Risk of
Investing in the Trust:" "Equity investing" and "Investing in securities of
foreign issuers."
Emerging Markets Equity
Principal Investment Strategies
The Sub-Adviser intends to keep the Portfolio essentially fully invested
with at least 65% of the value of its total assets in equity securities of
companies in emerging markets. The Portfolio will be actively managed.
The Portfolio will focus its investments in those emerging markets
countries which the Sub- Adviser believes have strongly developing economies and
in which the markets are becoming more sophisticated.
The Portfolio's primary equity investments will be the common stocks of
established companies in the emerging markets countries which the Sub-Adviser
has identified as attractive.
The assets of the Portfolio ordinarily will be invested in the securities
of issuers in at least three different countries considered to be emerging
markets.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Equity investing" and "Investing in securities of
foreign issuers."
Bond Debenture Portfolio
Principal Investment Strategies
The Portfolio will invest at least 80% of its total assets in debt
securities.
The Sub-Adviser will actively manage the Portfolio and seek unusual values,
particularly in lower-rated debt securities, some of which are convertible into
common stocks or have warrants to purchase common stocks.
Capital appreciation is an important consideration in the selection of
portfolio securities.
The Portfolio may invest substantially in lower-rated bonds for their
higher yields which entail greater risks.
The Portfolio normally invests in long-term debt securities when Portfolio
management believes that interest rates in the long run will decline and prices
of such securities generally will be high. When Portfolio management believes
that long-term interest rates will rise, it will endeavor to shift the Portfolio
into short-term debt.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Investing in fixed income securities" and "Prepayment
risk." Also, the Portfolio has higher risk than many other debt-type
investments, because it normally invests substantially in lower rated bonds
(commonly known as "junk bonds"), and the bonds in this Portfolio have higher
default rates than do high quality bonds.
Mid-Cap Value Portfolio
Principal Investment Strategies
The Portfolio invests primarily in common stocks, including securities
convertible into common stocks, of companies with good prospects for improvement
in earnings trends or asset values that are not yet fully recognized in the
investment community.
The Portfolio normally invests at least 65% of its total assets in mid-cap
companies (companies whose outstanding equity securities have an aggregate
market value of between $200 million and $5 billion.)
The Portfolio normally will be diversified among many issues representing
many different industries.
The holdings in the portfolio typically will be selected for their
potential for significant market appreciation from growing recognition of
substantial improvement in the company's financial results or increasing
anticipation of such improvement.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust;" "Equity investing" and "Value investing."
Large Cap Research Portfolio
Principal Investment Strategies
The Portfolio invests primarily in common stocks, including securities
convertible into common stocks such as investment-grade convertible bonds or
convertible preferred stocks, of large-cap companies (companies whose
outstanding equity securities have an aggregate market value of $1.5 billion and
above).
The Portfolio will normally invest at least 65% of its total assets in
large-cap companies with good prospects for improvement in earnings trends or
asset values.
The Portfolio focuses more on capital growth and growth of income than on
current income.
The Portfolio will be comprised of the equity securities of many companies
that are undervalued or out of current investment favor.
The Portfolio will be diversified among many issuers representing many
different industries.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Equity investing;" Investing in larger companies" and
"Value investing."
Developing Growth Portfolio
Principal Investment Strategies
The Portfolio normally will invest at least 65% of its total assets in
securities of companies in the developing growth phase which is one generally
characterized by a dramatic rate of growth.
The Portfolio also may invest in companies in their formative stage.
In selecting securities for the Portfolio, the management of the Portfolio
looks at:
special characteristics that it believes will help their growth;
certain financial characteristics;
certain characteristics of management of companies that it is considering,
in addition to those that are implied by the financial data.
The securities selected for the Portfolio are analyzed solely on
traditional investment fundamentals and not on trends indicated by technical
analyses.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Equity investing", "Value Investing" and "Investing in
less mature companies, smaller companies and companies with special situations."
Lord Abbett Growth and Income Portfolio
Principal Investment Strategies
The Portfolio intends to keep its assets invested in those securities which
are selling at reasonable prices in relation to value.
The Portfolio will normally invest in common stocks, including securities
convertible into common stocks, of large, seasoned companies in sound financial
condition, which common stocks are expected to show above-average price
appreciation.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Equity investing;" "Value investing;" and "Growth
investing."
Balanced Portfolio
Principal Investment Strategies
The Portfolio uses a disciplined approach of allocating assets among three
major asset groups.
equity securities
fixed income securities
cash equivalents
The Sub-Adviser allocates the Portfolio's assets based upon its evaluation
of the relative attractiveness of the three major asset groups.
The Portfolio's policy is generally to invest at least 25% of the value of
its total assets in fixed-income securities and no more than 75% in equity
securities, although the percentage allocations will vary.
The equity securities in which the Portfolio invests include common stock,
preferred stock, rights, warrants and convertible securities.
The fixed income securities in which the Portfolio invests include U.S.
Government securities or other investment grade fixed-income and related debt
securities, including mortgage backed securities.
The Portfolio may invest up to 25% of its total assets in non-mortgage
asset-backed securities.
Principal Risks
The major risk for the Portfolio is that the portfolio managers may not
correctly anticipate the relative performance of different asset categories for
specific periods resulting in the Portfolio underperforming other types of asset
allocation investments or other types of investments in general. In addition,
the Portfolio is subject to the risks described after the following captions
under "Principal Risks of Investing in the Trust:" "Equity investing;"
"Investing in fixed income securities;" and "Prepayment risk." These risks may
be moderated, however, by the greater variety of asset types in which the
Portfolio is generally expected to be invested, as compared with those of other
Portfolios.
Small Cap Equity Portfolio
Principal Investment Strategies
The Portfolio normally invests primarily in common stock of emerging or
established small- to medium-sized companies with above-average potential for
price appreciation, although it also may invest in established larger companies.
The Portfolio may also invest a portion of its assets in smaller companies
that have limited specialized-product lines, markets or financial resources, or
are dependent upon one-person management. To qualify for investment, however, a
company will be expected to have, in the opinion of the Sub-Adviser,
above-average possibilities for capital appreciation (relative to the average
appreciation of companies whose securities are included in the S&P 500).
The Portfolio may invest up to 25% of its total assets indirectly in
foreign securities through the purchase of such obligations as American
Depositary Receipts (ADRs) and European Depositary Receipts (EDRs).
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Equity investing;" "Investing in less mature
companies, smaller companies and companies with special situations;" "Growth
Investing" and "Investing in securities of foreign issuers."
Equity Income Portfolio
Principal Investment Strategies
The Portfolio intends to invest, under normal market and economic
conditions, substantially all of its assets in common stock, preferred stock,
rights, warrants and securities convertible into common stock.
The Sub-Adviser will select stocks based on a number of quantitative
factors including
dividend yield
current and future earnings potential compared to stock prices
total return potential
other measures of value, if appropriate, such as cash flow, asset values or
book value
Under normal market and economic conditions, the Portfolio will invest at
least 65% of its total assets in income-producing equity securities. The stocks
or securities in which the Portfolio invests may be expected to produce an above
average level of income (as measured by the S&P 500).
The Portfolio may invest up to 15% of its total assets indirectly in
foreign securities through the purchase of such obligations as ADRs and EDRs.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Equity investing" and "Investing in securities of
foreign issuers."
Growth & Income Equity Portfolio
Principal Investment Strategies
The Portfolio intends to invest, under normal market and economic
conditions, substantially all of its assets in common stock, preferred stock,
rights, warrants and securities convertible into common stock.
The Sub-Adviser selects stocks based on a number of factors including:
historical and projected earnings
growth and asset value
earnings compared to stock prices generally (as measured by the S&P 500)
consistency of earnings growth and earnings quality
The Portfolio may invest up to 15% of its total assets indirectly in
foreign securities through the purchase of such obligations as ADRs and EDRs.
Principal Risks
The risks described after the following captions under "Princpal Risks of
Investing in the Trust:" "Equity investing" and "Investing in securities of
foreign issuers."
Riggs Stock Portfolio
Principal Investment Strategies
The Portfolio pursues its investment objective primarily through equity
investments, such as common stocks and securities convertible into common
stocks, generally of readily recognizable companies whose earnings and dividends
are growing at above average rates.
Under normal market conditions, the Portfolio will invest at least 65% of
its assets in stocks which will be primarily of high quality large
capitalization domestic companies. The Portfolio may also invest in preferred
stocks, corporate bonds, notes, warrants and rights.
The Portfolio may invest up to 20% of its net assets in ADRs.
The Sub-Adviser uses a value-oriented approach applying value criteria to a
listing of 750 stocks to produce a list of securities from which it selects the
issues it believes to be especially attractive.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust;" "Equity investing," "Investing in larger companies;"
"Investing in securities of foreign issuers;" and "Value investing."
Riggs Small Company Stock Portfolio
Principal Investment Strategies
The Portfolio pursues its investment objectives by investing primarily in a
broad, diversified range of equity securities comprising the small
capitalization sector of the United States equity market (companies which have a
market capitalization of up to $1.2 billion). These equity securities will be
primarily common stocks and securities convertible into common stocks.
Under normal market conditions, the Portfolio will invest at least 65% of
its assets in equity securities of companies that have a market value
capitalization of up to $1.2 billion.
The Sub-Adviser uses the same value oriented approach as is described with
respect to the Riggs Stock Portfolio above and applies it to the small
capitalization sector of the equity market.
The Portfolio may purchase investment grade corporate debt obligations.
Principal Risks
The risks described after the following captions under "Principal Risks of
Investing in the Trust:" "Equity investing;" "Investing in less mature
companies, smaller companies and companies with special situations" and "Value
investing."
Principal Risks of Investing in the Trust
The following briefly describes the principal risks that are associated with one
or more of the Trust's Portfolios. In the discussion of each Portfolio that
appears immediately above, the paragraph entitled "Principal risks" states which
of the following are the principal risks for that Portfolio.
Equity investing: Portfolios that invest in equities could lose money due to
sudden unpredictable drops in value and the potential for periods of lackluster
performance. Such adverse developments could result from general market or
economic conditions and/or developments at a particular company that the
portfolio managers do not foresee or circumstances that they do not evaluate
correctly. Historically, investments in equities have been more volatile than
many other investments.
Investing in less mature companies, smaller companies and companies with special
situations: These investments can be particularly sensitive to market movements,
because they may be thinly traded and their market prices tend to reflect future
expectations. Also, these companies often have limited product lines, markets or
financial resources and their management personnel may lack depth and
experience.
Investing in larger companies: Larger more established companies may be unable
to respond quickly to new competitive challenges such as changes in technology
and consumer tastes. Many larger companies also may not be able to attain the
high growth rates of successful smaller companies, especially during extended
periods of economic expansion.
Investing in fixed income securities: These types of investments are subject to
loss in value if the market interest rates subsequently rise after purchase of
the obligation. This risk is greater for investments with longer remaining
durations. Another risk is that the issuer's perceived creditworthiness can drop
and cause the fixed income investment to lose value or the issuer could default
on interest or principal payments causing a loss in value. Lower rated
instruments, especially so called "junk bonds," involve greater risks due to the
financial health of the issuer and the economy generally and their market prices
can be more volatile.
Prepayment risk: Prepayment risk is the risk that an issuer of a debt security
owned by a Portfolio repays the debt before it is due. This is most likely to
occur when interest rates have declined and the issuer can therefore refinance
the debt at a lower interest rate. A Portfolio that owns debt obligations that
are prepaid would generally have to reinvest the amount prepaid in lower
yielding instruments. Also, debt obligations that can be prepaid tend to
increase less in value when interest rates decline, and decrease more when
interest rates rise, than otherwise similar obligations that are not prepayable.
Zero coupon risks: "Zero coupon" securities are debt obligations that provide
for payment of interest at the maturity date, rather than over the life of the
instrument. The values of zero coupon securities tend to respond more to changes
in interest rates than do otherwise comparable debt obligations that provide for
periodic payment of interest.
Investing in securities of foreign issuers: Investment in securities that are
traded outside the U.S. have additional risks beyond those of investing in U.S.
securities. Foreign securities are frequently more volatile and less liquid than
their U.S. counterparts for reasons that may include unstable political and
economic climates, lack of standardized accounting practices, limited
information available to investors and smaller markets that are more sensitive
to trading activity. Also, changes in currency exchange rates have the potential
of reducing gains or creating losses. There also can be risks of expropriation,
currency controls, foreign taxation or withholding, and less secure procedures
for transacting business in securities. The risks of investing in foreign
securities are usually higher in emerging markets such as most countries in
Southeast Asia, Eastern Europe, Latin America and Africa.
Value investing: This investment approach has additional risk associated with it
because the portfolio manager's judgement that a particular security is
undervalued in relation to the company's fundamental economic values may prove
incorrect.
Growth investing: This investment approach has additional risk associated with
it due to the volatility of growth stocks. Growth companies usually invest a
high portion of earnings in their businesses, and may lack the dividends of
value stocks that can cushion prices in a falling market. Also, earnings
disappointments often lead to sharply falling prices because investors buy
growth stocks in anticipation of superior earnings growth.
PERFORMANCE
The following tables and charts are provided to illustrate the variability of
the investment returns that each Portfolio shown below has earned in the past.
Average annual total return measures a Portfolio's performance over time,
and compares those returns to a representative index. Periods of 1, 5, and 10
years (or, since inception as applicable) are presented.
The graphs of year-by-year returns examine volatility by illustrating a
Portfolio's historic highs and lows, as well as the consistency of returns.
In general, as reflected in this section, Portfolios with higher average
annual total returns tend to be more volatile.
Return calculations do not reflect insurance product fees or other charges
and if included these charges would reduce each Portfolio's past performance.
Also, past performance does not necessarily indicate how a particular Portfolio
will perform in the future.
Certain Portfolios have commenced investment operations relatively recently
and consequently there is only a limited performance history shown below. A
longer history might give a clearer indication of the risks involved in
investing in the Portfolios.
The Emerging Market Equity Portfolio, Riggs Stock Portfolio and Riggs Small
Company Stock Portfolio have not yet commenced investment operations. The Lord
Abbett Growth and Income Portfolio commenced investment operations on January 8,
1999.
Quality Bond Portfolio
[BAR CHART]
Since May 1, 1996
One Year Ended (Date of initial
12/31/98 public offering)
Portfolio average annual total return
Salomon Brothers Broad Investment Grade Bond
Index
Small Cap Stock Portfolio
[BAR CHART]
Since May 1, 1996
One Year Ended (Date of initial
12/31/98 public offering)
Portfolio average annual total return
Russell 2000 Index
Large Cap Stock Portfolio
[BAR CHART]
Since May 1, 1996
One Year Ended (Date of initial
12/31/98 public offering)
Portfolio average annual total return
Standard & Poor's 500 Stock Index
Select Equity Portfolio
[BAR CHART]
Since May 1, 1996
One Year Ended (Date of initial
12/31/98 public offering)
Portfolio average annual total return
Standard & Poor's 500 Stock Index
International Equity Portfolio
[BAR CHART]
Since May 1, 1996
One Year Ended (Date of initial
12/31/98 public offering)
Portfolio average annual total return
MSCI EAFE Index
Bond Debenture Portfolio
[BAR CHART]
Since May 1, 1996
One Year Ended (Date of initial
12/31/98 public offering)
Portfolio average annual total return
First Boston High Yield Index
Salomon Brothers Broad Investment High Grade
Index
Merrill Lynch Convertible Index
Mid-Cap Value Portfolio
[BAR CHART]
Since August 20,
One Year Ended 1997 (Date of
12/31/98 commencement of
operations)
Portfolio average annual total return
Russell MidCap Index
Large Cap Research Portfolio
[BAR CHART]
Since August 20,
One Year Ended 1997 (Date of
12/31/98 commencement of
operations)
Portfolio average annual total return
Standard & Poor's 500 Stock Index
Developing Growth Portfolio
[BAR CHART]
Since August
One Year Ended 20,1997 (Date of
12/31/98 commencement of
operations)
Portfolio average annual total return
Russell 2000 Index
Balanced Portfolio
[BAR CHART]
Since July 1, 1997
One Year Ended (Date of
12/31/98 commencement of
operations)
Portfolio average annual total return
Standard & Poor's 500 Stock Index
Small Cap Equity Portfolio
[BAR CHART]
Since July 1, 1997
One Year Ended (Date of
12/31/98 commencement of
operations)
Portfolio average annual total return
Russell 2000 Index
Equity Income Portfolio
[BAR CHART]
Since July 1, 1997
One Year Ended (Date of
12/31/98 commencement of
operations)
Portfolio average annual total return
Russell 1000 Index
Growth & Income Equity
[BAR CHART]
Since July 1, 1997
One Year Ended (Date of
12/31/98 commencement of
operations)
Portfolio average annual total return
Standard & Poor's 500 Stock Index
DESCRIPTION OF THE PORTFOLIOS
Each Portfolio of the Trust has its own investment objective. Except where
otherwise noted, these objectives may be changed without shareholder approval.
Since investment in any Portfolio involves both opportunities for gain and risks
of loss, we cannot give you assurance that the Portfolios will achieve their
objectives. You should carefully review the objectives and investment practices
of the Portfolios and consider your ability to assume the risks involved before
allocating payments to particular Portfolios.
While certain of the investment techniques, instruments and risks associated
with each Portfolio are referred to in the discussion that follows, additional
information on these subjects appears in the Appendix to this Prospectus.
However, those discussions do not list every type of investment, technique, or
risk to which a Portfolio may be exposed. Further, the Portfolios may change
their investment practices at any time without notice, except for those policies
that this Prospectus or the Statement of Additional Information ("SAI")
specifically identify as requiring a shareholder vote to change. Unless
otherwise indicated, all percentage limitations, as well as the characterization
of a company's capitalization, are evaluated as of the date of purchase of the
security.
Each Portfolio may invest in money market instruments as a temporary defensive
measure during, or in anticipation of, adverse market conditions. This could
help a Portfolio avoid losses but may mean lost opportunities.
The investment objectives, principal investment strategies and principal risks
of each Portfolio have been described under the sections captioned "Investment
Objectives" and "Principal Investment Strategies and Risks of Each Portfolio" in
the "Risk/Return Summary." The discussion below provides further information
concerning the principal investment strategies and risks of each Portfolio.
Principal Investment Strategies
Portfolios Managed by J.P. Morgan Investment Management Inc.
Quality Bond Portfolio
The Portfolio is designed for investors who seek a total return over time that
is higher than that generally available from a portfolio of shorter-term
obligations while recognizing the greater price fluctuation of longer-term
obligations.
The Sub-Adviser actively manages the Portfolio's duration, the allocation of
securities across market sectors, and the selection of specific securities
within sectors. Based on fundamental, economic and capital markets research, the
Sub-Adviser adjusts the duration of the Portfolio in light of market conditions
and the Sub-Adviser's interest rate outlook. For example, if interest rates are
expected to fall, the duration may be lengthened to take advantage of the
expected associated increase in bond prices. The Sub-Adviser selects specific
securities which it believes are undervalued for purchase using:
advanced quantitative tools
analysis of credit risk
the expertise of a dedicated trading desk
the judgment of fixed income portfolio managers and analysts
Duration is a measure of the weighted average maturity of the bonds held in the
Portfolio and can be used as a measure of the sensitivity of the Portfolio's
market value to changes in interest rates. Under normal market conditions, the
Portfolio's duration will range between one year shorter and one year longer
than the duration of the U.S. investment grade fixed income universe, as
represented by Salomon Brothers Broad Investment Grade Bond Index, the
Portfolio's benchmark. Currently, the benchmark's duration is approximately
_____ years. The maturities of the individual securities in the Portfolio may
vary widely, however.
The Portfolio may invest in a broad range of debt securities of domestic and
foreign issuers. These securities will be of various types and maturities and
will include:
debentures
notes
mortgage securities
equipment trust certificates
zero coupon securities
other collateralized securities
Collateralized securities are backed by a pool of assets such as loans or
receivables which generate cash flow to lower the payments due on the
securities.
The Portfolio may invest in obligations issued or guaranteed by the U.S.
Government and backed by the full faith and credit of the United States
including
Treasury securities
GNMA Certificates
Obligations of the Farmers Home Administration and the Export Import Bank
The Portfolio may also invest in obligations issued or guaranteed by U.S.
Government agencies or instrumentalities where the Portfolio must look
principally to the issuing or guaranteeing agency for ultimate repayment. Some
examples of agencies or instrumentalities issuing these obligations are the
Federal Farm Credit System, the Federal Home Loan Banks and the Federal National
Mortgage Association. Although these governmental issuers are responsible for
payments on their obligations, they do not guarantee their market value.
The Portfolio may also invest in municipal obligations that have been issued on
a taxable basis or that have an attractive yield excluding tax considerations
debt securities of foreign governments and governmental entities
It is a current policy of the Portfolio that under normal circumstances at least
65% of its total assets will consist of securities that are rated at least A by
Moody's or S&P or that are unrated and in the Sub-Adviser's opinion are of
comparable quality. In the case of 30% of the Portfolio's investments, the
Portfolio may purchase debt securities that are rated Baa or better by Moody's
or BBB or better by S&P or are unrated and in the Sub-Adviser's opinion are of
comparable quality. The remaining 5% of the Portfolio's assets may be invested
in debt securities that are rated Ba or better by Moody's or BB or better by S&P
or are unrated and in the Sub-Adviser's opinion are of comparable quality.
