COVA SERIES TRUST
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
The Portfolios of Cova Series Trust ("Trust") offered herein are:
Balanced Portfolio
Small Cap Equity Portfolio
Equity Income Portfolio
Growth & Income Equity Portfolio
Quality Bond Portfolio
International Equity Portfolio
Bond Debenture Portfolio
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 3, 1999.
TABLE OF CONTENTS Page
SUMMARY 3
DESCRIPTION OF THE PORTFOLIOS 10
MANAGEMENT OF THE TRUST 16
PORTFOLIO SHARES 18
PERFORMANCE OF THE PORTFOLIOS 20
COMPARABLE PERFORMANCE 20
FINANCIAL HIGHLIGHTS 23
APPENDIX TO PROSPECTUS 28
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. 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:
o the Contract,
o the Portfolios of the Trust that are available under that Contract, and
o 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.
The Sub-Advisers for the Portfolios are:
Sub-Adviser Name of Portfolio
Mississippi Valley Balanced Portfolio
Advisors Inc. Small Cap Equity Portfolio
Equity Income Portfolio
Growth & Income Equity Portfolio
J.P. Morgan Quality Bond Portfolio
Investment International Equity Portfolio
Management Inc.
Lord, Abbett & Co. Bond Debenture Portfolio
RISK/RETURN SUMMARY
PRINCIPAL INVESTMENT STRATEGIES AND
RISKS OF EACH PORTFOLIO
Portfolios Managed by Mississippi Valley Advisors Inc.
Balanced Portfolio.
Investment Objective
o The Balanced Portfolio seeks to maximize total return through a
combination of growth of capital and current income consistent with the
preservation of capital.
Principal Investment Strategies
o The Portfolio uses a disciplined approach of allocating assets among three
major asset groups.
o equity securities
o fixed income securities
o cash equivalents
o The Sub-Adviser allocates the Portfolio's assets based upon its
evaluation of the relative attractiveness of the three major asset
groups.
o 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.
o The equity securities in which the Portfolio invests include common
stock, preferred stock, rights, warrants and convertible securities.
o 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.
o The Portfolio may invest up to 25% of its total assets in
non-mortgage asset-backed securities.
Principal Risks
The principal risks of investing in the Portfolio are:
o 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
other risks described below. 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.
o There is no assurance that the Sub-Adviser will find securities that meet
the goals of the Portfolio or that the companies the Sub-Adviser selects
will reach their potential value. The value of the securities purchased
by the Portfolio may decline as a result of economic, political or market
conditions or an issuer's financial circumstances.
o the risk that an issuer of a fixed income security owned by the Portfolio
may be unable to make interest or principal payments.
o the risk that fluctuations in interest rates may affect the value of the
Portfolio's interest-paying fixed income securities.
o the risk that the holder of a mortgage underlying a mortgage-backed
security owned by the Portfolio will prepay principal, particularly
during periods of declining interest rates.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payments you
(the owner of the Contract) originally invested in the Portfolio.
Small Cap Equity Portfolio.
Investment Objective
o The Small Cap Equity Portfolio seeks capital appreciation. Current
income is an incidental consideration in the selection of portfolio
securities.
Principal Investment Strategies
o 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.
o 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).
o 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 principal risks of investing in the Portfolio are:
o Investments in small to medium sized companies may produce higher returns
than investments in companies with larger capitalizations; however,
companies with smaller capitalizations may have a higher risk of failure
than larger companies.
o There is no assurance that the Sub-Adviser will find securities that meet
the goals of the Portfolio or that the companies the Sub-Adviser selects
will reach their potential value. The value of the securities purchased
by the Portfolio may decline as a result of economic, political or market
conditions or an issuer's financial circumstances.
o Securities of non-U.S. companies are subject to risks in addition to the
normal risks of investments, such as changes in value related to changes
in currency exchange rates, additional transaction costs and more
difficulty in selling the securities.
o Growth-style investing: Different types of stocks tend to shift into and
out of favor with stock market investors depending on market and economic
conditions. Because the Portfolio focuses on growth-style stocks, the
Portfolio's performance may at times be better or worse than the
performance of stock funds that focus on other types of stocks, or that
have a broader investment style.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payments you
(the owner of the Contract) originally invested in the Portfolio.
Equity Income Portfolio.
Investment Objective
o The Equity Income Portfolio seeks to provide an above-average level of
income consistent with long-term capital appreciation.
Principal Investment Strategies
o 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.
o The Sub-Adviser will select stocks based on a number of quantitative
factors including
o dividend yield
o current and future earnings potential compared to stock prices
o total return potential
o other measures of value, if appropriate, such as cash flow, asset
values or book value
o 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).
o 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 principal risks of investing in the Portfolio are:
o There is no assurance that the Sub-Adviser will find securities that meet
the goals of the Portfolio or that the companies the Sub-Adviser selects
will reach their potential value. The value of the securities purchased
by the Portfolio may decline as a result of economic, political or market
conditions or an issuer's financial circumstances.
o Securities of non-U.S. companies are subject to risks in addition to the
normal risks of investments, such as changes in value related to changes
in currency exchange rates, additional transaction costs and more
difficulty in selling the securities.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payments you
(the owner of the Contract) originally invested in the Portfolio.
Growth & Income Equity Portfolio.
Investment Objective
o The Growth & Income Equity Portfolio seeks to provide long-term capital
growth, with income as a secondary consideration.