Securities rated Baa by Moody's or BBB by S&P are considered investment grade,
but have some speculative characteristics. Securities rated Ba by Moody's or BB
by S&P are below investment grade and considered to be speculative with regard
to payment of interest and principal.
Small Cap Stock Portfolio
The 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 may also serve as an efficient vehicle to diversify an existing
portfolio by adding the equities of smaller U.S. companies. The small company
holdings of the Portfolio are primarily companies included in the Russell 2000
Index.
The Sub-Adviser seeks to enhance the Portfolio's total return relative to that
of the U.S. small company universe. To do so, the Sub-Adviser uses fundamental
research, systematic stock valuation and a disciplined portfolio construction
process. The Sub-Adviser continually screens the universe of small
capitalization companies to identify for further analysis those companies which
exhibit favorable characteristics such as significant and predictable cash flow
and high quality management. Based on fundamental research and using a dividend
discount model, the Sub-Adviser ranks these companies within economic sectors
according to their relative value. The Sub-Adviser then selects for purchase the
most attractive companies within each economic sector.
The Sub-Adviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Portfolio
relative to that of the U.S. small company universe. The Sub-Adviser believes
that under normal market conditions, the Portfolio will have sector weightings
comparable to that of the U.S. small company universe, although it may
moderately under- or over-weight selected economic sectors. In addition, as a
company moves out of the market capitalization range of the small company
universe, it generally becomes a candidate for sale by the Portfolio.
The Portfolio's net assets invested in equity securities will consist of common
stocks and other securities with equity characteristics such as preferred
stocks, warrants, rights and convertible securities. The Portfolio's primary
equity investments are the common stocks of small U.S. companies and, to a
limited extent, similar securities of foreign corporations. The common stock in
which the Portfolio may invest includes the common stock of any class or series
or any similar equity interest, such as trust or limited partnership interests.
These equity investments may or may not pay dividends and may or may not carry
voting rights. The Portfolio invests in securities listed on a securities
exchange or traded in an over-the-counter market, and may invest in certain
restricted or unlisted securities.
Large Cap Stock Portfolio.
Ordinarily, the Portfolio pursues its investment objective by investing
primarily in dividend-paying common stock. The Portfolio may also invest in
other equity securities, consisting of, among other things, non-dividend-paying
common stock, preferred stock, and securities convertible into common stock,
such as convertible preferred stock and convertible bonds, and warrants. The
Portfolio may also invest in ADRs and in various foreign securities if U.S.
exchange-listed.
The Portfolio is not subject to any limit on the size of companies in which it
may invest, but intends, under normal circumstances, to be fully invested to the
extent practicable in the stock of large- and medium-sized companies typically
represented by the S&P 500. In managing the Portfolio, the potential for
appreciation and dividend growth is given more weight than current dividends.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk by
investing in many different economic sectors, industries and companies.
Portfolio sector weightings will generally equal those of the S&P 500. In
selecting securities, the Sub-Adviser may emphasize securities that it believes
to be undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general as a result of a market
decline, poor economic conditions or tax-loss selling, or actual or anticipated
unfavorable developments affecting a company.
The Sub-Adviser uses a dividend discount model to rank companies within economic
sectors according to their relative value and then separates them into quintiles
by sector. The Portfolio will normally be comprised, based on the dividend
discount model, of stocks in the first three quintiles.
Select Equity Portfolio.
Ordinarily, the Portfolio pursues its investment objective by investing
primarily in dividend-paying common stock. The Portfolio may also invest in
other equity securities, consisting of, among other things, non-dividend-paying
common stock, preferred stock, and securities convertible into common stock,
such as convertible preferred stock and convertible bonds, and warrants. The
Portfolio may also invest in ADRs and in various foreign securities if U.S.
exchange-listed.
The Portfolio is not subject to any limit on the size of companies in which it
may invest, but intends, under normal circumstances, to be fully invested to the
extent practicable in the stock of large- and medium-sized companies primarily
included in the S&P 500. In managing the Portfolio, the potential for
appreciation and dividend growth is given more weight than current dividends.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk by
investing in many different economic sectors, industries and companies. The
Sub-Adviser may under- or over-weight selected economic sectors against the S&P
500's sector weightings to seek to enhance the Portfolio's total return or
reduce fluctuations in market value relative to the S&P 500. In selecting
securities, the Sub-Adviser may emphasize securities that it believes to be
undervalued. Securities of a company may be undervalued for a variety of reasons
such as
an overreaction by investors to unfavorable news about a company, an
industry, or the stock markets in general
as a result of a market decline, poor economic conditions, tax-loss
selling, or
actual or anticipated unfavorable developments affecting a company.
The Sub-Adviser uses a dividend discount model to rank companies within economic
sectors according to their relative value and then separates them into quintiles
by sector. The Portfolio will primarily consist of stocks of companies from the
first and second quintiles.
International Equity Portfolio.
The Portfolio seeks to achieve its investment objective through country
allocation, stock selection and management of currency exposure. The Sub-Adviser
uses a disciplined portfolio construction process to seek to enhance returns and
reduce volatility in the market value of the Portfolio relative to that of the
EAFE Index.
Based on fundamental research, quantitative valuation techniques, and
experienced judgment, the Sub-Adviser uses a structured decision-making process
to allocate the Portfolio primarily across the developed countries of the world
outside the United States by under- or over-weighting selected countries in the
EAFE Index. Currently, Japan has the heaviest weighting in the EAFE Index
(approximately ____%). The Portfolio will not invest more than 25% of its net
assets in Japan notwithstanding the Japan weighting in the EAFE Index.
Using a dividend discount model and based on analysts' industry expertise,
securities within each country are ranked within economic sectors according to
their relative value. Based on this valuation, the Sub-Adviser selects the
securities which appear the most attractive for the Portfolio. The Sub-Adviser
believes that under normal market conditions, economic sector weightings
generally will be similar to those of the EAFE Index.
Finally, the Sub-Adviser actively manages currency exposure, in conjunction with
country and stock allocation, in an attempt to protect and possibly enhance the
Portfolio's market value. Through the use of forward foreign currency exchange
contracts, the Sub-Adviser will adjust the Portfolio's foreign currency
weightings to reduce its exposure to currencies deemed unattractive and, in
certain circumstances, increase exposure to currencies deemed attractive, as
market conditions warrant, based on fundamental research, technical factors, and
the judgment of a team of experienced currency managers.
The Portfolio's assets in equity securities of foreign issuers will consist of
common stocks and other securities with equity characteristics such as preferred
stock, warrants, rights and convertible securities. The common stock in which
the Portfolio may invest includes the common stock of any class or series or any
similar equity interest such as trust or limited partnership interests. The
Portfolio may also invest in securities of issuers located in developing
countries. The Portfolio invests in securities listed on foreign or domestic
securities exchanges and securities traded in foreign or domestic
over-the-counter markets, and may invest in certain restricted or unlisted
securities.
Emerging Markets Equity Portfolio.
The Portfolio is designed for long-term investors who want exposure to the
rapidly growing emerging markets. The Sub-Adviser considers "emerging markets"
to be any country which is generally considered to be an emerging or developing
country by the World Bank, the International Finance Corporation, the United
Nations or its authorities. These countries generally include every country in
the world except
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Ireland
Italy
Japan
Netherlands
New Zealand
Norway
Spain
Sweden
Switzerland
United Kingdom
United States
The Portfolio will focus its investments in those emerging markets countries
which it believes have strongly developing economies and in which the markets
are becoming more sophisticated.
A company in an emerging market is one that:
has its principal securities trading market in an emerging market country;
is organized under the laws of an emerging market; derives 50% or more of
its total revenue from either goods produced, sales made or services
performed in emerging markets; or has at least 50% of its assets located in
emerging markets.
The Sub-Adviser seeks to achieve the Portfolio's investment objective by a
disciplined process of country allocation and company selection. Based on
fundamental research, quantitative analysis, and experienced judgment, the
Sub-Adviser identifies those countries where economic and political factors,
including currency movements, are likely to produce above-average returns. Based
on their relative value, the Sub-Adviser then selects those companies in each
country's major industry sectors which it believes are best positioned and
managed to take advantage of these economic and political factors.
The Portfolio's investments are primarily denominated in foreign currencies but
it may also invest in securities denominated in the U.S. dollar or multinational
currency units. The Sub-Adviser will not routinely attempt to hedge the
Portfolio's foreign currency exposure. However, the Sub-Adviser may from time to
time engage in foreign currency exchange transactions if, based on fundamental
research, technical factors, and the judgment of experienced currency managers,
it believes the transactions would be in the Portfolio's best interest.
The Portfolio's assets in equity securities of companies in emerging markets
will consist 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. The
common stock in which the Portfolio may invest includes the common stock of any
class or series or any similar equity interest, such as trust or limited
partnership interests. These equity investments may or may not pay dividends and
may or may not carry voting rights. The Portfolio invests in securities listed
on foreign or domestic securities exchange and securities traded in foreign or
domestic over-the-counter markets, and may invest in certain restricted or
unlisted securities.
Certain emerging markets are closed in whole or in part to equity investments by
foreigners except through specifically authorized investment funds. The
Portfolio may acquire securities of other investment companies to the extent
permitted under federal securities laws. No more than 5% of the Portfolio's
total assets may be invested in the securities of any one investment company. As
a shareholder in an investment fund, the Portfolio would bear its share of that
investment fund's expenses, including its advisory and administration fees. At
the same time the Portfolio would continue to pay its own operating expenses.
Portfolios Managed by Lord, Abbett & Co.:
Bond Debenture Portfolio.
It is the belief of the Portfolio's management that a high total return (current
income and capital appreciation) may be derived from an actively-managed,
diversified debt- security portfolio. The Portfolio seeks unusual values,
particularly in lower-rated debt securities, some of which are convertible into
common stocks or have warrants to purchase common stocks.
Higher yield on debt securities can occur during periods of inflation when the
demand for borrowed funds is high. Also, buying lower-rated bonds when the
credit risk is above average but, in the view of Portfolio management, likely to
decrease, can generate higher yields. Such debt securities normally will consist
of secured debt obligations of the issuer (i.e., bonds) general unsecured debt
obligations of the issuer (i.e., debentures) and debt securities which are
subordinate in right of payment to other debt of the issuer.
Capital appreciation potential is an important consideration in the selection of
portfolio securities. Capital appreciation may be obtained by investing in debt
securities when the trend of interest rates is expected to be down; investing in
convertible debt securities or debt securities with warrants attached entitling
the holder to purchase common stock; and investing in debt securities of issuers
in financial difficulties when, in the view of Portfolio management, the
problems giving rise to such difficulties can be successfully resolved, with a
consequent improvement in the credit standing of the issuers (such investments
involve corresponding risks that interest and principal payments may not be made
if such difficulties are not resolved).
In no event will the Portfolio invest more than 10% of its gross assets at the
time of investment in debt securities which are in default as to interest or
principal.
The Portfolio must keep at least 20% of the value of its total assets in debt
securities which, at the time of purchase, are rated within one of the four
highest grades determined either by Moody's or S&P, debt securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, cash or
cash equivalents (short-term obligations of banks, corporations or the U.S.
Government), or a combination of any of the foregoing
The Portfolio may invest up to 10% of its gross assets, at market value, in debt
securities primarily traded in foreign countries - such foreign debt securities
normally will be limited to issues where there does not appear to be substantial
risk of nationalization, exchange controls, confiscation or other government
restrictions.
Subject to the percentage limitations for purchases of other than debt
securities described below, the Portfolio may purchase common and preferred
stocks
The Portfolio may hold or sell any property or securities which it may obtain
through the exercise of conversion rights or warrants or as a result of any
reorganization, recapitalization or liquidation proceedings for any issuer of
securities owned by it. In no event will the Portfolio voluntarily purchase any
securities other than debt securities, if, at the time of such purchase or
acquisition, the value of the property and securities, other than debt
securities, in the Portfolio is greater than 20% of the value of its gross
assets.
The Portfolio may invest substantially in lower-rated bonds for their higher
yields which entail greater risks. Since the risk of default generally is higher
among lower-rated bonds, the research and analysis performed by the Sub-Adviser
are especially important in the selection of such bonds, which, if rated BB/Ba
or lower, often are described as "high-yield bonds" because of their generally
higher yields and referred to colloquially as "junk bonds" because of their
greater risks. In selecting lower-rated bonds for investment, the Sub-Adviser
does not rely upon ratings, which evaluate only the safety of principal and
interest, not market value risk, and which, furthermore, may not accurately
reflect an issuer's current financial condition. The Portfolio does not have any
minimum rating criteria for its investments in bonds and some issuers may
default as to principal and/or interest payments subsequent to the purchase of
their securities. Through portfolio diversification, good credit analysis and
attention to current developments and trends in interest rates and economic
conditions, investment risk can be reduced, although there is no assurance that
losses will not occur.
The Portfolio may invest in the securities markets of foreign countries.
Mid-Cap Value Portfolio
Under normal circumstances, at least 65% of the Portfolio's total assets will
consist of investments in mid-cap companies, determined at the time of purchase.
"Mid-cap" companies are defined for this purpose as companies whose outstanding
equity securities have an aggregate market value of between $200 million and $5
billion.
Selection of stocks is based on appreciation potential, without regard to
current income. The holdings in the Portfolio typically will be selected for
their potential for significant market appreciation from growing recognition of
substantial improvement in the company's financial results or increasing
anticipation of such improvement. This potential may derive from such factors as
changes in the economic and financial environment,
new or improved products or services,
new or rapidly expanding markets,
changes in management or structure of the company,
price increases due to shortages of resources or productive capacity,
improved efficiencies resulting from new technologies or changes in
distribution or
changes in governmental regulations, political climate or competitive
conditions.
The companies represented will have a strong or, in the perception of Portfolio
management, an improving financial position. The outstanding stock of companies
in the Portfolio ordinarily will have an aggregate market value of not less than
approximately $50 million. At the time of purchase, the stocks may be largely
neglected by the investment community or, if widely followed, they may be out of
favor or at least controversial. Characteristically, the Portfolio will not
carry a large cash position as an investment strategy. While the Portfolio may
take short-term gains if deemed appropriate, normally the Portfolio will hold
securities in order to realize long-term capital gains. The Portfolio may invest
up to 10% of its net assets in securities (of the type described above) which
are primarily traded in foreign countries.
Large Cap Research Portfolio
The Portfolio will invest in companies on the basis of the fundamental economic
and business factors (such as government, fiscal and monetary policies,
employment levels, demographics, retail sales and market share) which will
affect future earnings and which Portfolio management believes are the primary
factors determining the future market valuation of stocks. Although the prices
of common stocks fluctuate and their dividends vary, historically, common stocks
have appreciated in value and their dividends have increased when the companies
they represent have prospered and grown.
In seeking to fulfill its objective, the Portfolio will invest also in both
small and middle-sized companies, as measured by the value of their outstanding
stock guided by the policies mentioned herein.
Portfolio management concentrates its research and stock selection on companies
that are undervalued or out of current investment favor and thus the investment
portfolio typically will encompass less market risk as measured by its
price-to-normal earnings and price-to-book value ratios. The Portfolio's
management process results in the sale of stocks that it judges to be overpriced
and reinvestment in other securities which it believes offer better values and
less market risk.
The Portfolio reflects the collective judgment of the Research Department of the
Sub-Adviser as to what securities represent the greatest investment value,
regardless of industry sector, market capitalization, or Wall Street
sponsorship. At the time of purchase, securities selected for the Portfolio may
be largely neglected by the investment community or, if widely followed, they
may be out of favor or at least controversial.
Up to 10% of the Portfolio's net assets (at the time of investment) may be
invested in foreign securities (of the type described herein) primarily traded
in foreign countries.
The Portfolio may invest in closed-end investment companies if bought in the
secondary market with a fee or commission no greater than the customary broker's
commission in compliance with the 1940 Act. Shares of such investment companies
sometimes trade at a discount or premium in relation to their net asset value
and there may be duplication of fees, for example, to the extent that the
Portfolio and the closed-end investment company both charge a management fee.
Neither an issuer's ceasing to be rated investment grade nor a rating reduction
below that grade will require elimination of a bond from the Portfolio.
Developing Growth Portfolio.
The Portfolio's present investment strategy, as developed by the Sub-Adviser, is
based on the four phases of corporate growth. As described below, only the
second (or developing growth) phase is characterized by a dramatic rate of
growth. The management of the Portfolio looks for companies in that phase and,
under normal circumstances, will invest at least 65% of the Portfolio's total
assets in securities of such companies. The Portfolio also may invest in
companies which are in their formative phase. Developing growth companies are
almost always small, usually young and their shares are generally traded over
the counter. Having, in the view of Portfolio management, passed the pitfalls of
the formative years, they are now in a position to grow rapidly in their market.
THE FOUR PHASES OF BUSINESS GROWTH
(as perceived by the Sub-Adviser)
PHASE 1 - FORMATIVE: Phase 1 has high risk. Companies in this phase are
formative and the perils of infancy take a high toll during these years. Skill
of management and growth of revenues and earnings permit some companies to
survive and advance into the second phase.
PHASE 2 - DEVELOPING GROWTH: Phase 2 usually is a period of swift
development, when growth occurs at a rate rarely equaled by established
companies in their mature years. The management of the Portfolio focuses on
companies which it believes are strongly positioned in this phase. Of course,
the actual growth of a company cannot be foreseen and it may be difficult to
determine in which phase a company is presently situated.
PHASE 3 - ESTABLISHED GROWTH: Phase 3 is a time of established growth when
competitive forces, regulations and internal bureaucracy often begin to blunt
the sharp edge of success in the marketplace.
PHASE 4 - MATURITY: Phase 4 is a time of maturity when companies ease into
a growth pattern that roughly reflects the increase in Gross Domestic Product.
At any given time, there are many hundreds of publicly-traded corporations in
the developing growth phase. In choosing from among them, Portfolio management
looks for special characteristics that will help their growth. These can include
a unique product or service for which management foresees a rising demand;
a special area of technological expertise;
the ability to service a region that is growing faster than average;
a competitive advantage or new opportunities in foreign trade or from
shifts in government priorities and programs;
or an ability to take advantage of growth of consumers' discretionary
income and demographic changes.
The management of the Portfolio also looks for certain financial characteristics
such as:
at least five years of higher-than-average growth of revenues and earnings
per share;
higher-than-average returns on equity;
ability to finance growth in the form of a lower-than-average ratio of
long-term debt to capital and price/earnings ratios that are below expected
growth rates.
The Portfolio also looks for certain characteristics of management in addition
to those that are implied by the financial data. The Portfolio looks for
management that is well-seasoned and diverse in its talent and that is
aggressive enough to seize the opportunities it perceives in each company's
future. Finally, the Portfolio looks for management that has demonstrated an
ability to manage through a full economic cycle. The Portfolio does not,
however, invest in order to control management.
Securities being considered for the Portfolio are analyzed solely on traditional
investment fundamentals. In addition to the financial data already mentioned,
the management of the Portfolio evaluates the market for
each company's products or services,
the strengths and weaknesses of competitors,
the availability of raw materials,
diversity of product mix, etc.
Finally, in assembling the investment portfolio, the management of the Portfolio
tries to diversify the Portfolio's investments. Within the bounds of other
criteria, the management of the Portfolio tries to invest in many securities and
industries so that any misjudgments it might make are adequately cushioned.
Lord Abbett Growth and Income Portfolio.
The Portfolio intends to keep its assets invested in those securities which are
selling at reasonable prices in relation to value and, to do so, it may have to
forego some opportunities for gains when, in the judgment of Portfolio
management , they carry excessive risk.
The Portfolio will try to anticipate major changes in the economy and select
stocks which it believes will benefit most from these changes.
The Portfolio will normally invest in common stocks. Although the prices of
common stocks fluctuate and their dividends vary, historically, common stocks
have appreciated in value and their dividends have increased when the companies
they represent have prospered and grown.
The Portfolio constantly seeks to balance the opportunity for profit against the
risk of loss. In the past, very few industries have continuously provided the
best investment opportunities. The Portfolio will take a flexible approach and
adjust the Portfolio to reflect changes in the opportunity for sound investments
relative to the risks assumed. Therefore, the Portfolio will sell stocks that
are judged to be overpriced and reinvest the proceeds in other securities which
are believed to offer better values for the Portfolio.
The Portfolio will not purchase securities for trading purposes. To create
reserve purchasing power and also for temporary defensive purposes, the
Portfolio may invest in straight bonds and other fixed-income securities.
Portfolios Managed by Mississippi Valley Advisors Inc.
Balanced Portfolio.
In pursuing the Portfolio's investment objective, the Sub-Adviser allocates the
Portfolio's assets based upon its evaluation of the relative attractiveness of
the major asset groups:
equity securities
fixed income securities
cash equivalents
In an effort to better quantify the relative attractiveness of the major asset
groups over a one- to three-year period of time, the Sub-Adviser has
incorporated into its asset allocation decision-making process several dynamic
computer models which it has created. The purpose of these models is to show the
statistical impact of the Sub-Adviser's economic outlook upon the future returns
of each asset group. The models are especially sensitive to the forecasts for
inflation, interest rates and long-term corporate earnings growth. Investment
returns are normally heavily impacted by such variables and their expected
changes over time. Therefore, the Sub-Adviser's method attempts to take
advantage of changing economic conditions by increasing or decreasing the ratio
of stocks to bonds in the Portfolio. For example, if the Sub-Adviser expected
more rapid economic growth leading to better corporate earnings, it would
increase the Portfolio's holdings of equity securities and reduce its holdings
of fixed income securities and cash equivalents.
The fixed-income securities in which the Balanced Portfolio invests include U.S.
Government securities or other fixed-income and related debt securities rated in
one of the four highest rating categories assigned by a Rating Agency at the
time of purchase or in unrated investments deemed by the Sub-Adviser to be of
comparable quality pursuant to guidelines approved by the Trust's Board of
Trustees. Debt securities may include
a broad range of fixed and variable rate bonds, debentures, notes, and
securities convertible into or exchangeable for common stock;
dollar-denominated debt obligations of foreign issuers, including foreign
corporations and governments; and
first mortgage loans, income participation loans, participation
certificates in pools of mortgages, including mortgages issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, collateralized mortgage
obligations and other mortgage-related securities, and other asset-backed
securities.
The Portfolio may invest up to 10% of its total assets at the time of purchase
in dollar-denominated debt obligations of foreign issuers, either directly or
through ADRs and European Depositary Receipts ("EDRs"), and up to 25% of its
total assets at the time of purchase in non-mortgage asset-backed securities,
respectively.
The Portfolio's dollar-weighted average portfolio quality is expected to be at
least "A" or higher. In making investment decisions, the Sub-Adviser will
consider a number of factors including
current yield
maturity
yield to maturity
anticipated changes in interest rates, and
the overall quality of the investment.
The Portfolio seeks to provide a current yield greater than that generally
available from money market instruments.
The Portfolio may purchase asset-backed securities (i.e., securities backed by
mortgages, installment sale contracts, corporate receivables, credit card
receivables or other assets). Such securities are issued by entities such as the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and by
private issuers.
Small Cap Equity Portfolio.
In pursuing its investment objective, the Portfolio normally invests primarily
in common stock of emerging or established small- to medium-sized companies with
above-average potential for price appreciation. Current income is an incidental
consideration in the selection of portfolio securities. The Portfolio may invest
in preferred stock, rights, warrants, and securities convertible into common
stock. It may invest a portion of its assets in established larger companies
that, in the opinion of the Sub-Adviser, offer improved growth possibilities
because of rejuvenated management, product changes, or other developments that
might stimulate earnings or asset growth, or in companies that seem undervalued
relative to their underlying assets.
The Small Cap Equity Portfolio uses a research intensive approach and valuation
techniques that emphasize earnings and asset growth. The Sub-Adviser selects
stocks based on a number of factors, including
historical and projected earnings
asset value
potential for price appreciation and earnings growth and
quality of products manufactured and/or services offered.
Stocks purchased for the Portfolio may be listed on a national securities
exchange or may be unlisted securities with or without an established
over-the-counter market. The Portfolio may also invest in initial public
offerings of new companies that demonstrate the potential for price
appreciation. A convertible security may be purchased for the Portfolio when, in
the Sub-Adviser's opinion, the price of the convertible security is favorable
compared to the price of the common stock. In general, the Portfolio's stocks
and other securities will be diversified over a number of industry groups in an
effort to reduce the risks inherent in such investments.
The Portfolio may invest in securities issued by Canadian corporations and
Canadian counterparts of U.S. corporations, which may or may not be listed on a
national securities exchange or traded in over-the-counter markets.
Equity Income Portfolio.
Stocks purchased for the Portfolio generally will be listed on a national
securities exchange or will be unlisted securities with an established
over-the-counter market. A convertible security may be purchased for the
Portfolio when, in the Sub-Adviser's opinion, the price and yield of the
convertible security is favorable as compared to the price and yield of the
common stock.
Growth & Income Equity Portfolio
The Sub-Adviser selects stocks based on a number of factors, including
historical and projected earnings, growth and asset value, earnings compared to
stock prices generally (as measured by the Standard & Poor's 500 Index), and
consistency of earnings growth and earnings quality. Stocks purchased for the
Portfolio generally will be listed on a national securities exchange or will be
unlisted securities with an established over-the-counter market. A convertible
security may be purchased for the Portfolio when, in the Sub-Adviser's opinion,
the price and yield of the convertible security is favorable compared to the
price and yield of the common stock. The stocks or securities in which the
Portfolio invests may be expected to produce some income but income is not a
major criterion in their selection. In general, the Portfolio's stocks and
securities will be diversified over a number of industry groups in an effort to
reduce the risks inherent in such investments.
Portfolios Managed by the Trust Division of Riggs Bank, N.A.
Riggs Stock Portfolio.
In addition to the investments described in the section captioned "Principal
Investment Strategies and Risks of Each Portfolio," the Portfolio may invest in
commercial paper rated A-1 by S&P, Prime-1 by Moody's, or F-1+ or F-1 by Fitch,
and money market instruments (including commercial paper) which are unrated but
deemed to be of comparable quality by the Sub-Adviser including Canadian
Commercial Paper and Europaper;
certain instruments of domestic and foreign banks and savings associations;
and
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including those obligations purchased on a when-issued or
delayed delivery basis.
In selection investment for the Portfolio, the Sub-Adviser follows a
value-based, disciplined investment philosophy. Using a computer model and
hands-on fundamental analysis, stocks are selected based on such factors as
low price/earnings ratios relative to earnings growth and history;
rising earnings estimates;
relative price strength;
high or improving earnings; and
credit quality.
Computer screens based upon value criteria are applied to a listing of 750
stocks that are selected based upon market capitalization, trading volume, and
availability of data, to rank them according to relative attractiveness. These
rankings are refined by additional screens focusing on earnings growth and
relative price strength. This computer model is complemented with the
Sub-Adviser's fundamental analysis to produce a list of securities from which
the Sub-Adviser will select what it believes to be especially attractive issues.
The relative price action of each stock is monitored, and price momentum is
followed to determine when the value of a security is beginning to be recognized
by the market.
Riggs Small Company Stock Portfolio.
In addition to the investments described in the section captioned "Principal
Investment Strategies and Risks of Each Portfolio," the Portfolio may invest in
preferred stocks, real estate investment trusts, corporate bonds, notes,
warrants, and rights;
ADRs of foreign companies;
commercial paper rated A-1 by S&P, Prime-1 by Moody's, or F-1 by Fitch, and
money market instruments (including commercial paper) which are unrated but
deemed to be of comparable quality by the Sub-Adviser, including Canadian
Commercial Paper and Europaper;
certain instruments of domestic and foreign banks and savings associations;
and
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including those obligations purchased on a when-issued or
delayed delivery basis.
While the Portfolio will only purchase corporate debt obligations that, at the
time of purchase, are rated in the top three rating categories, in the event
that any such security is downgraded to the fourth category, the Portfolio may
continue to hold the security. In the event that any such security is downgraded
by a ratings service below the fourth highest rating category, the Portfolio
will dispose of the security.
In selecting investments for the Portfolio, the Sub-Adviser employs the same
value-based, disciplined investment philosophy that is described above with
respect to the Riggs Stock Portfolio, and applies it to the small capitalization
sector of the equity market. Using a computer model and hands-on fundamental
analysis, small capitalization stocks are selected based on such factors as:
low price/earnings ratios relative to earnings growth and history;
rising earnings estimates;
relative price strength;
high or improving earnings; and
credit quality.
Computer screens based upon value criteria are applied to a listing of small
capitalization stocks that are selected using the same methodology that is used
for the Riggs Stock Portfolio to rank them according to relative attractiveness.
These rankings are refined by additional screens focusing on earnings growth and
relative price strength. This computer model is complemented with the
Sub-Adviser's fundamental analysis to produce a list of securities from which
the Sub-Adviser will select what it believes to be especially attractive issues.
The relative price action of each small capitalization stock is monitored, and
price momentum is followed to determine when the value of a security is
beginning to be recognized by the market.
PRINCIPAL RISKS
* Market Risks. All securities have market risk. The Sub-Advisers invest in
different types of securities and investment techniques all of which
involve varying amounts of risk. The value of bonds and other fixed income
securities will go up and down in response to changes in interest rates
charged by the Federal Reserve and the lending banks. Stocks may be
affected by the overall economy, both within and without the United States
and by changes in demand for certain products or in certain parts of the
market.
* Investments in Stocks. Stocks tend to go up and down in value more than do
bonds or other debt obligations (fixed income securities), making them more
volatile. Volatile securities have a greater potential return than do fixed
income securities, but have more risk of loss. Although, in the past,
stocks that have been held for a long period of time have provided higher
returns than less volatile securities, there is no assurance that they will
do so in the future.
* Investment in Bonds. The value of bonds and other debt obligations(fixed
income securities) will change when interest rates change. If interest
rates go down, the market value of bonds held by the Portfolio that pay
higher interest rates increases; however if interest rates go up, the
market value of bonds held by the Portfolio that pay lower interest rates
goes down.
* Smaller Companies. Investment in the stocks of smaller companies has risks
in addition to the risk of investing in any stocks. Smaller companies have
less capitalization than larger companies and a greater risk of failing.
Smaller companies may be less diversified than larger companies and
therefore may be more at risk from economic changes that affect only
specific industries or markets.
* Investing in Larger Companies. Larger more established companies may be
unable to respond quickly to new competitive challenges such as changes in
technology and consumer tastes. Many larger companies also may not be able
to attain the high growth rates of successful smaller companies, especially
during an extended period of economic expansion.
* Purchasing for Value. When a Sub-Adviser purchases stocks of companies that
other investors have not recognized as having value, there is a risk that
those stocks will never be recognized by other investors and therefore may
not achieve their potential value.
* Derivatives. Derivatives can be volatile investments and involve certain
risks. A Portfolio may be unable to limit its losses by closing a position
due to lack of a liquid market or similar factors. Losses may also occur if
there is not a perfect correlation between the value of futures or forward
contracts and the related securities. The use of futures may involve a high
degree of leverage because of low margin requirements. As a result, small
price movements in futures contracts may result in immediate and
potentially unlimited gains or losses to a Portfolio. Leverage may
exaggerate losses of principal. The amount of gains or losses on
investments in futures contracts depends on the investment adviser's
ability to predict correctly the direction of stock prices, interest rates
and other economic factors.
* Foreign Securities. Investments in non-U.S. securities are subject to risks
in addition to the normal risks of investments. The value of non-U.S.
securities will change as the exchange rates for the currency in the
countries where the companies are located change. Some countries do not
have the same kinds of laws that protect the purchasers of securities, as
do countries with more established markets such as the United States.
Therefore, there is more risk in purchasing securities issued by companies
located in those countries. In addition, there may be less information
available about non-U.S. issuers, delays in settling sales of foreign
securities and governmental restrictions or controls that can adversely
affect the value of securities of foreign companies. Securities of foreign
companies may not be as easy to sell as securities of U.S. companies. A
Portfolio may incur additional costs in handling foreign securities, such
as increased sales costs and custody costs.
* Emerging Market Countries. The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in emerging markets countries, as these markets are generally
more volatile than the markets of developed countries.
* Mortgage-Backed Securities. There is a risk for a Portfolio when it
purchases mortgage-backed securities. Under these arrangements, the
Portfolio acquires an interest in a pool of loans and the mortgages
securing those loans. As the borrowers make principal and interest payments
on the loans, the Portfolio receives a share of those payments. The value
of the interests in these pools will go up and down as interest rates go up
and down in the same manner as bonds. In addition, however, the value is
reduced if the borrowers repay the loans earlier than predicted,
particularly when the interest rates on the repaid loans are higher than
current interest rates being paid for new loans that would replace the
repaid loans. The value of the interests is also reduced if the borrowers
default on the loans and the mortgaged property, collateral and/or other
guarantees securing the loans are not sufficient to cover the amounts in
default.
* Repurchase Agreements. Under a repurchase agreement the purchaser acquires
a debt instrument for a relatively short time. The seller of the debt
instrument agrees to repurchase the instrument and the purchaser agrees to
resell the instrument at a fixed price and time. Repurchase agreements give
the Portfolio the potential for increased returns, but also have similar
market risks to those of investing in mortgage dollar roll transactions
described below. If the value of the security that will be repurchased
increases above the repurchase price, the Portfolio will benefit. However,
if the value goes down, the Portfolio will be purchasing a security at a
price higher than its value. In addition in a repurchase agreement, there
is a risk that the other party will refuse to resell the security at the
end of the transaction period. The purchaser receives collateral from the
seller to back up the seller's agreement to repurchase; however, there is a
risk that the collateral may not be worth the amount paid by the purchaser
for the instrument. The purchaser may also have difficulty selling the
collateral.
* Mortgage Dollar Roll Transactions. Mortgage dollar roll transactions have
risks that are similar to those of reverse repurchase agreements. These
transactions can increase the return of a Portfolio if the market value of
the security sold by the Portfolio goes up to a price higher than the price
at which the Portfolio can repurchase the security. However, if the market
value goes down, the Portfolio will be purchasing a security at a price
that is higher than its market value.
* Borrowing. All of the Portfolios may borrow money for temporary or
emergency purposes. Most of the Portfolios can engage in borrowing by
investing in dollar roll transactions, repurchase agreements or similar
securities. Some Portfolios can borrow money or securities to increase the
return on a Portfolio. Borrowing money or securities increases the assets
that a Portfolio has available to invest. If the investments are
profitable, the return for the Portfolio is enhanced. However, if the
investments lose value, the losses are exaggerated.
* Lending Securities. Lending securities means that the Portfolio lends
securities that the Portfolio owns to a third party for a fee. The
Portfolio holds other assets of the borrower as collateral to insure the
repayment of the securities loaned. Lending Portfolio securities may result
in losses to the Portfolio if the borrower does not repay the securities
loaned and the Portfolio is unable to sell the collateral for an amount
equal to the value of the loaned securities.
* Below Investment Grade Bonds or Junk Bonds. Investing in below investment
grade bonds, such as the lower quality, higher yielding bonds called junk
bonds, can increase the risks of loss for a Portfolio. Junk bonds are bonds
that are issued by small companies or companies with limited assets or
short operating histories. These companies are more likely than more
established or larger companies to default on the bonds and not pay
interest or pay back the full principal amount. Third parties may not be
willing to purchase the bonds from the Portfolios, which means they may be
difficult to sell and some may be considered illiquid. Because of these
risks, the companies issuing the junk bonds pay higher interest rates than
companies issuing higher grade bonds. The higher interest rates can give
investors a higher return on their investment.
* Short Sales. Engaging in short sales of stock can increase the losses of
the Portfolio if the value of the stock increases before the Portfolio buys
the stock to cover the short sale.
* Illiquid and Restricted Securities. All Portfolios may invest certain
percentages of their assets in illiquid securities which are securities
which a Portfolio cannot easily sell or which it cannot sell quickly
(within seven days) without taking a reduced price for them. Any Portfolio
may invest in securities that the Portfolio cannot sell unless it meets
certain restrictions (restricted securities). The restrictions usually
relate to the initial sale of the security, such as securities purchased in
a private transaction or securities sold only to qualified purchasers. It
may take the Sub-Advisers more time to sell illiquid or restricted
securities than it would take them to sell other securities. The Portfolio
might be forced to sell the securities at a discount or be unable to sell
securities at all that are losing value.
* Cash Investments. In addition to the investments described above for each
Portfolio, each Sub-Adviser may keep a portion of a Portfolio's assets in
cash or in investments that are as liquid as cash such as money market
mutual funds. The Sub-Advisers keep the cash available to meet unexpected
expenditures such as redemptions. Investments in cash or similar liquid
securities (cash equivalents) generally do not provide as high a return as
would assets invested in other types of securities.
* Defensive Positions. The Sub-Advisers have described their strategies for
investing the assets of each Portfolio under normal market conditions.
Under extraordinary market, economic, political or other conditions, the
Sub-Advisers may not follow their normal strategies, but instead may take
certain temporary, defensive actions. These actions may include moving all
assets to cash or cash equivalent investments or taking extraordinary steps
to limit losses in response to adverse conditions. Defensive actions may
prevent a Portfolio from achieving its investment goal.
* Portfolio Turnover Rates. The rate of portfolio turnover is the annual
amount, expressed as a percentage, of a Portfolio's securities that it
replaces in one year. The portfolio turnover rate will not be a limiting
factor when it is deemed appropriate to purchase or sell securities for a
Portfolio. Some of the Sub-Advisers may buy and sell securities for the
Portfolios frequently, which increases a Portfolio's portfolio turnover
rate. Portfolio turnover may vary from year to year or within a year,
depending upon economic, market or business conditions and contributions
and withdrawals. To the extent that brokerage commissions and transaction
costs are incurred in buying and selling portfolio securities, the rate of
portfolio turnover could affect each Portfolio's net asset value. The
Sub-Advisers that actively trade Portfolio assets, expect that the
potentially improved performance from frequent transactions will offset the
higher costs; however, higher transaction costs can reduce the return of
the Portfolio. The historical rates of portfolio turnover for all of the
Portfolios are set forth in the Prospectus under the Financial Highlights.
* Year 2000 (Y2K. Like other mutual funds, as well as other financial and
business organizations around the world, the Trust could be adversely
affected if the computer systems used by the Adviser, the Sub-Advisers and
other service providers, in performing their administrative functions do
not properly process and calculate date related information and data as of
and after January 1, 2000. This is commonly known as the "Year 2000 Issue."
The Adviser and Sub-Advisers are taking steps that they believe are
reasonably designed to address the Year 2000 Issue with respect to computer
systems that they use and obtain reasonable assurances that comparable
steps are being taken by the Trust's other major service providers. At this
time, however, there can be no guarantees that these steps will be
sufficient to avoid any adverse impact to the Trust.
MANAGEMENT OF THE TRUST
THE TRUSTEES
The Trust is organized as a Massachusetts business trust. The overall
responsibility for the supervision of the affairs of the Trust vests in the
Trustees. The Trustees have entered into an Investment Advisory Agreement with
the Adviser to handle the day-to-day affairs of the Trust. The Trustees meet
periodically to review the affairs of the Trust and to establish certain
guidelines which the Adviser is expected to follow in implementing the
investment policies and objectives of the Trust.
ADVISER
Under an Investment Advisory Agreement dated April 1, 1996, as amended, the
Adviser, located at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois
60181-4644, manages the business and affairs of the Portfolios and the Trust,
subject to the control of the Trustees.
The Adviser is an Illinois corporation which was incorporated on August 31, 1993
under the name Oakbrook Investment Advisory Corporation and is registered with
the Securities and Exchange Commission as an investment adviser under the
Investment Advisers Act of 1940. The Adviser changed its name to its present
name on January 17, 1996. The 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
$____ billion of life insurance in force and approximately $____ billion in
assets. The Adviser has acted as the investment adviser to the Trust since May
1, 1996.
The Investment Advisory Agreement authorizes the Adviser to manage the
investment of the assets of each Portfolio, based on the investment objectives
and policies of each Portfolio. The Adviser must develop a program for investing
the assets of each Portfolio that is consistent with the investment objective of
each Portfolio and that follows the policies and restrictions that the Board of
Trustees has set for the Portfolios. The Adviser may retain Sub-Advisers to
assist it. This Prospectus and the Statement of Additional Information describe
these policies. (See the back cover of this Prospectus to find out how to get a
free copy of the Statement of Additional Information.)
Compensation. The Adviser receives a fee, monthly, from each Portfolio for
management of the net assets of the Portfolio. The Adviser calculates the fee
based on the average daily net assets of each Portfolio. During 1998, the last
fiscal year of the Portfolio, each of the Portfolios paid the Adviser the
following percentage of its average daily net assets as compensation for its
services as investment adviser to the Portfolios:
Bond Debenture............................_____%
Quality Bond.............................._____%
International Equity......................_____%
Select Equity............................._____%
Small Cap Stock..........................._____%
Large Cap Stock..........................._____%
Mid-Cap Value............................._____%
Large Cap Research........................_____%
Developing Growth........................._____%
Balanced.................................._____%
Small Cap Equity.........................._____%
Equity Income............................._____%
Growth & Income Equity...................._____%
The percentage of net assets paid to the Adviser as an investment advisory fee
for each Portfolio changes with the amount of net assets in the Portfolio.
Generally the larger the net assets, the lower the fees as a percentage of net
assets.
Under the Investment Advisory Agreement, the Trust is obligated to pay the
Adviser a monthly fee at the following annual rates based on the average daily
net assets of a Portfolio:
<TABLE>
<CAPTION>
Average Daily
Portfolio Net Assets % Per Annum
- ---------------------- ------------------ ------------
<S> <C> <C>
Bond Debenture _______________ .75%
Quality Bond First $75 million .55%
Over $75 million .50%
International Equity First $50 million .85%
Over $50 million .75%
Select Equity First $50 million .75%
Over $50 million .65%
Emerging Markets
Equity First $25 million 1.25%
Over $25 million 1.05%
Small Cap Stock _______________ .85%
Large Cap Stock _______________ .65%
Mid-Cap Value _______________ 1.00%
Large Cap Research _______________ 1.00%
Developing Growth _______________ .90%
Lord Abbett
Growth and Income _______________ .65%
Balanced _______________ 1.00%
Small Cap Equity _______________ 1.00%
Equity Income _______________ 1.00%
Growth & Income Equity _______________ 1.00%
Riggs Stock _______________ .95%
Riggs Small Company Stock _______________ 1.00%
</TABLE>
Other Services and Expenses. The Adviser is also responsible for the operation
of each Portfolio and the supervision of others who provide services to the
Portfolios such as custodians, accountants and transfer agents. The Adviser must
provide office space and the services of personnel to carry out the operations
of the Portfolios. The Adviser pays all ordinary office expenses for the Trust
and the Portfolios. The Adviser also pays the salaries and costs of persons
employed by the Adviser who serve as officers or Trustees of the Trust. The
Portfolios are responsible for all of their own direct expenses such as fees of
custodians, accountants, transfer agents and unaffiliated trustees. Cova Life
and/or the Adviser and/or the Sub-Advisor(s) may at their discretion, but are
not obligated to assume all or any portion of Trust expenses.
Cova Financial Services Life Insurance Company, Cova Life Management Company and
the Adviser have entered into an Investment Advisory Services Agreement, dated
April 1, 1996, the purpose of which is to ensure that the Adviser, which is
minimally capitalized, has adequate facilities and financing for the carrying on
of its business. Under the terms of the Agreement, Cova Financial Services Life
Insurance Company is obligated to provide the Adviser with adequate
capitalization in order for the Adviser to meet any minimum capital
requirements. Cova Financial Services Life Insurance Company is further
obligated to reimburse the Adviser or assume payment for any obligation incurred
by the Adviser. Cova Life Management Company is obligated to provide the Adviser
with facilities and personnel sufficient for the Adviser to perform its
obligations under the Investment Advisory Agreement.
TRUST ADMINISTRATION
The Adviser retains Investors Bank & Trust Company ("IBTC"), a Massachusetts
trust company, to supervise various aspects of the Trust's administrative
operations and to perform certain specific services including, but not limited
to, the preparation and filing of Trust reports and tax returns, pursuant to an
Administration Agreement between the Trust, the Adviser and IBTC. IBTC also
serves as the transfer agent for the Trust.
SUB-ADVISERS AND PORTFOLIO MANAGEMENT
The Investment Advisory Agreement allows the Adviser to contract with third
parties to provide some or all of its duties to the Portfolios under the
Investment Advisory Agreement. The Adviser has contracted with the Sub-Advisers
listed below to provide day to day management of the assets of each of the
Portfolios. Under the terms of the agreements between each Sub-Adviser and the
Adviser, the Sub-Adviser will develop a plan for investing the assets of each
Portfolio, select the assets to be purchased and sold by each Portfolio, select
the broker-dealer or broker-dealers through which the Portfolio will buy and
sell its assets, and negotiate the payment of commissions, if any, to those
broker-dealers. Each Sub-Adviser follows the policies set by the Adviser and the
Board of Trustees for each of the Portfolios.
Compensation. Under the Sub-Advisory Agreements, the Adviser has agreed to pay
each Sub-Adviser a fee for its services out of the fees the Adviser receives
from the Portfolios. During 1998, the last fiscal year of the Portfolios, the
Adviser paid the Sub-Advisers fees based on the following percentages of each
Portfolio's average daily net assets:
Bond Debenture............................_____%
Quality Bond.............................._____%
International Equity......................_____%
Select Equity............................._____%
Small Cap Stock..........................._____%
Large Cap Stock..........................._____%
Mid-Cap Value............................._____%
Large Cap Research........................_____%
Developing Growth........................._____%
Balanced.................................._____%
Small Cap Equity.........................._____%
Equity Income............................._____%
Growth & Income Equity...................._____%
The percentage of net assets paid to the Sub-Advisers as fees for their services
to each Portfolio changes with the amount of net assets in the Portfolio.
Generally the larger the net assets, the lower the fees as a percentage of net
assets.
Under the terms of each Sub-Advisory Agreement, the Adviser shall pay to each
Sub-Adviser, as full compensation for services rendered under the Sub-Advisory
Agreement with respect to each Portfolio, monthly fees at the following annual
rates based on the average daily net assets of each Portfolio:
<TABLE>
<CAPTION>
Average Daily Sub-Advisory
Portfolio Net Assets Fee
- ---------------------- ------------------ -------------
<S> <C> <C>
Bond Debenture _______________ .50%
Quality Bond First $75 million .30%
Over $75 million .25%
International Equity First $50 million .60%
Over $50 million .50%
Emerging Markets Equity First $25 million 1.00%
Over $25 million .80%
Select Equity First $50 million .50%
Over $50 million .40%
Large Cap Stock __________________ .40%
Small Cap Stock __________________ .60%
Mid-Cap Value __________________ .75%
Large Cap Research __________________ .75%
Developing Growth __________________ .65%
Lord Abbett Growth and
Income __________________ .40%
Balanced __________________ .75%
Small Cap Equity __________________ .75%
Equity Income __________________ .75%
Growth & Income Equity __________________ .75%
Riggs Stock __________________ .70%
Riggs Small Company
Stock __________________ .75%
</TABLE>
J.P. MORGAN INVESTMENT MANAGEMENT INC., 522 Fifth Avenue, New York, New York
10036, a Delaware corporation, and a wholly-owned subsidiary of J.P. Morgan &
Co., Incorporated, is the Sub-Adviser for the Quality Bond, International
Equity, Select Equity, Large Cap Stock, Small Cap Stock and Emerging Markets
Equity Portfolios of the Trust.
Harriet T. Huber, Vice President of the Sub-Adviser, is the Portfolio Manager
for the Quality Bond Portfolio. Ms. Huber is a portfolio manager of active
portfolios. Previously she worked in the insurance asset and liability group at
Salomon Brothers and prior to that she traded interest rate swaps and sold
taxable fixed income securities at First Boston. She was also an Associate
Member of the Chicago Board of Trade for two years. Ms. Huber received a B.A. in
mathematics from the University of Wisconsin, Madison, and an M.B.A. from the
University of Chicago.
Nigel Emmett [BIOGRAPHICAL INFORMATION TO BE FILED BY AMENDMENT]
James B. Otness, Managing Director of the Sub-Adviser, is the Portfolio Manager
for the Small Cap Stock Portfolio. Mr. Otness is a member of the Equity and
Balanced Accounts Group. Mr. Otness co-manages Morgan's Small Company Fund and
other client portfolios employing a small company investment approach. Mr.
Otness joined Morgan in 1970 after graduation from Harvard University and
service in the U.S. Marine Corps Reserve. Prior to his current assignment, he
managed large capitalization equities and before that was unit head in the
Investment Research Department. Mr. Otness is a Chartered Financial Analyst with
24 years of investment experience.
James Wiess, Vice President of the Sub-Adviser, is the Portfolio Manager for the
Large Cap Stock Portfolio. Mr. Wiess is a member of the Equity and Balanced
Accounts Group, with responsibility for portfolio rebalancing and product
research and development in structured equity strategies. Prior to joining
Morgan in 1992, Mr. Wiess gained experience in stock index arbitrage during
seven years at Oppenheimer & Co. He also was a financial markets consultant at
Data Resources. Mr. Wiess earned his undergraduate degree from the Wharton
School at the University of Pennsylvania.
Michael J. Kelly, Vice President of the Sub-Adviser, is the Portfolio Manager
for the Select Equity Portfolio. Mr. Kelly is an institutional portfolio manager
with responsibility for a number of employee benefit, foundation, and endowments
clients. Prior to assuming his current position, he was in the Equity Research
Group covering capital goods, electrical equipment, and conglomerates. Mr. Kelly
also served as the group's generalist. Before joining Morgan in 1985, he held a
position at the economic firm Townsend-Greenspan & Co., Inc. Mr. Kelly served as
President of the Machinery Analysts of New York, Vice President of the
Electrical Products Group, committee member for the AIMR and is a member of the
Money Marketeers of New York. Mr. Kelly has an undergraduate degree from
Gettysburg College and an M.B.A. from The Wharton School. Mr. Kelly is a
Chartered Financial Analyst.
Leigh Wasson, Vice President of the Sub-Adviser, is the Portfolio Manager for
the Emerging Markets Equity Portfolio. Prior to this assignment, Ms. Wasson
worked in the firm's Melbourne office as relationship manager and product
liaison to clients invested in the Sub-Adviser's international strategies and in
the New York office marketing to U.S. based consultants. Ms. Wasson joined the
Sub-Adviser's Equity Research Group in 1987, after working in the Lloyds of
London insurance market. She received her Bachelor of Science degree from the
University of Texas and her MBA from The Wharton School.
Douglas Dooley is Managing Director of the Sub-Adviser. Mr. Dooley has senior
responsibility for emerging markets equity investing at the firm. Prior to
assuming this position, he was head of the International Research Group in
London. Mr. Dooley joined Morgan's U.S. Equity Research Department in 1979 and
subsequently managed institutional and balanced accounts. Mr. Dooley has a B.S.
from American University and an M.B.A. from Columbia University. He is a
Chartered Financial Analyst.
LORD, ABBETT & CO. ("LORD ABBETT"), The General Motors Building, 767 Fifth
Avenue, New York, New York 10153-0203. Lord Abbett has been an investment
manager for over 68 years and currently manages approximately $25 billion in a
family of mutual funds and other advisory accounts. Lord Abbett is the
Sub-Adviser for the Bond Debenture, Mid-Cap Value, Large Cap Research,
Developing Growth and Lord Abbett Growth and Income Portfolios.
Christopher J. Towle, Executive Vice President of Lord Abbett, is Portfolio
Manager for the Bond Debenture Portfolio. Mr. Towle joined Lord Abbett in 1987
as Assistant Fixed Income Portfolio Manager and assumed full responsibilities as
Fixed Income Portfolio Manager in August, 1995. Prior to joining Lord Abbett,
Mr. Towle was an Assistant Vice President and Portfolio Manager with American
International Group. He earned a B.A. degree in economics from Rutgers
University and is a Chartered Financial Analyst.
Edward K. von der Linde is primarily responsible for the day-to-day management
of the Mid-Cap Value Portfolio. Mr. von der Linde has been with Lord Abbett
since 1988 and has over 11 years of investment experience.
Robert G. Morris, Lord Abbett partner, is primarily responsible for the
day-to-day management of the Large Cap Research Portfolio. Prior to joining Lord
Abbett in 1991, Mr. Morris was Vice President and Manager of Chase Manhattan
Bank, N.A. Mr. Morris delegates management duties to a committee consisting, at
any time, of three Lord Abbett employees from the Research Department. The
members of the committee have staggered terms to assure continuity and a forum
for different judgments as to what securities represent the greatest investment
value, regardless of industry sector, market capitalization or Wall Street
sponsorship.
Stephen J. McGruder serves as portfolio manager for the Developing Growth
Portfolio. Prior to joining Lord Abbett, Mr. McGruder had served as Vice
President of Wafra Investments Advisory Group, a private investment company,
since October 1988. Mr. McGruder has over 25 years of experience in the
investment business.
W. Thomas Hudson, Jr. is primarily responsible for the day-to-day management of
the Lord Abbett Growth and Income Portfolio. Mr. Hudson has been employed by
Lord Abbett since 1982.
MISSISSIPPI VALLEY ADVISORS INC. ("MVA"), One Mercantile Center, Seventh &
Washington Streets, St. Louis, Missouri 63101. MVA is the Sub-Adviser for the
Balanced, Small Cap Equity, Equity Income and Growth & Income Equity Portfolios.
MVA is a wholly-owned subsidiary of Mercantile Bank of St. Louis National
Association ("Mercantile"). As of December 31, 1997, MVA had approximately $9.5
billion in assets under investment management.
Timothy S. Engelbrecht is the person primarily responsible for the day-to-day
management of the Growth & Income Equity Portfolio. Mr. Engelbrecht, a Senior
Associate, has been employed by MVA for the past seventeen years and has had
portfolio management and other responsibilities for MVA for the past sixteen
years.
Peter Merzian is the person primarily responsible for the day-to-day management
of the Balanced Portfolio. Mr. Merzian, a Senior Associate, has been with MVA
since 1993 and prior thereto was employed as a portfolio manager of another
financial institution.
Robert J. Anthony is the person primarily responsible for the day-to-day
management of the Small Cap Equity Portfolio. Mr. Anthony, a Senior Associate,
has been with MVA for 23 years.
Gregory A. Glidden is the person primarily responsible for the day-to-day
management of the Equity Income Portfolio. Mr. Glidden, a Senior Associate, has
been with MVA since 1983. For the past 15 years, he has served as a stock
analyst and has managed several of Mercantile's common funds.
TRUST DIVISION OF RIGGS BANK N.A., 5700 RiverTech Court, Riverdale, MD 20737-
1250. The Trust Division of Riggs Bank N.A. is the Sub-Adviser for the Riggs
Stock and Riggs Small Company Stock Portfolios.
[INFORMATION CONCERNING THIS SUB-ADVISER AND THE INDIVIDUAL PORTFOLIO MANAGERS
TO BE FILED BY AMENDMENT.]
PORTFOLIO SHARES
Distribution and Redemption
All Portfolios of the Trust sell shares to the separate accounts of Cova
Financial Services Life Insurance Company and its affiliated life insurance
companies (collectively, "Cova Life") as a funding vehicle for the variable
annuity contracts and/or variable life insurance policies ("Contracts") offered
by Cova Life. No fee is charged upon the sale or redemption of the Trust's
shares. Expenses of the Trust are passed through to the separate accounts of
Cova Life, and therefore, are ultimately borne by Contract owners. In addition,
other fees and expenses are assessed by Cova Life at the separate account level.
(See the Prospectus for the Contract for a description of all fees and charges
relating to the Contract.)
Price of Shares
The Portfolios will buy or sell shares at the price determined at the end of
each day during which the New York Stock Exchange is open for trading (see Net
Asset Value, below). The Portfolios must receive your order by 4:00 p.m. Eastern
time for you to receive the price for that day. The Portfolios will buy or sell
shares for orders they receive after 4:00 p.m. at the price calculated for the
next day on which the New York Stock Exchange is open.
Placing Orders for Shares
The prospectus for your Contract describes the procedures for investing your
purchase payments or premiums in shares of the Portfolios. You may obtain a copy
of that prospectus, free of charge, from Cova Life or from the person who sold
you the Contract. The Adviser and Cova Life will not consider an order to buy or
sell shares in the Portfolios as received until the order meets the requirements
for documentation or signatures described in the prospectus for your Contract.
The Portfolios do not charge any fees for selling (redeeming) shares. You should
review the prospectus for your Contract to see if Cova Life charges any fees for
redeeming your interest in the Contract or for moving your assets from one
Portfolio to another.
Payment for Redemptions
Payment for orders to sell (redeem) shares will be made within seven days after
the Adviser receives the order.
Suspension or Rejection of Purchases and Redemptions
The Portfolios may suspend the offer of shares, or reject any specific request
to purchase shares from a Portfolio at any time. The Portfolios may suspend
their obligation to redeem shares or postpone payment for redemptions when the
New York Stock Exchange is closed or when trading is restricted on the Exchange
for any reason, including emergency circumstances established by the Securities
and Exchange Commission.
Right to Restrict Transfers
Neither the Trust nor the Variable Accounts are designed for professional market
timing organizations, other entities, or individuals using programmed, large
and/or frequent transfers. The Variable Accounts, in coordination with the
Trust, reserve the right to temporarily or permanently refuse exchange requests
if, in the Adviser's judgment, a Portfolio would be unable to invest effectively
in accordance with its investment objectives and policies, or would otherwise
potentially be adversely affected. In particular, a pattern of exchanges that
coincides with a "market timing" strategy may be disruptive to a Portfolio and
therefore may be refused. Investors should consult the Variable Account
prospectus that accompanies this Trust Prospectus for information on other
specific limitations on the transfer privilege.
Net Asset Value
The value or price of each share of each Portfolio (net asset value per share)
is calculated at the close of business, usually 4:00 p.m., of the New York Stock
Exchange, every day that the New York Stock Exchange is open for business. The
value of all assets held by each Portfolio at the end of the day, is determined
by subtracting all liabilities and dividing the total by the total number of
shares outstanding. This value is provided to Cova Life, which uses it to
calculate the value of your interest in your Contract. It is also the price at
which shares will be bought or sold in the Portfolios for orders they received
that day.
The value of the net assets of the Portfolio is determined by obtaining market
quotations, where available, usually from pricing services. Short-term debt
instruments maturing in less than 60 days are valued at amortized cost.
Securities for which market quotations are not available are valued at their
fair value as determined, in good faith, by the Adviser based on policies
adopted by the Board of Trustees.
Some of the Portfolios trade securities on foreign markets or in foreign
currencies. Those markets are open at different times and occasionally on
different days than securities traded on the New York Stock Exchange. Exchange
rates for foreign currencies are usually determined at 1:00 p.m. rather than
4:00 p.m. These factors may mean that the value of the securities held by these
Portfolios may change after the close of business of the New York Stock
Exchange.
Dividends and Distributions
Each Portfolio will declare and distribute dividends from net ordinary income
and will distribute its net realized capital gains, if any, at least annually.
Cova Life generally directs that all dividends and distributions of the
Portfolios be reinvested in the Portfolios under the terms of the Contracts.
Tax Matters
The Trust intends to qualify as a regulated investment company under the tax law
and, as such distributes substantially all of each Portfolio's ordinary net
income and capital gains each calendar year as a dividend to the separate
accounts funding the Contracts to avoid an excise tax on certain undistributed
amounts. The Trust expects to pay no income tax. Dividends are reinvested in
additional full and partial shares of the Portfolio as of the dividend payment
date.
The Trust and its Portfolios intend to comply with special diversification and
other tax law requirements that apply to investments under the Contracts. Under
these rules, shares of the Trust will generally only be available through the
purchase of a variable life insurance or annuity contract. Income tax
consequences to Contract owners who allocate purchase payments or premiums to
Trust shares are discussed in the prospectus for the Contracts that accompanies
this Prospectus.
Additional Information
This Prospectus sets forth concisely the information about the Trust and each
Portfolio that you should know before you invest money in a Portfolio. Please
read this Prospectus carefully and keep it for future reference. The Trust has
prepared and filed with the Securities and Exchange Commission (Commission) a
Statement of Additional Information that contains more information about the
Trust and the Portfolios. You may obtain a free copy of the Statement of
Additional Information from your registered representative who offers you the
Contract. You may also obtain copies by calling the Trust at 1-800-831-LIFE or
by writing to the Trust at the following address: Cova Financial Services Life
Insurance Company, One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-
4644.
Legal Proceedings
Neither the Trust nor any Portfolio is involved in any material legal
proceedings. Neither the Adviser nor any Sub-Adviser is involved in any legal
proceedings that if decided against any such party would materially affect the
ability of the party to carry out its duties to the Portfolios. None of such
persons is aware of any litigation that has been threatened.
PERFORMANCE OF THE PORTFOLIOS
Performance information for the Portfolios of the Trust, including a bar chart
and average annual total return information since the inception of the
Portfolios, is contained in this Prospectus under the heading "Performance."
COMPARABLE PERFORMANCE
Public Fund Performance
Each of the Bond Debenture Portfolio, the Mid-Cap Value Portfolio, the Large Cap
Research Portfolio and the Developing Growth Portfolio has a substantially
similar investment objective and follows substantially the same investment
strategies as certain mutual funds whose shares are sold to the public. Each of
these public mutual funds is managed by Lord, Abbett & Co., the same Sub-Adviser
which manages each of the corresponding Portfolios.
The historical performance of each of these public mutual funds is shown below.
This performance data should not be considered as an indication of future
performance of the Portfolios. The public mutual fund performance figures shown
below:
* reflect the deduction of the historical fees and expenses paid by the
public mutual funds and not those to be paid by the Portfolios
* do not reflect Contract fees or charges imposed by Cova Life.
Investors should refer to the separate account prospectus for
information describing the Contract fees and charges. These fees and
charges will have a detrimental effect on Portfolio performance.
The Portfolios and their corresponding public mutual fund series are expected to
hold similar securities. However, their investment results are expected to
differ for the following reasons:
* differences in asset size and cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security
selections
* differences in the relative weightings of securities
* differences in the price paid for particular portfolio holdings
* differences relating to certain tax matters
The following table shows average annualized total returns for each comparable
public mutual fund for their fiscal 1998 years (ended December 31, 1998). Also
shown are performance comparisons between these public mutual funds and
comparable indices.
BOND DEBENTURE PORTFOLIO
Corresponding 1 5 10
Public Fund Year Year Year
_________________________________________________________________
Lord Abbett - Bond
Debenture Fund, Inc. _____% _____% _____%
MID-CAP VALUE PORTFOLIO
Corresponding 1 5 10
Public Fund Year Year Year
_________________________________________________________________
Lord Abbett -
Mid-Cap Value Fund _____% _____% _____%
LARGE CAP RESEARCH PORTFOLIO
Corresponding 1 5 Since
Public Fund Year Year Inception
(June 3, 1992)
_________________________________________________________________
Lord Abbett Research Fund
(Large Cap Series) _____% _____% _____%
DEVELOPING GROWTH PORTFOLIO
Corresponding 1 5 10
Public Fund Year Year Year
_________________________________________________________________
Lord Abbett
Developing Growth Fund _____% _____% _____%
CORRESPONDING PORTFOLIO PERFORMANCE - LORD ABBETT GROWTH AND INCOME PORTFOLIO
The Lord Abbett Growth and Income Portfolio, which is managed by Lord, Abbett &
Co., commenced operations on January 8, 1999. It is managed with investment
objectives, policies and strategies substantially similar to those used in
managing the Growth and Income Portfolio ("Corresponding Portfolio") of Lord
Abbett Series Fund, Inc., a mutual fund whose shares are offered only to life
insurance companies for allocation to certain of their separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance policies and to tax-qualified pension and retirement plans.
This Corresponding Portfolio is managed by the same portfolio manager of Lord,
Abbett & Co. who manages the Lord Abbett Growth and Income Portfolio.
The historical performance of the Corresponding Portfolio is shown below. This
performance date should be not considered as an indication of future performance
of the Portfolios. The Corresponding Portfolio performance figures shown below:
reflect the deduction of the historical fees and expenses paid by the
Corresponding Portfolio and not those to be paid by the Lord Abbett Growth and
Income Portfolio
do not reflect Contract fees or charges imposed by Cova Life. Investors
should refer to the separate account prospectus for information describing the
Contract fees and charges. These fees and charges will have a detrimental effect
on the performance of the Lord Abbett Growth and Income Portfolio.
The Lord Abbett Growth and Income Portfolio and the Corresponding Portfolio are
expected to hold similar securities. However, their investment results are
expected to differ for the following reasons:
differences in asset size and cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security selections
differences in the relative weightings of securities
differences in the price paid for particular portfolio holdings
The following table shows average annual total return for the time periods shown
for the Corresponding Portfolio (for the periods ended 12/31/98).
LORD ABBETT GROWTH AND INCOME PORTFOLIO
Corresponding 1 5 Since
Portfolio Year Year Inception
(December 11, 1989)
_________________________________________________________________
Lord Abbett Series Fund, Inc.
(Growth and Income Portfolio) _____% _____% _____%
PRIVATE ACCOUNT PERFORMANCE
The Select Equity, Large Cap Stock, Small Cap Stock and Quality Bond Portfolios,
each of which is managed by J.P. Morgan Investment Management Inc., commenced
public sale of their shares on May 1, 1996. Each of these Portfolios has
investment objectives, policies and strategies which are substantially similar
to those employed by J.P. Morgan Investment Management Inc. with respect to
certain Private Accounts.
The Balanced, Small Cap Equity, Equity Income and Growth & Income Equity
Portfolios, managed by MVA, commenced investment operations as of July 1, 1997.
Each of these Portfolios has investment objectives, policies and strategies
which are substantially similar to those employed by MVA with respect to certain
Private Accounts.
The Riggs Stock and Riggs Small Company Stock Portfolios, managed by the Trust
Division of Riggs Bank N.A., have not yet commenced investment operations. Each
of these Portfolios has investment objectives, policies and strategies which are
substantially similar to those employed by the Trust Division of Riggs Bank N.A.
with respect to certain Private Accounts.
Thus, the performance information derived from these Private Accounts may be
deemed relevant to the investor. The performance of the Portfolios will vary
from the Private Account composite information in that
each Portfolio will be actively managed and its investments will vary
from time to time
each Portfolio's investments will not be identical to the past portfolio
investments of the Private Accounts
the Private Accounts are not subject to certain investment limitations,
diversification requirements and other restrictions imposed by federal tax and
securities laws
the Private Accounts do not reflect Contract fees or charges imposed by
Cova Life. Investors should refer to the separate account prospectus for
information describing the Contract fees and charges. These fees and charges
will have a detrimental effect on Portfolio performance.
The Portfolios and their corresponding Private Accounts are expected to hold
similar securities. However, their investment results are expected to differ
for the following reasons:
differences in asset size and cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security selections
differences in the relative weightings of securities
differences in the price paid for particular portfolio holdings.
The chart below shows performance information derived from historical composite
performance of the Private Accounts. The performance figures shown below
represent the performance results of the composites of comparable Private
Accounts, adjusted to reflect the deduction of the fees and expenses paid or
anticipated to be paid by the Portfolios. Investors should be aware that the
Private Account composites are not substitutes for the performance histories of
the Portfolios. The Private Account composite performance figures are
time-weighted rates of return which include all income and accrued income and
realized and unrealized gains or losses, but do not reflect the deduction of
investment advisory fees actually charged to the Private Accounts. Inception was
June 1, 1987 for the Public Bond Composite, November 1, 1989 for the Structured
Stock Selection Composite and January 1, 1989 for the Equity Income Composite.
PRIVATE ACCOUNT COMPOSITE PERFORMANCE
REDUCED BY PORTFOLIO FEES AND EXPENSES
FOR THE PERIODS ENDED 12/31/98
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
10 Years
or Since
Portfolio 1 Year 5 Years Inception
- ------------------------------ ------- -------- ----------
<S> <C> <C> <C>
Active Equity
Composite _____% _____% _____%
(Select Equity Portfolio)
Structured Stock Selection
Composite
(Large Cap Stock Portfolio) _____% _____% _____%
Small Cap Directly Invested
Composite _____% _____% _____%
(Small Cap Stock Portfolio)
Public Bond
Composite _____% _____% _____%
(Quality Bond Portfolio)
Balanced
Composite _____% _____% _____%
(Balanced Portfolio)
Small Cap Equity
Composite _____% _____% _____%
(Small Cap Equity Portfolio)
Equity Income
Composite _____% _____% _____%
(Equity Income Portfolio)
Growth & Income Equity
Composite _____% _____% _____%
(Growth & Income Equity
Portfolio)
____________
Composite _____% _____% _____%
(Riggs Stock Portfolio)
____________
Composite _____% _____% _____%
(Riggs Small Company
Stock Portfolio)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PERFORMANCE RECAP Performance
10 Yrs or
Portfolio Type 1 Yr 5 Yrs Since Inception
- ---------- ---- ------ ------ ----------------
MANAGED BY J. P. MORGAN
INVESTMENT MANAGEMENT INC.
Select Equity Private Account _____% _____% _____%
Composite
Existing Portfolio _____% -- _____%*
Small Cap Stock Private Account _____% _____% _____%
Composite
Existing Portfolio _____% -- _____%*
Quality Bond Private Account _____% _____% _____%
Composite
Existing Portfolio _____% -- _____%*
Large Cap Stock Private Account _____% _____% _____%
Composite
Existing Portfolio _____% -- _____%*
International Equity Existing Portfolio _____% -- _____%*
MANAGED BY LORD, ABBETT & CO.
Bond Debenture Public Fund _____% _____% _____%
Existing Portfolio _____% -- _____%*
Mid-Cap Value Public Fund _____% _____% _____%
Existing Portfolio -- -- _____%*
Large Cap Research Public Fund _____% _____% _____%
Existing Portfolio -- -- _____%*
Developing Growth Public Fund _____% _____% _____%
Existing Portfolio -- -- _____%*
Lord Abbett Growth and Income Corresponding Portfolio _____% _____% _____%
MANAGED BY MISSISSIPPI
VALLEY ADVISORS, INC.
Balanced Private Account _____ _____% _____%
Composite
Existing Portfolio -- -- _____%*
Small Cap Equity Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
Equity Income Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
Growth & Income Equity Private Account _____% _____% _____%
Composite
Existing Portfolio -- -- _____%*
MANAGED BY THE TRUST DIVISION
OF RIGGS BANK N.A.
Riggs Stock Private Account
Composite _____% _____% _____%
Existing Portfolio -- -- --
Riggs Small Company Stock Private Account
Composite _____% _____% _____%
Existing Portfolio -- -- --
- ----------------------------- ------------------ ------ ------- -------
</TABLE>
* The inception date for the Quality Bond, Small Cap Stock, Large Cap Stock,
Select Equity, International Equity and Bond Debenture Portfolios is May 1,
1996. The inception date for the Balanced, Small Cap Equity, Equity Income
and Growth & Income Equity Portfolios is July 1, 1997. The inception date
for the Mid-Cap Value, Large Cap Research and Developing Growth Portfolios
is August 20, 1997. The inception date for the Lord Abbett Growth and
Income Portfolio is January 8, 1999. The Riggs Stock and Riggs Small
Company Stock Portfolios have not yet commenced investment operations. All
of the inception dates shown in this paragraph are the dates from which the
average annual total return computations are calculated for these
Portfolios.
(1) Investors should not consider the performance data of these Private
Accounts and Public Funds as an indication of the future performance of the
respective Portfolios. The figures also do not reflect the deduction of any
insurance fees or charges which are imposed by Cova Life in connection with its
sale of Contracts. Investors should refer to the separate account prospectus
describing the Contracts for information pertaining to these insurance fees and
charges. All fees and charges will have a detrimental effect on the performance
of a Portfolio.
ADDITIONAL PERFORMANCE INFORMATION
Further information about the Trust's performance is contained in the Annual
Report to shareholders which may be obtained, without charge, by calling (800)
831-LIFE, or writing Cova Life at One Tower Lane, Suite 3000, Oakbrook Terrace,
Illinois 60181-4644.
FINANCIAL HIGHLIGHTS
Financial Information
The following information is intended to help you understand the financial
performance of the Portfolios since the time they were first offered to the
public. The total returns in the table represent the rate that an investor would
have earned or lost on an investment in the Portfolios, assuming reinvestment of
all dividends and distributions. This information has been audited by
_____________________, Independent Accountants, whose unqualified report
thereon is included in the Annual Report for the Trust. The annual report is
incorporated into the Statement of Additional Information for the Trust. You
will find information about how to get a free copy of the annual report and
Statement of Additional Information on the back cover of this Prospectus.
FINANCIAL HIGHLIGHTS
[TO BE FILED BY AMENDMENT]
COVA SERIES TRUST
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
Additional information about the Trust and its Portfolios can be found in the
Statement of Additional Information. Additional information about the
Portfolios' investments is available in the Trust's annual and semi-annual
reports to shareholders. In the annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
performance of the Portfolios during their last fiscal year. The Statement of
Additional Information and the annual and semi-annual reports are available on
request without charge for any person having an interest in the Trust. Please
call 1-800-831-LIFE or write to the Trust at the address listed above to
request copies of the Statement of Additional Information, the annual report,
the semi-annual report, or any additional information you would like about the
Portfolios or to ask questions about the Portfolios.
Information about the purchase and sale of the Trust shares and the related
costs is included in the prospectus for the Contracts that offer the Portfolios
as investments.
The Commission maintains a Web site (http://www.sec.gov) on the Internet that
contains the Statement of Additional Information, which is incorporated into
this Prospectus by reference, and other information about the Trust and this
offering. You can also review and copy those materials at the Public Reference
Room of the Securities and Exchange Commission in Washington, D.C. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330 (1-800-732-0330).
SEC File No: 33-16005
APPENDIX TO PROSPECTUS
DESCRIPTION OF CERTAIN INVESTMENTS, TECHNIQUES AND RISKS
STRATEGIC TRANSACTIONS. Certain Portfolios may purchase and sell
exchange-listed and over-the-counter put and call options on
securities,
financial futures,
fixed-income and equity indices and other financial instruments and
purchase and sell financial futures contracts.
Certain Portfolios may also enter into various currency transactions such as
currency forward contracts,
currency futures contracts,
currency swaps or options on currencies or currency futures,
stock index futures contracts, and
options on stock indexes and stock index futures contracts.
Collectively, all of the above are referred to as "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,
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 interest rate exposure of a Portfolio,
to protect against changes in currency exchange rates, 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 a Sub-Adviser's ability to
predict pertinent market movements, which cannot be assured. The Portfolios 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 of portfolio securities at inopportune times or for
prices other than at 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 contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value and possibly income. The Strategic Transactions that the Portfolios may
use and some of their risks are described more fully in the Statement of
Additional Information.
REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements
with selected commercial banks and broker-dealers, under which the Portfolio
acquires securities and agrees to resell the securities at an agreed upon time
and at an agreed upon price. The Portfolio accrues as interest the difference
between the amount it pays for the securities and the amount it receives upon
resale. At the time the Portfolio enters into a repurchase agreement, the value
of the underlying security including accrued interest will be equal to or exceed
the value of the repurchase agreement and, for repurchase agreements that mature
in more than one day, the seller will agree that the value of the underlying
security including accrued interest will continue to be at least equal to the
value of the repurchase agreement. Each Sub-Adviser will monitor the value of
the underlying security in this regard. The Portfolio will enter into repurchase
agreements only with commercial banks whose deposits are insured by the Federal
Deposit Insurance Corporation and whose assets exceed $500 million or
broker-dealers who are registered with the Securities and Exchange Commission.
In determining whether the Portfolio should enter into a repurchase agreement
with a bank or broker-dealer, the Sub-Adviser will take into account the
credit-worthiness of the party and will monitor its credit-worthiness on an
ongoing basis in accordance with standards by the Board of Trustees. In the
event of a default by the party, the delays and expenses potentially involved in
establishing the Portfolio's rights to, and in liquidating, the security may
result in a loss to the Portfolio.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. Certain Portfolios may
purchase and sell securities on a "when issued" and "delayed delivery" basis,
that is, obligate themselves to purchase or sell securities with delivery and
payment to occur at a later date in order to secure what is considered to be an
advantageous price and yield to the Portfolio at the time of entering into the
obligation. When a Portfolio engages in such transactions, the Portfolio relies
on the buyer or seller, as the case may be, to consummate the sale. No income
accrues to or is earned by the Portfolio on portfolio securities in connection
with such transactions prior to the date the Portfolio actually takes delivery
of such securities. These transactions are subject to market fluctuation; the
value of such securities at delivery may be more or less than their purchase
price, and yields generally available on such securities when delivery occurs
may be higher than yields on such securities obtained pursuant to such
transactions. Because the Portfolio relies on the buyer or seller, as the case
may be, to consummate the transaction, failure by the other party to complete
the transaction may result in the Portfolio missing the opportunity of obtaining
a price or yield considered to be advantageous. When the Portfolio is the buyer
in such a transaction, however, it will maintain, in a segregated account on the
Trust's records, cash or high-grade portfolio securities having an aggregate
value equal to the amount of such purchase commitments until payment is made.
The Portfolio will make commitments to purchase securities on such basis only
with the intention of actually acquiring these securities, but the Portfolio may
sell such securities prior to the settlement date if such sale is considered to
be advisable. To the extent the Portfolio engages in when issued and delayed
delivery transactions, it will do so for the purpose of acquiring securities for
the Portfolio consistent with the Portfolio's investment objective and policies
and not for the purposes of investment leverage. No specific limitation exists
as to the percentage of any Portfolio's assets which may be used to acquire
securities on a when issued or delayed delivery basis.
U.S. GOVERNMENT OBLIGATIONS. Certain Portfolios may invest in securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities
which historically have involved little risk of loss of principal if held to
maturity. However, due to fluctuations in interest rates, the market value of
such securities may vary during the period a shareholder owns shares of a
Portfolio. Examples of the types of U.S. Government obligations that may be held
by the Portfolios, subject to their investment objectives and policies, include,
in addition to U.S. Treasury bonds
notes and bills, the obligations of Federal Home Loan Banks,
Federal Farm Credit Banks,
Federal Land Banks,
the Federal Housing Administration,
Farmers Home Administration,
Export-Import Bank of the United States,
Small Business Administration,
Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"),
General Services Administration,
Student Loan Marketing Association,
Central Bank for Cooperatives,
Federal Intermediate Credit Banks,
Resolution Trust Corporation, and
Maritime Administration.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as those of GNMA, are supported by the full faith and credit of the U.S.
Treasury;
others such as the Export-Import Bank of the United States, are supported
by the right of the issuer to borrow from the Treasury;
others, such as those of FNMA, are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations;
still others such as those of the Student Loan Marketing Association, are
supported only by the credit of the instrumentality.
There is no assurance that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
STRIPPED GOVERNMENT SECURITIES. To the extent consistent with their
respective investment policies, certain Portfolios may invest in
bills,
notes and bonds (including zero coupon bonds) issued by the U.S. Treasury,
as well as "stripped" U.S. Treasury obligations offered under the Separate
Trading of Registered Interest and Principal Securities ("STRIPS") program or
Coupon Under Bank-Entry Safekeeping ("CUBES") program or other stripped
securities issued directly by agencies or instrumentalities of the U.S.
Government.
STRIPS and CUBES represent either future interest or principal payments and are
direct obligations of the U.S. Government that clear through the Federal Reserve
System. Stripped securities are issued at a discount to their "face value" and
may exhibit greater price volatility than ordinary debt securities because of
the manner in which their principal and interest are returned to investors. The
Sub-Adviser will consider the liquidity needs of a Portfolio when any
investments in zero coupon obligations or other principal- only obligations are
made.
VARIABLE AND FLOATING RATE INSTRUMENTS. Certain Portfolios may purchase
rated or unrated variable and floating rate instruments. These instruments may
include variable rate master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. Unrated instruments purchased by a Portfolio will be determined
by the Sub-Adviser to be of comparable quality at the time of purchase to rated
instruments that may be purchased. The absence of an active secondary market for
a particular variable or floating rate instrument, however, could make it
difficult for a Portfolio to dispose of an instrument if the issuer were to
default on its payment obligation. A Portfolio could, for these or other
reasons, suffer a loss with respect to such instruments.
SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain circumstances and
subject to their investment policies, certain Portfolios may invest in
securities issued by other investment companies which invest in securities in
which such Portfolios are permitted to invest. These Portfolios may invest in
securities of other investment companies to the extent permitted under the 1940
Act--that is, a Portfolio may invest up to 10% of its total assets in securities
of other investment companies so long as not more than 3% of the outstanding
voting stock of any one investment company is held by the Portfolio. In
addition, not more than 5% of a Portfolio's total assets may be invested in the
securities of any one investment company. As a shareholder in an investment
fund, a Portfolio would bear its share of that investment fund's expenses,
including its advisory and administration fees. At the same time the Portfolio
would continue to pay its own operating expenses.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolios may each invest in
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted and illiquid securities in all
Portfolios will be valued at fair value as determined in good faith by or at the
direction of the Trustees for the purposes of determining the net asset value of
each Portfolio. Restricted securities salable among qualified institutional
buyers without restriction pursuant to Rule 144A under the Securities Act of
1933 that are determined to be liquid by the Sub-Adviser under guidelines
adopted by the Board of Trustees of the Trust (under which guidelines the
Sub-Adviser will consider factors such as trading activities and the
availability of price quotations) will not be treated as restricted securities
by the Portfolios pursuant to such rules.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, all of the Portfolios may lend their securities to selected
commercial banks or broker-dealers up to a maximum of 25% of the assets of each
Portfolio (except up to 33 1/3% with respect to the Emerging Markets Equity
Portfolio and the Portfolios managed by Mississippi Valley Advisors Inc. and the
Trust Division of Riggs Bank N.A.). Such loans must be callable at any time and
be continuously secured by collateral deposited by the borrower in a segregated
account with the Trust's custodian consisting of cash or of securities issued or
guaranteed by the U.S. Government or its agencies, which collateral is equal at
all times to at least 100% of the value of the securities loaned, including
accrued interest. A Portfolio will receive amounts equal to earned income for
having made the loan. Any cash collateral pursuant to these loans will be
invested in short- term instruments. A Portfolio is the beneficial owner of the
loaned securities in that any gain or loss in the market price during the loan
inures to the Portfolio and its shareholders. Thus, when the loan is terminated,
the value of the securities may be more or less than their value at the
beginning of the loan. In determining whether to lend its portfolio securities
to a bank or broker-dealer, a Portfolio will take into account the
credit-worthiness of such borrower and will monitor such credit- worthiness on
an ongoing basis in as much as a default by the other party may cause delays or
other collection difficulties. A Portfolio may pay finders' fees in connection
with loans of its portfolio securities.
REVERSE REPURCHASE AGREEMENTS AND BORROWINGS. The Portfolios may enter into
reverse repurchase agreements with selected commercial banks or broker-dealers
with respect to securities which could otherwise be sold by the Portfolios.
Reverse repurchase agreements involve sales by a Portfolio of Portfolio assets
concurrently with an agreement by the Portfolio to repurchase the same assets at
a later date at a fixed price which is greater than the sales price. The
difference between the amount the Portfolio receives for the securities and the
amount it pays on repurchase is deemed to be a payment of interest by the
Portfolio. Each Portfolio will maintain, in a segregated account with its
custodian, cash, Treasury bills, or other U.S. Government Securities having an
aggregate value equal to the amount of commitment to repurchase, including
accrued interest, until payment is made. Each Portfolio will enter into reverse
repurchase agreements only with commercial banks whose deposits are insured by
the Federal Deposit Insurance Corporation and whose assets exceed $500 million
or broker-dealers who are registered with the SEC. In determining whether a
Portfolio should enter into a reverse repurchase agreement with a bank or
broker-dealer, each Sub-Adviser will take into account the credit-worthiness of
the party and will monitor the credit-worthiness on an ongoing basis. During the
reverse repurchase agreement period, a Portfolio continues to receive principal
and interest payments on these securities. Reverse repurchase agreements involve
the risk that the market value of the securities retained by the Portfolio may
decline below the price of the securities the Portfolio has sold but is
obligated to repurchase under the agreement. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, a Portfolio's use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Portfolio's obligation to repurchase the securities. Reverse
repurchase agreements create leverage and will be treated as borrowings for the
purposes of each Portfolio's investment restriction on borrowings.
Each of the Mid-Cap Value, Large Cap Research, Developing Growth, Lord Abbett
Growth and Income, Riggs Stock and Riggs Small Company Stock Portfolios may
borrow from banks (as defined in the 1940 Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed). Each of the Mid-Cap Value, Large
Cap Research, Developing Growth and Lord Abbett Growth and Income Portfolios may
borrow up to an additional 5% of its total assets for temporary purposes. Each
of the Select Equity, Large Cap Stock and Small Cap Stock Portfolios is
permitted to borrow money for extraordinary or emergency purposes in amounts up
to 10% of the value of the Portfolio's total assets. Each of the Quality Bond,
International Equity and Emerging Markets Equity Portfolios is permitted to
borrow money for extraordinary or emergency purposes in amounts up to 30% of the
value of the Portfolio's total assets and in connection with reverse repurchase
agreements. The Bond Debenture Portfolio is permitted to borrow money for
extraordinary or emergency purposes in amounts up to 5% of the Portfolio's gross
assets.
Each of the Balanced, Small Cap Equity, Equity Income and Growth & Income Equity
Portfolios may borrow money from banks for temporary defensive purposes in
amounts not in excess of 10% of the Portfolio's total assets at the time of such
borrowing.
Borrowing by a Portfolio creates an opportunity for increased net income but, at
the same time, creates special risk considerations such as changes in the net
asset value of the shares and in the yield on the Portfolio. Although the
principal of such borrowings will be fixed, the Portfolio's assets may change in
value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Portfolio which can exceed the income from the assets
retained. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Portfolio will have to pay, the
Portfolio's net income will be greater than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed funds is not
sufficient to cover the cost of borrowing, the net income of the Portfolio will
be less than if borrowing were not used.
SHORT SALES. Certain Portfolios may utilize short sales on securities to
implement their investment objectives. A short sale is effected when it is
believed that the price of a particular investment will decline, and involves
the sale of an investment which the Portfolio does not own in the hope of
purchasing the same investment at a later date at a lower price. To make
delivery to the buyer, the Portfolio must borrow the investment, and the
Portfolio is obligated to return the investment to the lender, which is
accomplished by a later purchase of the investment by the Portfolio.
The Portfolio will incur a loss as a result of the short sale if the price of
the investment increases between the date of the short sale and the date on
which the Portfolio purchases the investment to replace the borrowed investment.
The Portfolio will realize a gain if the investment declines in price between
those dates. The amount of any gain will be decreased and the amount of any loss
increased by any premium or interest the Portfolio may be required to pay in
connection with a short sale. It should be noted that possible losses from short
sales differ from those that could arise from a cash investment in that the
former may be limitless while the latter can only equal the total amount of the
Portfolio's investment in the investment. For example, if the Portfolio
purchases a $10 investment, the most that can be lost is $10. However, if the
Portfolio sells a $10 investment short, it may have to purchase the investment
for return to the lender when the market value is $50, thereby incurring a loss
of $40. The amount of any gain or loss on a short sale transaction is also
dependent on brokerage and other transaction costs.
CONVERTIBLE SECURITIES. The convertible securities in which a Portfolio 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.
WARRANTS. A Portfolio may invest in warrants, which entitle the holder to
buy common stock from the issuer 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 securities, yet warrants are
subject to similar price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. A warrant will expire worthless if it is not exercised on or
prior to the expiration date.
MONEY MARKET INSTRUMENTS. Certain Portfolios are permitted to invest in
money market instruments although they intend to stay invested in equity
securities to the extent practical in light of their objectives and long-term
investment perspective. These Portfolios may make money market investments
pending other investment or settlement, for liquidity or in adverse market
conditions. The money market investments permitted for these Portfolios include
U.S. Government Securities, other debt securities, commercial paper, bank
obligations and repurchase agreements. These Portfolios may also invest in
short-term obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions.
PART B
STATEMENT OF ADDITIONAL INFORMATION
COVA SERIES TRUST
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
The date of this Statement of Additional Information is May 1, 1999
This Statement of Additional Information is not a prospectus. It contains
information that supplements the information in the prospectus dated May 1,
1999, for the Trust and its Portfolios. It also contains additional information
that may be of interest to you. The prospectus incorporates this Statement of
Additional Information by reference. You may obtain a free copy of the
prospectus from your registered representative who offered or sold you your
variable annuity contract or variable life insurance policy that uses the
Portfolios for investment. You may also obtain copies by calling Cova Financial
Services Life Insurance Company at 1-800-831-LIFE or by writing to: Cova
Financial Services Life Insurance Company One Tower Lane, Suite 3000 Oakbrook
Terrace, Illinois 60181-4644
TABLE OF CONTENTS
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THE TRUST
History
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated July 9, 1987 (the "Declaration of
Trust"). The Trust changed its name from "Van Kampen Merritt Series Trust" to
its current name on May 1, 1996.
Classification
The Trust is an open-end, management investment company. It is divided into
different series, each of which has its own assets, investment objectives and
policies. Each is managed separately, using distinct strategies appropriate to
its objectives and policies. The Trust currently has seventeen Portfolios. The
Trust may authorize additional Portfolios in the future. The Trust cannot change
its classification as an open-end, management investment company without the
consent of a majority of its shareholders. A Portfolio that is currently
diversified cannot change to nondiversified without the approval of a majority
of the shareholders of that Portfolio.
Shareholder Liability
Under Massachusetts law, shareholders of a trust may be held personally liable
as partners for the obligations of the trust under certain circumstances. The
Declaration of Trust contains an express disclaimer of shareholder liability in
connection with Trust property or the acts, obligations, or affairs of the
Trust. The Declaration of Trust also provides for indemnification out of a
Portfolio's property of any shareholder of that Portfolio held personally liable
for the claims and liabilities to which a shareholder may become subject by
reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Portfolio itself would be unable to meet its
obligations. A copy of the Declaration of Trust is on file with the Secretary of
State of The Commonwealth of Massachusetts.
INVESTMENT STRATEGIES AND RISKS
Summary
The prospectus for the Trust describes the principal strategies of each of the
Portfolios and the risks of those strategies. This Section describes the
strategies that are not principal strategies for the Portfolios, but which the
Subadvisers may use in managing a Portfolio and the risks of those strategies.
Some of these strategies could affect the return of the Portfolio. Additional
information on certain Portfolios is also provided.
ADDITIONAL INFORMATION - 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 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 misevaluation 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.
EMERGING MARKETS EQUITY PORTFOLIO. This Portfolio is designed for investors
with a long term investment horizon who want exposure to the rapidly growing
emerging markets. The Portfolio's investment objective is to provide a high
total return from a portfolio of equity securities of companies in emerging
markets.
The Portfolio seeks to achieve its investment objective by investing
primarily in equity securities of emerging markets issuers. 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 emerging
markets countries render investments in such countries inadvisable.
INVESTMENT PROCESS
Country allocation: The Sub-Adviser's country allocation decision begins
with a forecast of the expected return of each market in the Portfolio's
universe. These expected returns are calculated using a proprietary valuation
method that is forward looking in nature rather than based on historical data.
The Sub-Adviser then evaluates these expected returns from two different
perspectives: first, it identifies those countries that have high real expected
returns relative to their own history and other nations in their universe.
Second, it identifies those countries that it expects will provide high returns
relative to their currency risk. Countries that rank highly on one or both of
these scores are overweighted relative to the Portfolio's benchmark, the MSCI
Emerging Markets Free Index, while those that rank poorly are underweighted. To
help contain risk, the Sub-Adviser places limits on the total size of the
Portfolio's country over- and under-weightings.
Stock selection: The Sub-Adviser's 12 emerging market equity analysts--
each an industry specialist--monitor a universe of approximately 900 companies
in these countries, developing forecasts of earnings and cash flows for the most
attractive among them. Companies are ranked from most to least attractive based
on this research, and then a diversified portfolio is constructed using
disciplined buy and sell rules. The portfolio manager's objective is to
concentrate the Portfolio's holdings in the stocks deemed most undervalued, and
to keep sector weightings relatively close to those of the index. Stocks are
generally held until they fall into the bottom half of the Sub-Adviser's
rankings.
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."
STRIPPED U.S. GOVERNMENT OBLIGATIONS. As described in the Prospectus and
subject to their respective investment policies, certain Portfolios may hold
stripped U.S. Treasury securities, including (1) coupons that have been stripped
from U.S. Treasury bonds, which are held through the Federal Reserve Bank's
book-entry system called "Separate Trading of Registered Interest and Principal
of Securities" ("STRIPS") or (2) through a program entitled "Coupon Under
Book-Entry Safekeeping" ("CUBES"). Certain Portfolios may also acquire U.S.
Government obligations and their unmatured interest coupons that have been
stripped by a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
obligations, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRS") and "Certificates of Accrual on Treasury Securities"
("CATS"). Such securities may not be as liquid as STRIPS and CUBES and are not
viewed by the staff of the SEC as U.S. Government securities for purposes of the
1940 Act.
The stripped coupons are sold separately from the underlying principal,
which is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic interest (cash) payments. Purchasers of stripped principal-only
securities acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury Department sells
itself. In the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder), the underlying U.S. Treasury
bonds and notes themselves are held in trust on behalf of the owners.
The U.S. Government does not issue stripped Treasury securities directly.
The STRIPS program, which is ongoing, is designed to facilitate the secondary
market in the stripping of selected U.S. Treasury notes and bonds into separate
interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
For custodial receipts, the underlying debt obligations are held separate
from the general assets of the custodian and nominal holder of such securities,
and are not subject to any right, charge, security interest, lien or claim of
any kind in favor of or against the custodian or any person claiming through the
custodian. The custodian is also responsible for applying all payments received
on those underlying debt obligations to the related receipts or certificates
without making any deductions other than applicable tax withholding. The
custodian is required to maintain insurance for the protection of holders of
receipts or certificates in customary amounts against losses resulting from the
custody arrangement due to dishonest or fraudulent action by the custodian's
employees. The holders of receipts or certificates, as the real parties in
interest, are entitled to the rights and privileges of the underlying debt
obligations, including the right, in the event of default in payment of
principal or interest, to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their respective
investment limitations, certain Portfolios may purchase variable and floating
rate obligations. The Sub-Advisers will consider the earning power, cash flows
and other liquidity ratios of the issuers and guarantors of such obligations
and, for obligations subject to a demand feature, will monitor their financial
status to meet payment on demand. In determining average weighted portfolio
maturity, a variable or floating rate instrument issued or guaranteed by the
U.S. Government, its agencies and instrumentalities, or a variable or floating
rate instrument scheduled on its face to be paid in 397 days or less, will be
deemed to have a maturity equal to the period remaining until the obligation's
next interest rate adjustment. Other variable or floating rate notes will be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the time the Portfolio can recover payment of
principal as specified in the instrument.
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. 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.
RIGHTS AND WARRANTS
Certain of the Portfolios may participate in rights offerings and purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally
have a short life span to expiration. Warrants may have a life ranging from less
than a year to twenty years or may be perpetual. However, most warrants have
expiration dates after which they are worthless. The purchase of rights or
warrants involves the risk that the Portfolio could lose the purchase value of a
right or warrant if the right to subscribe to additional shares is not exercised
prior to the rights' or warrants' expiration. Also, the purchase of rights or
warrants involves the risk that the effective price paid for the right or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security.
FOREIGN INVESTMENTS
Each of the Portfolios may invest in foreign securities. The International
Equity Portfolio and the Emerging Markets Equity Portfolio make substantial
investments in foreign countries. The Quality Bond, Select Equity, Large Cap
Stock and Small Cap Stock 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. 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"). (See "ADRs and EDRs", below.)
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.
INTRODUCTION OF THE EURO
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain are members of the European Economic and
Monetary Union (the "European Union"). On January 1, 1999, the European Union
established a common European currency for participating countries that will
generally be known as the "Euro." Each such member country supplements its
existing currency with the Euro and intends to replace its existing currency
with the Euro on July 1, 2002. Additional European countries that are members of
the European Union may elect to supplement their existing currencies with the
Euro after January 1, 1999.
The introduction of the Euro presents unique risks and uncertainties, including
the treatment of outstanding financial contracts after January 1, 1999; the
application of exchange rates for existing currencies and the Euro; and the
creation of suitable clearing and settlement systems for the new currency. While
it is impossible to predict what effect the Euro's introduction may have on a
Portfolio's investments in foreign securities and foreign currencies, these and
other factors could cause market disruptions and could, among other things,
adversely affect the value of securities held by the Portfolio.
ADRs AND EDRs
Certain Portfolios may invest their assets in securities such as ADRs and
EDRs, which are receipts issued by a U.S. bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer. ADRs and EDRs may
be listed on a national securities exchange or may trade in the over-the-counter
market. ADR and EDR prices are denominated in U.S. dollars, even though the
underlying security may be denominated in a foreign currency. The underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities. Investments in such instruments involve risks similar to
those of investing directly in foreign securities. Such risks include political
or economic instability of the issuer or the country of issue, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities of domestic corporations. In addition, there may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. With respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
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 on the Trust's records 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 commitments.
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.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment
companies may be acquired by each of the Portfolios to the extent permitted
under the Investment Company Act of 1940, as amended ("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 on the Trust's records 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.
REAL ESTATE INVESTMENT TRUSTS
Certain Portfolios may purchase interests in real estate investment trusts.
Risks associated with real estate investments include the fact that equity and
mortgage real estate investment trusts are dependent upon management skill and
are not diversified, and are, therefore, subject to the risk of financing single
projects or unlimited number of projects. They are also subject to heavy cash
flow dependency, defaults by borrowers, and self-liquidation. Additionally,
equity real estate investment trusts may be affected by any changes in the value
of the underlying property owned by the trusts, and mortgage real estate
investment trusts may be affected by the quality of any credit extended. These
risks may be mitigated by selecting real estate investment trusts diversified by
sector (shopping malls, apartments building complexes, and health care
facilities) and geographic location.
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. 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 PORTFOLIO. The Quality Bond Portfolio invests 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, or if 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
berated 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 a 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.
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.
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.
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.
FNMA AND FHLMC CERTIFICATES. Mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-backed securities issued
by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Bank. Freddie
Macs entitle the holder to timely payment of interest, which is guaranteed by
the FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
LOWER GRADE SECURITIES
Certain of the Portfolios may invest in lower-grade income securities. (The
Bond Debenture Portfolio may invest a substantial portion of its assets in
medium and lower grade corporate debt securities entailing certain risks.) 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.
A 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").
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 1940 Act 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.
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. Where an investment restriction or policy restricts it to a specified
percentage of its total assets in any type of instrument, that percentage is
measured at the time of purchase. Except as noted hereunder, there will be no
violation of any investment policy or restriction if that restriction is
complied with at the time the relevant action is taken notwithstanding a later
change in the market value of an investment, in net or total assets, in the
securities rating of the investment or any other change.
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.
EMERGING MARKETS EQUITY PORTFOLIO
The Emerging Markets Equity Portfolio may not:
1. Purchase any security if, as a result, more than 25% of the value of the
Portfolio's total assets would be invested in securities of issuers having their
principal business activities in the same industry. This limitation shall not
apply to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities;
2. Borrow money, except that the Portfolio may (i) borrow money from banks
for temporary or emergency purposes (not for leveraging purposes) and (ii) enter
into reverse repurchase agreements for any purpose; provided that (i) and (ii)
in total do not exceed 33 1/3% of the value of the Portfolio's total assets
(including the amount borrowed)less liabilities (other than borrowings). If at
any time any borrowings come to exceed 33 1/3% of the value of the Portfolio's
total assets, the Portfolio will reduce its borrowings within three business
days to the extent necessary to comply with the 33 1/3% limitation;
3. With respect to 75% of its total assets, purchase any security if, as a
result, (a) more than 5% of the value of the Portfolio's total assets would be
invested in securities or other obligations of any one issuer; or (b) the
Portfolio would hold more than 10% of the outstanding voting securities of that
issuer. This limitation shall not apply to Government securities (as defined in
the 1940 Act);
4. Make loans to other persons, except through the purchase of debt
obligations, loans of portfolio securities, and participation in repurchase
agreements;
5. Purchase or sell physical commodities or contracts thereon, unless
acquired as a result of the ownership of securities or instruments, but the
Portfolio may purchase or sell futures contracts or options (including options
on futures contracts, but excluding options or futures contracts on physical
commodities) and may enter into foreign currency forward contracts;
6. Purchase or sell real estate, but the Portfolio may purchase or sell
securities that are secured by real estate or issued by companies (including
real estate investment trusts) that invest or deal in real estate;
7. Underwrite securities of other issuers, except to the extent the
Portfolio, in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act; and
8. Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder.
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.
GROWTH & INCOME EQUITY, SMALL CAP EQUITY, BALANCED AND EQUITY INCOME PORTFOLIOS
The Growth & Income Equity, Small Cap Equity, Balanced and Equity Income
Portfolios of the Trust may not:
1. Purchase securities of any one issuer (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities), if,
immediately after and as a result of such investments, more than 5% of the
Portfolio's total assets would be invested in the securities of such issuer, or
more than 10% of the issuer's outstanding voting securities would be owned by
the Portfolio or the Trust, except that up to 25% of the Portfolio's total
assets may be invested without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the Portfolio's
total assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry, provided that, however, (a) with respect to each Portfolio, (i) there
is no limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements secured
by obligations of the U.S. Government or its agencies or instrumentalities, and
with respect to the Equity Income Portfolio only, securities issued by domestic
banks, thrifts or savings institutions; (ii) wholly-owned finance companies will
be considered to be in the industries of their parents if their activities are
primarily related to financing the activities of their parents; and (iii)
utilities will be divided according to their services (for example, gas, gas
transmission, electric and gas, electric, and telephone will each be considered
a separate industry).
3. Borrow money or issue senior securities, except that the Portfolio may
borrow from banks and enter into reverse repurchase agreements for temporary
defensive purposes in amounts not in excess of 10% of the Portfolio's total
assets at the time of such borrowing; or mortgage, pledge, or hypothecate any
assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the Portfolio's
total assets at the time of such borrowing; or purchase securities while its
borrowings exceed 5% of its total assets. A Portfolio's transactions in futures
and related options (including the margin posted by a Portfolio in connection
with such transactions), and securities held in escrow or separate accounts in
connection with a Portfolio's investment practices described in this Statement
of Additional Information are not subject to this limitation.
4. Make loans, except that each Portfolio may purchase or hold debt
instruments, lend portfolio securities, enter into repurchase agreements and
make other investments in accordance with its investment objective and policies.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Portfolio's transactions in options, and futures contracts and
related options, and (b) a Portfolio may obtain short-term credits as may be
necessary for the clearance of purchases and sales of portfolio securities.
6. Make investments for the purpose of exercising control or management.
7. Purchase or sell real estate, provided that each Portfolio may invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein.
8. Act as an underwriter of securities within the meaning of the Securities
Act of 1933 except insofar as a Portfolio might be deemed to be an underwriter
upon disposition of portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with a Portfolio's
investment objective, policies and limitations may be deemed to be underwriting.
9. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each of the Balanced Portfolio
and the Equity Income Portfolio may, to the extent appropriate to its investment
objective, purchase publicly traded securities of companies engaging in whole or
in part in such activities and may invest in futures contracts and related
options in accordance with their respective investment activities and policies.
10. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
a Portfolio's investment objective, policies and limitations may be deemed to be
underwriting.
LORD ABBETT GROWTH AND INCOME PORTFOLIO
The Lord Abbett Growth and Income Portfolio may not:
1. sell short securities or buy securities or evidences of interests
therein on margin, although it may obtain short-term credit necessary for the
clearance of purchases of securities;
2. buy or sell put or call options, although it may buy, hold or sell
rights or warrants, write covered call options and enter into closing purchase
transactions as discussed below;
3. borrow money which is in excess of one-third of the value of its total
assets taken at market value (including the amount borrowed) and then only from
banks as a temporary measure for extraordinary or emergency purposes (borrowings
beyond 5% of such total assets may not be used for investment leverage to
purchase securities but solely to meet redemption requests where the liquidation
of the Portfolio's investment is deemed to be inconvenient or disadvantageous);
4. lend money or securities to any person except that it may enter into
short-term repurchase agreements with sellers of securities it has purchased,
and it may lend its portfolio securities to registered broker-dealers where the
loan is 100% secured by cash or its equivalent as long as it complies with
regulatory requirements and the Portfolio deems such loans not to expose the
Portfolio to significant risk (investment in repurchase agreements exceeding 7
days and in other illiquid investments is limited to a maximum of 5% of a
Portfolio's assets);
5. pledge, mortgage or hypothecate its assets; however, this provision does
not apply to permitted borrowing mentioned above or to the grant of escrow
receipts or the entry into other similar escrow arrangements arising out of the
writing of covered call options;
6. buy or sell real estate including limited partnership interests therein
(except securities of companies, such as real estate investment trusts, that
deal in real estate or interests therein), or oil, gas or other mineral leases,
commodities or commodity contracts in the ordinary course of its business,
except such interests and other property acquired as a result of owning other
securities, though securities will not be purchased in order to acquire any of
these interests;
7. invest more than 5% of its gross assets, taken at market value at the
time of investment, in companies (including their predecessors) with less than
three years' continuous operation;
8. buy securities if the purchase would then cause a Portfolio to have more
than (i) 5% of its gross assets, at market value at the time of purchase,
invested in securities of any one issuer, except securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, or (ii) 25% of its
gross assets, at market value at the time of purchase, invested in securities
issued or guaranteed by a foreign government, its agencies or instrumentalities;
9. buy voting securities if the purchase would then cause a Portfolio to
own more than 10% of the outstanding voting stock of any one issuer;
10. own securities in a company when any of its officers, directors or
security holders is an officer or Trustee of the Trust or an officer, director
or partner of the investment adviser or sub-adviser, if after the purchase any
of such persons owns beneficially more than 1/2 of 1% of such securities and
such persons together own more than 5% of such securities;
11. concentrate its investments in any particular industry, but if deemed
appropriate for attainment of its investment objective, up to 25% of its gross
assets (at market value at the time of investment) may be invested in any one
industry classification used for investment purposes; or
12. buy securities from or sell them to the Trust's officers, directors, or
employees, or to the investment adviser or sub-adviser or to their partners,
directors and employees.
LARGE CAP RESEARCH, DEVELOPING GROWTH AND MID-CAP VALUE PORTFOLIOS
The Large Cap Research, Developing Growth and Mid-Cap Value Portfolios may
not:
1. borrow money, except that (i) the Portfolio may borrow from banks (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act")) in
amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii)
the Portfolio may borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Portfolio may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities
and (iv) the Portfolio may purchase securities on margin to the extent permitted
by applicable law;
2. pledge its assets (other than to secure borrowings, or to the extent
permitted by the Portfolio's investment policies as permitted by applicable
law);
3. engage in the underwriting of securities, except pursuant to a merger or
acquisition or to the extent that, in connection with the disposition of its
portfolio securities, it may be deemed to be an underwriter under federal
securities laws;
4. make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar instruments
shall not be subject to this limitation, and except further that the Portfolio
may lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law;
5. buy or sell real estate (except that the Portfolio may invest in
securities directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein) or
commodities or commodity contracts (except to the extent the Portfolio may do so
in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act, as, for example, with futures
contracts);
6. with respect to 75% of the gross assets of the Portfolio, buy securities
of one issuer representing more than (i) 5% of the Portfolio's gross assets,
except securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or (ii) 10% of the voting securities of such issuer;
7. invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding securities of the
U.S. Government, its agencies and instrumentalities); or
8. issue senior securities to the extent such issuance would violate
applicable laws.
RIGGS STOCK AND RIGGS SMALL COMPANY STOCK PORTFOLIOS0
1. The Portfolios will not issue senior securities except that a Portfolio
may borrow money directly or through reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amount borrowed;
and except to the extent that a Portfolio may enter into futures contracts. The
Portfolios will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the Portfolio by enabling a Portfolio to
meet redemption requests when the liquidation of portfolio securities is deemed
to be inconvenient or disadvantageous. A Portfolio will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase agreements are
outstanding, a Portfolio will restrict the purchase of portfolio securities to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements.
2. The Portfolios will will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as are necessary
for clearance of purchases and sales of securities. The deposit or payment by a
Portfolio of initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a security on
margin.
3. The Portfolios will not mortgage, pledge, or hypothecate any assets,
except to secure permitted borrowings. In these cases the Portfolios may pledge
assets having a value of 15% of assets taken at cost. For purposes of this
restriction, (a) the deposit of assets in escrow in connection with the writing
of covered put or call options and the purchase of securities on a when-issued
basis; and (b) collateral arrangements with respect to (i) the purchase and sale
of stock options and (ii) initial or variation margin for futures contracts will
not be deemed to be pledges of a Portfolio's assets. Margin deposits for the
purchase and sale of futures contracts and related options are not deemed to be
a pledge.
4. The Portfolios will not lend any of their respective assets except
portfolio securities up to one-third of the value of total assets. This shall
not prevent a Portfolio from purchasing or holding U.S. government obligations,
money market instruments, variable amount demand master notes, bonds,
debentures, notes, certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other transactions where
permitted by a Portfolio's investment objective, policies, and limitations or
the Trust's Declaration of Trust.
5. The Portfolios will not invest more than 10% of their respective net
assets in securities subject to restrictions on resale under the Securities Act
of 1933, except for commercial paper issued under Section 4(2) of the Securities
Act of 1933 and certain other restricted securities which meet the criteria for
liquidity as established by the Board of Trustees.
6. The Portfolios will not invest in commodities, except to the extent that
they may engage in transactions involving futures contracts or options on
futures contracts.
7. The Portfolios will not purchase or sell real estate, including limited
partnership interests, although they may invest in securities of issuers whose
business involves the purchase or sale of real estate or in securities which are
secured by real estate or interests in real estate.
8. With respect to 75% of the value of its respective total assets, each
Portfolio will not purchase securities issued by any one issuer (other than
cash, cash items or securities issued or guaranteed by the government of the
United States or its agencies or instrumentalities and repurchase agreements
collateralized by such securities), if as a result more than 5% of the value of
its total assets would be invested in the securities of that issuer. No
Portfolio will acquire more than 10% of the outstanding voting securities of any
one issuer.
9. A Portfolio will not invest 25% or more of the value of its respective
total assets in any one industry (other than securities issued by the U.S.
government, its agencies, or instrumentalities or repurchase agreements
collateralized by these securities).
10. A Portfolio will not underwrite any issue of securities, except as a
Portfolio may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
Except with respect to the Portfolios' policy of borrowing money, if a
percentage limitation is adhered to at the time of investment, a later increase
or decrease in percentage resulting from any change in value or net assets will
not result in a violation of such restriction.
For purposes of their policies and limitations, the Portfolios consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings association having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - QUALITY BOND PORTFOLIO, SELECT EQUITY
PORTFOLIO, LARGE CAP STOCK PORTFOLIO, SMALL CAP STOCK PORTFOLIO AND
INTERNATIONAL EQUITY PORTFOLIO
The investment limitation 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.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - EMERGING MARKETS EQUITY PORTFOLIO
(i) Acquire securities of other investment companies, except as permitted
by the 1940 Act or any rule, order or interpretation thereunder, or in
connection with a merger, consolidation, reorganization, acquisition of assets
or an offer of exchange;
(ii) 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 net assets would be in investments that are illiquid;
(iii) Sell any security short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold or unless it
covers such short sales as required by the current rules or positions of the SEC
or its staff. Transactions in futures contracts and options shall not constitute
selling securities short; or
(iv) Purchase securities on margin, but the Portfolio may obtain such short
term credits as may be necessary for the clearance of transactions.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - LARGE CAP RESEARCH, DEVELOPING GROWTH
AND MID-CAP VALUE PORTFOLIOS
Each Portfolio may not:
1. borrow in excess of 5% of its 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;
2. make short sales of securities or maintain a short position except to
the extent permitted by applicable law;
3. invest knowingly more than 15% of its net assets (at the time of
investment) in illiquid securities, except for securities qualifying for resale
under Rule 144A of the Securities Act of 1933, deemed to be liquid by the Board
of Trustees;
4. invest in the securities of other investment companies as defined in the
1940 Act except as permitted by applicable law;
5. invest in securities of issuers which, with their predecessors, have a
record of less than three years' continuous operations, if more than 5% of the
Portfolio's total assets would be invested in such securities (this restriction
shall not apply to mortgaged-backed securities, asset-backed securities or
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities);
6. hold securities of any issuer if more than 1/2 of 1% of the securities
of such issuer are owned beneficially by one or more officers or Trustees of the
Trust or by one or more partners or members of the Trust's underwriter or
investment adviser if these owners in the aggregate own beneficially more than
5% of the securities of such issuer;
7. invest in warrants if, at the time of the acquisition, its investment in
warrants, value at the lower of cost or market, would exceed 5% of the
Portfolio's total assets (included within such limitation, but not to exceed 2%
of the Portfolio's total assets, are warrants which are not listed on the New
York or American Stock Exchange or a major foreign exchange);
8. invest in real estate limited partnership interests or interests in oil,
gas or other mineral leases, or exploration or other development programs,
except that the Portfolio may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or other development activities;
9. write, purchase or sell puts, calls, straddles, spreads or combinations
thereof, except to the extent permitted in the Portfolio's prospectus and
statement of additional information, as they may be amended from time to time;
or
10. buy from or sell to any of its officers, Trustees, employees, or its
investment adviser or any of its officers, directors, partners or employees, any
securities other than shares of the Portfolio's common stock.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS - RIGGS STOCK AND RIGGS SMALL COMPANY
STOCK PORTFOLIOS0
1. The Portfolios will not invest more than 15% of the value of their
respective net assets in illiquid securities, including repurchase agreements
providing for settlement more than seven days after notice, over-the-counter
options and certain restricted securities not determined by the Trustees to be
liquid.
2. Unless permitted by order of the Securities and Exchange Commission, the
Portfolios will limit their respective investment in other investment companies
to no more than 3% of the total outstanding voting stock of any investment
company, and will not invest more than 5% of their respective total assets in
any one investment company, or invest more than 10% of their respective total
assets in investment companies in general. The Portfolios will purchase
securities of closed-end investment companies only in open market transactions
involving only customary broker's commissions. However, these limitations are
not applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets.
3. A Portfolio will not enter into transactions for the purpose of engaging
in arbitrage.
4. A Portfolio will not purchase securities of a company for the purpose of
exercising control or management.
5. The Portfolios may not invest more than 5% of their respective net
assets in warrants, including those acquired in units or attached to other
securities. For purposes of this investment restriction, warrants will be valued
at the lower of cost or market, except that warrants acquired by the Portfolios
in units with or attached to securities may be deemed to be without value.
DESCRIPTION OF SECURITIES RATINGS
APPENDIX - DESCRIPTION OF CORPORATE BOND RATINGS
STANDARD & POOR'S CORPORATION. A brief description of the applicable Standard &
Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt 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 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 for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
LONG-TERM CORPORATE BONDS.
AAA - Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC - Debt rated 'BB', 'B', 'CCC', or 'CC' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'CC' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - This rating is reserved for income bonds on which no interest is being
paid.
D - Debt rated 'D' is in default, and payment of interest and/or repayment
of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from 'A' to 'B' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L - The letter 'L' indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully insured
by the Federal Deposit Insurance Corp.
[DAGGER] - Continuance of the rating is contingent upon S&P's receipt of
closing documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR - Indicates 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.
MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings (as published
by Moody's Investors Service, Inc.) follows:
LONG-TERM CORPORATE BONDS.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
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:
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.
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.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+." "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection factors
qualify issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to ensure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for timely payment
is adequate; however, near-term adverse changes could cause these securities to
be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for timely payment
and are vulnerable to near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by a strong capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
Such capacity is more susceptible to adverse changes in business, economic or
financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are currently
in default.
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.
AA A 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.
MANAGEMENT OF THE TRUST
Responsibilities of Trustees
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Trust and the Portfolios. In carrying out their duties, the Trustees
follow the provisions of the Investment Company Act of 1940, the General Laws of
the Commonwealth of Massachusetts governing business trusts, the Declaration of
Trust of the Trust and its Bylaws. The Trustees approve contracts with the
investment adviser, custodians and other service providers on behalf of the
Portfolios. The Trustees also set broad policies for the management of the
assets of each Portfolio, including the pricing of securities owned by the
Portfolios and the policies governing investments by the Portfolios.
<TABLE>
<CAPTION>
OFFICERS AND TRUSTEES
MANAGEMENT OF THE TRUST
Principal Occupation During Past Five
Position(s) Held Years (and Positions held with Affiliated
Name, Address and Age with Registrant Persons or Principal Underwriters of the Registrant)
- --------------------- --------------- ----------------------------------------------------
<S> <C> <C>
Lorry J. Stensrud* President and Chief President of Cova Financial Services Life
One Tower Lane, Suite 3000 Executive Officer Insurance Company ("Cova Life") since
Oakbrook Terrace, IL 60181- June, 1995; prior thereto, Executive Vice
4644 President of Cova
Age: 49
William C. Mair* Vice President, Vice President and Controller of Cova Life;
One Tower Lane, Suite 3000 Treasurer, Controller, Vice President, Treasurer and Controller of
Oakbrook, Terrace IL 60181- Chief Financial Officer, Cova Investment Advisory Corporation
4644 Chief Accounting Officer
Age: 57 and Trustee
Stephen M. Alderman Trustee Partner in the law firm of Garfield & Merel
211 West Wacker Drive
Chicago, IL 60606
Age: 39
Theodore A. Myers Trustee Senior Financial Advisor; formerly Chief
550 Washington Avenue Financial Officer of Qualitech Steel
Glencoe, IL 60022 Corporation, 1990-1994; Director of 34 Van
Age: 68 Kampen American Capital Mutual Funds;
member of Arthur Andersen C.F.O.
Advisory Committee.
Deborah A. Vohasek Trustee Principal, Vohasek Oetjen Marketing
7752 W. Lake Street
Morton Grove, IL 60053
Age: 35
R. Kevin Williams Trustee Partner in the law firm of O'Donnell, Byrne &
20 North Wacker Drive Williams from June 1993 through the
Chicago, IL 60606 present
Age: 45
William H. Wilton Vice President Vice President & Actuary of Cova Life; prior
One Tower Lane, Suite 3000 to October, 1992, Associate Actuary,
Oakbrook Terrace, IL 60181- Allstate Life Insurance Co., Northbrook, IL
4644
Age: 38
Frances S. Cook Secretary First Vice President and Associate General
One Tower Lane, Suite 3000 Counsel of Cova Life since 1990
Oakbrook Terrace, IL 60181-
4644
Age: 45
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</FN>
</TABLE>
COMMITTEES
The Board has established two committees. The committees, their members and the
responsibilities of the comittees are as follows:
PRICING COMMITTEE. The Pricing Committee has the responsibility of overseeing
the determination of the net asset value of the Portfolios and the calculation
of the value of any debt instrument, share of stock, or other Portfolio security
or asset. The members are as follows:
Drew Ahrens
William Flory
Terri Tanaka
AUDIT COMMITTEE. The Audit Committee makes recommendations to the Board
concerning the selection of the Trust's independent accountants and reviews with
such accountants the scope and results of the Trust's annual audit. The members
are as follows:
Stephen M. Alderman
Theodore A. Myers
Deborah A. Vohasek
R. Kevin Williams
COMPENSATION OF MANAGEMENT
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.
The table below describes the compensation paid by the Trust during the past
fiscal year to each of the Trustees who is a not an interested person of the
Trust. None of the officers and no Trustee who is an interested person of the
Trust received compensation from the Trust during the past fiscal year.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement Estimated From Registrant
Aggregate Benefits Accrued Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid to
Name of Person, Position From Registrant Expenses Retirement Trustees
- ------------------------ --------------- -------- ---------- --------
<S> <C> <C> <C> <C>
William C. Mair, N/A N/A N/A N/A
Vice President, Treasurer,
Controller, Chief Financial
Officer, Chief Accounting
Officer and Trustee
Stephen M. Alderman, $______ N/A N/A $______
Trustee
Theodore A. Myers, $______ N/A N/A $______
Trustee
Deborah A. Vohasek, $______ N/A N/A $______
Trustee
R. Kevin Williams, $______ N/A N/A $______
Trustee
</TABLE>
SUBSTANTIAL SHAREHOLDERS
Shares of the Trust are issued and redeemed in connection with investments
in and payments under certain variable annuity contracts and variable life
insurance policies ("Variable Contracts") issued by Cova Financial Services Life
Insurance Company and/or its affiliated insurance companies. On April 1, 1999,
Cova Variable Annuity Account One and Cova Variable Life Account One, separate
accounts of Cova Financial Services Life Insurance Company, Cova Variable
Annuity Account Five, a separate account of Cova Financial Life Insurance
Company, First Cova Variable Annuity Account One, a separate account of First
Cova Life Insurance Company, together were known to the Board of Trustees and
the management of the Trust to own of record ___% of the Trust's shares.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
Cova Life has advised the Trust that as of April 1, 1999, 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 ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116, 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. IBT also provides fund
administration and accounting services to the Trust and is the Trust's transfer
agent.
DIVIDENDS
All dividends are distributed to the separate accounts and will be automatically
reinvested in Trust shares. Dividends and distributions made by the Portfolios
are taxable, if at all, to Cova Life; they are not taxable to Variable Contract
owners.
TAX STATUS
It is the intention of the Trust to qualify as a "regulated investment company"
under Sub-chapter M of the Internal Revenue Code. If the Trust so qualifies and
distributes each year to its shareholders at least 90% of its net investment
income in each year, it will not be required to pay federal income taxes on any
income distributed to shareholders. Each Portfolio of the Trust distributes all
of its net income and gains to its shareholders (the separate accounts). Each
Portfolio is treated as a separate entity for Federal income tax purposes and,
therefore, the investments and results of the Portfolio are determined
separately for purposes of determining whether the Trust qualifies as a
"regulated investment company" and for purposes of determining net ordinary
income (or loss) and net realized capital gains (or losses).
Some of the Trust's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Trust and affect the holding period of the securities held by the Trust and the
character of the gains or losses realized by the Trust. These provisions may
also require the Trust to mark-to-market some of the positions in its portfolio
(i.e., treat them as if they were closed out), which may cause the Trust to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the 90% distribution requirement and the
distribution requirements for avoiding income and excise taxes. The Trust will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these rules and prevent disqualification of the Trust as a
regulated investment company.
Investments of the Trust in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Trust will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Trust may
have to dispose of securities that it would otherwise have continued to hold.
NET ASSET VALUES
Portfolio shares are sold and redeemed at a price equal to the share's net asset
value. The net asset value of a Portfolio is determined by calculating the total
value of the Portfolio's assets, deducting its total liabilities, and dividing
the result by the number of shares outstanding. The net asset value for each
Portfolio is computed once daily as of the close of the New York Stock Exchange,
Monday through Friday, except on customary business holidays, or except on any
day on which no purchase or redemption orders are received, or there is not a
sufficient degree of trading in the Portfolio's investments so that the
Portfolio's net asset value per share might be materially affected. The Trust
reserves the right to calculate the net asset value and to adjust the public
offering price based thereon more frequently than once a day if deemed
desirable.
Securities that are listed on a securities exchange are valued at their closing
sales price on the day of the valuation. Price valuations for listed securities
are based on market quotations where the security is primarily traded or, if not
available, are valued at the mean of the bid and asked prices on any valuation
date. Unlisted securities in a Portfolio are primarily valued based on their
latest quoted bid price or, if not available, are valued by a method determined
by the Trustees to accurately reflect fair value. Money market instruments
maturing in 60 days or less are valued on the basis of amortized cost, which
means that securities are valued at their acquisition cost to reflect a constant
amortization rate to maturity of any premium or discount, rather than at current
market value.
PERFORMANCE DATA
As required by regulations of the Securities and Exchange Commission, the
annualized total return of the 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.
Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in a Portfolio over a period of one, five and ten years (or, if less,
up to the life of a Portfolio, calculated pursuant to the formula:
(n)
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = an average annual total return
n = the number of years
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year period at the
end of the 1, 5, or 10 year period (or fractional portion
thereof)
From time to time, the investment adviser may reduce its compensation or assume
expenses in respect of the operations of a Portfolio in order to reduce the
Portfolio's expenses. Any such waiver or assumption would increase a Portfolio's
yield and total return during the period of the waiver or assumption.
Advertisements and other sales literature for the Portfolios may quote total
returns which are calculated for periods other than the 1-, 5- and 10-year
periods required by the Rules of the Securities and Exchange Commission or may
quote returns that do not reflect the deduction of all expenses incurred by a
Portfolio. The investment adviser may use these returns in advertising if the
investment adviser believes the nonstandard returns are useful. Nonstandard
returns are always accompanied by total returns calculated as required by Rules
of the Securities and Exchange Commission, which require performance to be
calculated for 1-, 5- and 10-year periods with the deduction of all expenses and
the assumption that all dividends and distributions are reinvested.
In addition, Portfolio performance may be advertised relative to certain indices
and benchmark investments. The composition of the investment in such indices are
the characteristics of such benchmark investments are not identical to, and in
some cases are very different from, those of a Portfolio. These indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may be different from those of the equations used by
the Trust to calculate a Portfolio's performance figures.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its operating
expenses. The effective yield and total return for a Portfolio should be
distinguished from the rate of return of a corresponding division of Cova Life's
separate account, which rate will reflect the deduction of additional charges,
including mortality and expense risk charges, and will therefore be lower.
Accordingly, performance figures for a Portfolio will only be advertised if
comparable performance figures for the corresponding division of the separate
account are included in the advertisements. Contract owners should consult the
Contract prospectus for further information. Each Portfolio's results also
should be considred relative to the risks associated with its investment
objectives and policies.
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, 99 High
Street, Boston, Massachusetts 02110.
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
$____ billion of life insurance in force and approximately $____ 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, as amended ("Investment Advisory Agreement").
Prior to this date, Van Kampen American Capital Investment Advisory Corp. 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. An Amendment to the Investment Advisory Agreement
providing for the addition of eight new Portfolios to the Agreement was
approved by the Board of Trustees of the Trust on April 22, 1997 and by Cova
Financial Services Life Insurance Company, as sole shareholder of the eight
new Portfolios, on April 28, 1997. An Amendment to the Investment Advisory
Agreement, providing for the addition of the Emerging Markets Equity Portfolio,
was approved by the Board of Trustees of the Trust on February 26, 1998.
An Amendment to the Investment Advisory Agreement providing for the addition of
the Riggs Stock and Riggs Small Company Stock Portfolios will be submitted to
the Board of Trustees for approval prior to the commencement of the sale of
shares of these two Portfolios.
As described in the Prospectus, the Investment Adviser has retained
Sub-Advisers to assist it in managing the Portfolios. The Sub-Advisory
Agreements between the Investment Adviser and Lord, Abbett & Co. (with respect
to the Bond Debenture Portfolio) and between the Investment Adviser and J. P.
Morgan Investment Management Inc., respectively, were reapproved by the Board of
Trustees, including a majority of the independent Trustees, on February 26,
1998. 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. An Amendment to the Sub-Advisory Agreement
between the Investment Adviser and J.P. Morgan Investment Management, Inc.,
providing for the addition of the Emerging Markets Equity Portfolio, was
approved by the Board of Trustees of the Trust on February 26, 1998. The
Sub-Advisory Agreements between the Investment Adviser and Mississippi Valley
Advisors Inc. ("MVA") and between the Investment Adviser and Lord, Abbett & Co.
(with respect to the Mid-Cap Value Portfolio, Large Cap Research Portfolio,
Developing Growth Portfolio and Lord Abbett Growth and Income Portfolio),
respectively, were approved by the Board of Trustees, including a majority of
the independent Trustees, on April 22, 1997. Cova Financial Services Life
Insurance Company, as sole shareholder of the Portfolios for which MVA acts as
Sub-Adviser and as sole shareholder of the Portfolios listed above for which
Lord, Abbett & Co. acts as Sub-Adviser, approved the Sub-Advisory Agreements
between the Investment Adviser and each of these two Sub-Advisers by way of
corporate resolutions adopted on April 28, 1997. A Sub-Advisory Agreement
between the Investment Adviser and the Trust Division of Riggs Bank, N.A. (with
respect to the Riggs Stock and Riggs Small Company Stock Portfolios) will be
submitted to the Board of Trustees for approval prior to the commencement of the
sale of shares of these two Portfolios.
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.
COMPENSATION. The Investment Adviser receives a fee from the Trust for its
services as investment adviser as described in the Prospectus.
The Investment Adviser calculates the fee each day that the New York Stock
Exchange is open for business based on the net asset value determined for that
day. The fee accrues daily and is paid monthly. The Investment Adviser received
the following fees from each Portfolio during the past three fiscal years.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name of
Portfolio Fiscal Year Ended
1998 1997 Period Ended
1996
Quality Bond Portfolio $________ $________ $_______
Small Cap Stock Portfolio $________ $________ $_______
Large Cap Stock Portfolio $________ $________ $_______
Select Equity Portfolio $________ $________ $_______
International Equity Portfolio $________ $________ $_______
Bond Debenture Portfolio $________ $________ $_______
Mid-Cap Value Portfolio $________ $________ N/A
Large Cap Research Portfolio $________ $________ N/A
Developing Growth Portfolio $________ $________ N/A
Balanced Portfolio $________ $________ N/A
Small Cap Equity Portfolio $________ $________ N/A
Equity Income Portfolio $________ $________ N/A
Growth & Income Equity Portfolio $________ $________ N/A
</TABLE>
The Investment Adviser received no advisory fee with respect to the Emerging
Markets Equity Portfolio, Lord Abbett Growth and Income Portfolio, Riggs Stock
Portfolio and Riggs Small Cap Stock Portfolio through December 31, 1998 in that
these Portfolios had not yet commenced investment operations as of that date.
EXPENSES OF THE TRUST
Although each Portfolio must bear the expenses directly attributable to it, the
Portfolios are expected to experience cost savings over the aggregate amount
that would be payable if each Portfolio were a separate fund, because they have
the same Trustees, accountants, attorneys and other general and administrative
expenses. Any expenses which are not directly attributable to a specific
Portfolio are allocated on the basis of the net assets of the respective
Portfolios.
For the year ended December 31, 1998, the expenses, taking into account the
waivers and expense assumptions, borne by the Bond Debenture Portfolio amounted
to $_______ or ___% of its average net assets on an annualized basis; the net
expenses borne by the Quality Bond Portfolio amounted to $______ or ___% of its
average net assets on an annualized basis; the net expenses borne by the
International Equity Portfolio amounted to $_______ or ___% of its average net
assets on an annualized basis; the net expenses borne by the Select Equity
Portfolio amounted to $_______ or ___% of its average net assets on an
annualized basis; the net expenses borne by the Large Cap Stock Portfolio
amounted to $______ or ____% of its average net assets on an annualized basis;
the net expenses borne by the Small Cap Stock Portfolio amounted to $________ or
___% of its average net assets on an annualized basis; the net expenses borne by
the Balanced Portfolio amounted to $_____ or ____% of its average net assets on
an annualized basis; the net expenses borne by the Small Cap Equity Portfolio
amounted to $_____ or ____% of its average net assets on an annualized basis;
the net expenses borne by the Equity Income Portfolio amounted to $_____ or
____% of its average net assets on an annualized basis; the net expenses borne
by the Growth & Income Equity Portfolio amounted to $_____ or ____% of its
average net assets on an annualized basis; the net expenses borne by the Mid-Cap
Value Portfolio amounted to $_____ or ____% of its average net assets on an
annualized basis; the net expenses borne by the Large Cap Research Portfolio
amounted to $_____ or ____% of its average net assets on an annualized basis;
and the net expenses borne by the Developing Growth Portfolio amounted to $_____
or ____% of its average net assets on an annualized basis.
Cova Life and/or the Adviser and/or the Sub-Adviser(s) may at their discretion,
but are not obligated to, assume all or any portion of Trust expenses. For the
year ended December 31, 1998, Cova Life and the Adviser together assumed
expenses of $ ______, with respect to the Quality Bond Portfolio; $________,
with respect to the International Equity Portfolio; $_______, with respect to
the Select Equity Portfolio; $______, with respect to the Large Cap Stock
Portfolio; $_______, with respect to the Small Cap Stock Portfolio; $______ with
respect to the Balanced Portfolio; $______ with respect to the Small Cap Equity
Portfolio; $______ with respect to the Equity Income Portfolio; $______ with
respect to the Growth & Income Equity Portfolio; $______ with respect to the
Mid-Cap Value Portfolio; $______ with respect to the Large Cap Research
Portfolio and $______ with respect to the Developing Growth Portfolio.
CODE OF ETHICS
To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Advisers have
adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes contain
policies restricting securities trading in personal accounts of the portfolio
managers and others who normally come into possession of information on
portfolio transactions. These Codes comply, in all material respects, with the
recommendations of the Investment Company Institute.
SUB-ADVISERS
APPOINTMENT. The Investment Adviser has entered into agreements with registered
investment advisers to carry out the management of the assets of the Portfolios
based on the investment objectives and policies of the Portfolios. The
Sub-Advisers are responsible for deciding which securities to purchase and sell
for the Portfolios and for placing trades for those securities. The prospectus
provides more information about the Sub-Advisers.
COMPENSATION. The Investment Adviser pays the Sub-Advisers fees for their
services, as described in the Prospectus, out of the compensation the Investment
Adviser receives from each Portfolio.
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.
COMMISSIONS PAID BY THE PORTFOLIOS. The following are the aggregate amounts of
commissions paid by each of the Portfolios for brokerage during the past three
fiscal years:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name of Fiscal Year Ended
Portfolio
1998 1997 Period Ended
1996
Quality Bond Portfolio $________ $________ $_______
Small Cap Stock Portfolio $________ $________ $_______
Large Cap Stock Portfolio $________ $________ $_______
Select Equity Portfolio $________ $________ $_______
International Equity Portfolio $________ $________ $_______
Bond Debenture Portfolio $________ $________ $_______
Mid-Cap Value Portfolio $________ $________ N/A
Large Cap Research Portfolio $________ $________ N/A
Developing Growth Portfolio $________ $________ N/A
Balanced Portfolio $________ $________ N/A
Small Cap Equity Portfolio $________ $________ N/A
Equity Income Portfolio $________ $________ N/A
Growth & Income Equity Portfolio $________ $________ N/A
</TABLE>
FINANCIAL STATEMENTS
[TO BE FILED BY AMENDMENT]
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust(1)
(b) By-laws of Trust(1)
(c) Not Applicable
(d)(1) Form of Investment Advisory Agreement(1)
(d)(2) Form of Amendment to Investment Advisory Agreement(3)
(d)(3) Form of Amendment to Investment Advisory Agreement(4)
(d)(4) Amendment to Investment Advisory Agreement
(d)(5) Form of Sub-Advisory Agreement - Lord, Abbett & Co.(1)
(d)(6) Form of Sub-Advisory Agreement - J.P. Morgan Investment
Management Inc.(1)
(d)(7) Form of Sub-Advisory Agreement - Van Kampen American
Capital Investment Advisory Corp.(1)
(d)(8) Form of Sub-Advisory Agreement - Mississippi Valley
Advisors Inc.(3)
(d)(9) Form of Amendment to Sub-Advisory Agreement - Lord, Abbett
& Co. - (Mid-Cap Value Portfolio, Large Cap Research Portfolio,
Developing Growth Portfolio and Lord Abbett Growth and
Income Portfolio)(3)
(d)(10) Amendment to Sub-Advisory Agreement - Lord, Abbett & Co.
(d)(11) Form of Amendment to Sub-Advisory Agreement - Emerging
Markets Equity Portfolio(4)
(d)(12)Form of Sub-Advisory Agreement - Trust Division of Riggs Bank, N.A.
(to be filed by amendment)
(e)(1) Principal Underwriters Agreement(4)
(e)(2) Form of Addendum to Principal Underwriters Agreement(4)
(f) Not Applicable
(g) Custodian Contract (2)
(h) Administration Agreement (2)
(i) Consent and Opinion of Counsel (to be filed by amendment)
(j) Consent of Independent Auditors (to be filed by amendment)
(k) Not Applicable
(l) Agreement Governing Contribution of Capital(4)
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(1) incorporated by reference to Registrant's Post-Effective Amendment No. 14
filed electronically on April 26, 1996.
(2) incorporated by reference to Registrant's Post-Effective Amendment No. 15
filed electronically on October 18, 1996.
(3) incorporated by reference to Registrant's Post-Effective Amendment No. 17
filed electronically on April 25, 1997.
(4) incorporated by reference to Registrant's Post-Effective Amendment No. 19
filed electronically on April 16, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
The shares of the Trust are currently sold to Cova Variable Annuity Account One
and Cova Variable Life Account One of Cova Financial Services Life Insurance
Company; Cova Variable Annuity Account Five and Cova Variable Life Account Five
of Cova Financial Life Insurance Company; and to First Cova Variable Annuity
Account One of First Cova Life Insurance Company which together control all
Portfolios of the Trust through their share ownership thereof.
ITEM 25. 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 26. BUSINESS AND OTHER CONNECTIONS OF THE 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:
Lord, Abbett & Co.
File No. 801-6997
J.P. Morgan Investment Management Inc.
File No. 801-21011
Mississippi Valley Advisors Inc.
File No. 801-28897
ITEM 27. PRINCIPAL UNDERWRITERS
Not Applicable
ITEM 28. 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: J.P. Morgan Investment Management Inc., 522
Fifth Avenue, New York, NY 10036; Lord, Abbett & Co., The General Motors
Building, 767 Fifth Avenue, New York, NY 10153-0203; Mississippi Valley Advisors
Inc., One Mercantile Center, Suite 2100, Saint Louis, Missouri 63101; and Riggs
Bank, N.A., 5700 RiverTech Court, Riverdale, MD 20737-1250.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
the Registrant has duly caused this Post-Effective Amendment No. 20 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
10th day of February, 1999.
COVA SERIES TRUST
By: /S/ LORRY J. STENSRUD*
_____________________________________
Lorry J. Stensrud
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 20 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
/S/ LORRY J. STENSRUD* President 2-10-99
- ----------------------- (Principal Executive Officer) -------
Lorry J. Stensrud
Vice President, Treasurer,
/S/WILLIAM C. MAIR* Controller and Trustee (Prin- 2-10-99
- ----------------------- cipal Financial Officer and -------
William C. Mair Principal Accounting Officer)
/S/STEPHEN M. ALDERMAN* Trustee 2-10-99
- ----------------------- -------
Stephen M. Alderman
/S/THEODORE A. MYERS* Trustee 2-10-99
- ----------------------- -------
Theodore A. Myers
/S/DEBORAH A. VOHASEK* Trustee 2-10-99
- ----------------------- -------
Deborah A. Vohasek
/S/R. KEVIN WILLIAMS* Trustee 2-10-99
- ----------------------- -------
R. Kevin Williams
</TABLE>
*By: /S/ FRANCES S. COOK
------------------------
Frances S. Cook, Attorney-in-Fact
INDEX TO EXHIBITS
EX-99(d)(4) Amendment to Investment Advisory Agreement
EX-99(d)(10) Amendment to Sub-Advisory Agreement - Lord Abbett
AMENDMENT DATED MAY 1, 1997
TO
INVESTMENT ADVISORY AGREEMENT
BETWEEN
COVA SERIES TRUST
AND
COVA INVESTMENT ADVISORY CORPORATION
WHEREAS, pursuant to Section 1(a) of the Investment Advisory Agreement by
and between COVA SERIES TRUST (the "Trust"), formerly VAN KAMPEN MERRITT SERIES
TRUST, and COVA INVESTMENT ADVISORY CORPORATION (the "Advisor") dated May 1,
1996 (the "Advisory Agreement"), the Trust seeks to employ the Advisor to act as
investment advisor for eight additional Sub-Trusts;
NOW THEREFORE, said Advisory Agreement is hereby amended with the addition
of the following Sub-Trusts to Section 1(a):
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
Balanced Portfolio
Small Cap Equity
Portfolio Equity Income Portfolio
Growth & Income Equity Portfolio.
In addition the following Fee Schedules are added as Exhibits to the Advisory
Agreement pursuant to Section 2(a):
EXHIBIT N
COVA SERIES TRUST
MID-CAP VALUE PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
May 1, 1996, as amended, the Mid-Cap Value Portfolio shall pay to the Advisor at
the end of each calendar month an investment management fee of 1.00% of the
average daily net assets of the Mid-Cap Value Portfolio.
EXHIBIT O
COVA SERIES TRUST
LARGE CAP RESEARCH PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
May 1, 1996, as amended, the Large Cap Research Portfolio shall pay to the
Advisor at the end of each calendar month an investment management fee of 1.00%
of the average daily net assets of the Large Cap Research Portfolio.
EXHIBIT P
COVA SERIES TRUST
DEVELOPING GROWTH PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
May 1, 1996, as amended, the Developing Growth Portfolio shall pay to the
Advisor at the end of each calendar month an investment management fee of .90%
of the average daily net assets of the Developing Growth Portfolio.
EXHIBIT Q
COVA SERIES TRUST
LORD ABBETT GROWTH AND INCOME PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
May 1, 1996, as amended, the Lord Abbett Growth and Income Portfolio shall pay
to the Advisor at the end of each calendar month an investment management fee of
.65% of the average daily net assets of the Lord Abbett Growth and Income
Portfolio.
EXHIBIT R
COVA SERIES TRUST
BALANCED PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
May 1, 1996, as amended, the Balanced Portfolio shall pay to the Advisor at the
end of each calendar month an investment management fee of 1.00% of the average
daily net assets of the Balanced Portfolio.
EXHIBIT S
COVA SERIES TRUST
SMALL CAP EQUITY PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
May 1, 1996, as amended, the Small Cap Equity Portfolio shall pay to the Advisor
at the end of each calendar month an investment management fee of 1.00% of the
average daily net assets of the Small Cap Equity Portfolio.
EXHIBIT T
COVA SERIES TRUST
EQUITY INCOME PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
May 1, 1996, as amended, the Equity Income Portfolio shall pay to the Advisor at
the end of each calendar month an investment management fee of 1.00% of the
average daily net assets of the Equity Income Portfolio.
EXHIBIT U
COVA SERIES TRUST
GROWTH & INCOME EQUITY PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated
May 1, 1996, as amended, the Growth & Income Equity Portfolio shall pay to the
Advisor at the end of each calendar month an investment management fee of 1.00%
of the average daily net assets of the Growth & Income Equity Portfolio.
IN WITNESS WHEREOF, the Trust and the Advisor have caused this Amendment to
be executed on the day and year first above written.
COVA INVESTMENT COVA SERIES TRUST
ADVISORY CORPORATION
By: /S JEFFERY K. HOELZEL By: /S/ JEFFERY K. HOELZEL
______________________________ ___________________________
Its: Secretary Its: Senior Vice President
____________________ and Secretary
______________________
AMENDMENT TO SUB-ADVISORY AGREEMENT
between
COVA INVESTMENT ADVISORY CORPORATION,
LORD ABBETT & CO.
and
COVA SERIES TRUST
WHEREAS, COVA INVESTMENT ADVISORY CORPORATION (the "Advisor"), LORD ABBETT & CO.
(the "Sub-Advisor") and COVA SERIES TRUST (the "Trust") entered into a
Sub-Advisory Agreement dated April 1, 1996 (the "Agreement") with respect to the
Bond Debenture Portfolio;
WHEREAS, said Agreement provides that it may be amended by agreement of all the
parties thereto;
NOW THEREFORE,
Pursuant to Section 8 of the Agreement, said Agreement is hereby amended as
follows:
The Sub-Advisor is hereby retained by the Advisor to manage the investment
and reinvestment of the assets of the following Sub-Trusts which shall be
established under the Trust effective May 1, 1997 in accordance with the terms
of the Agreement, as amended:
Mid-Cap Value Sub-Trust
Large Cap Research Sub-Trust
Developing Growth Sub-Trust
Lord Abbett Growth and Income Sub-Trust.
Exhibit A is amended with the addition of the compensation rates for the
new portfolios as set forth in the Revised Exhibit A attached hereto.
WITNESS the due execution hereof effective this 1st day of May, 1997.
COVA INVESTMENT
ADVISORY CORPORATION
Attest:
__________________________ By: /S/ JEFFERY K. HOELZEL
-------------------------
LORD ABBETT & CO.
Attest:
__________________________ By: signature illegible
-------------------------
COVA SERIES TRUST
Attest:
__________________________ By: /S/ JEFFERY K. HOELZEL
-----------------------
REVISED
EXHIBIT A
COVA SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Advisor hereunder, Advisor shall pay to
Sub-Advisor and Sub-Advisor agrees to accept as full compensation for all
services rendered hereunder, fees at the end of each calendar month equal to a
percentage of the average daily net assets of the Sub-Trusts as follows:
Portfolio % Per Annum
Bond Debenture Portfolio .50 of 1%
Mid-Cap Value Portfolio .75 of 1%
Large Cap Research Portfolio .75 of 1%
Developing Growth Portfolio .65 of 1%
Lord Abbett Growth and Income Portfolio .40 of 1%