Principal Investment Strategies
o 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.
o The Sub-Adviser selects stocks based on a number of factors including:
o historical and projected earnings
o growth and asset value
o earnings compared to stock prices generally (as measured by the
S&P 500)
o consistency of earnings growth and earnings quality
o 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 principal risks of investing in the Portfolio are:
o There is no assurance that the Sub-Adviser will find securities that meet
the goals of the Portfolio or that the companies the Sub-Adviser selects
will reach their potential value. The value of the securities purchased
by the Portfolio may decline as a result of economic, political or market
conditions or an issuer's financial circumstances.
o Securities of non-U.S. companies are subject to risks in addition to the
normal risks of investments, such as changes in value related to changes
in currency exchange rates, additional transaction costs and more
difficulty in selling the securities.
o All securities fluctuate in value. The value of your investment in a
Portfolio at any given time may be less than the purchase payments you
(the owner of the Contract) originally invested in the Portfolio.
Portfolios Managed by J.P. Morgan Investment Management Inc.:
Quality Bond Portfolio.
Investment Objective
o The Quality Bond Portfolio seeks to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity.
Principal Investment Strategies
o The Portfolio will invest at least 65% of its assets in bonds under
normal circumstances.
o 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:
o U.S. Government and agency securities
o corporate securities
o private placements
o asset backed securities
o mortgage related securities
o The Portfolio may invest up to 25% of its assets in foreign securities.
o The Portfolio will normally invest at least 65% of its total assets in
investment grade debt securities.
Principal Risks
The principal risks of investing in the Portfolio are:
o The risk that the Sub-Adviser will not be able to find securities that
meet the goals of the Portfolio or that the companies the Sub-Adviser
selects will not reach their potential value. The value of the securities
purchased by the Portfolio may decline as a result of economic, political
or market conditions or an issuer's financial circumstances. The value of
your investment in a Portfolio at any given time may be less than the
purchase payments you (the owner of the Contract) originally invested in
the Portfolio.
o the risk that an issuer of a fixed income security owned by the Portfolio
may be unable to make interest or principal payments.
o the risk that fluctuations in interest rates may affect the value of the
Portfolio's interest-paying fixed income securities.
o the risk that the holder of a mortgage underlying a mortgage-backed
security owned by the Portfolio will prepay principal, particularly
during periods of declining interest rates.
o the additional risks of investing in securities of non-U.S. companies,
such as changes in value related to changes in currency exchange rates,
additional transaction costs and more difficulty in selling the
securities.
International Equity Portfolio.
Investment Objective
o The International Equity Portfolio seeks to provide a high total return
from a portfolio of equity securities of foreign corporations.
Principal Investment Strategies
o 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").
o 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.
o 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.
o The Portfolio may invest in the securities of issuers located in
developing countries.
o The Sub-Adviser actively manages currency exposure in an attempt to
protect and possibly enhance the Portfolio's market value through the
use of derivatives such as forward foreign currency exchange
contracts.
Principal Risks
The principal risks of investing in the Portfolio are:
o Securities of non-U.S. companies are subject to risks in addition to the
normal risks of investments, such as changes in value related to changes
in currency exchange rates, additional transaction costs and more
difficulty in selling the 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.
o There is no assurance that the Sub-Adviser will find securities that meet
the goals of the Portfolio or that the companies the Sub-Adviser selects
will reach their potential value. The value of the securities purchased
by the Portfolio may decline as a result of economic, political or market
conditions or an issuer's financial circumstances. The value of your
investment in a Portfolio at any given time may be less than the purchase
payments you (the owner of the Contract) originally invested in the
Portfolio.
o There is a risk in using derivative transactions that the security may
not go up or down as the Sub-Adviser anticipates, resulting in a loss to
the Portfolio. Losses may also occur if there is not a perfect
correlation between the value of futures or forward contracts and the
related securities.
Portfolio Managed by Lord, Abbett & Co.:
Bond Debenture Portfolio.
Investment Objective
o 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.
Principal Investment Strategies
o The Portfolio will invest at least 80% of its total assets in debt
securities.
o 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.
o Capital appreciation is an important consideration in the selection of
portfolio securities.
o The Portfolio may invest substantially in lower-rated bonds (junk
bonds) for their higher yields which entail greater risks.
o 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 principal risks of investing in the Portfolio are:
o Lower quality, higher-yielding, bonds (junk bonds) may have a greater
potential return than higher quality bonds but also have a higher risk of
default.
o the risk that an issuer of a fixed income security owned by the Portfolio
may be unable to make interest or principal payments.
o the risk that fluctuations in interest rates may affect the value of the
Portfolio's interest-paying fixed income securities.
o the risk that the holder of a mortgage underlying a mortgage-backed
security owned by the Portfolio will prepay principal, particularly
during periods of declining interest rates.
o There is no assurance that the Sub-Adviser will find securities that meet
the goals of the Portfolio or that the companies the Sub-Adviser selects
will reach their potential value. The value of the securities purchased
by the Portfolio may decline as a result of economic, political or market
conditions or an issuer's financial circumstances. The value of your
investment in a Portfolio at any given time may be less than the purchase
payments you (the owner of the Contract) originally invested in the
Portfolio.
Bar Charts and Tables
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.
o 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.
o The graphs of year-by-year returns examine volatility by illustrating
a Portfolio's historic highs and lows.
o In general, as reflected in this section, Portfolios with higher average
annual total returns tend to be more volatile.
o 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.
o 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.
Balanced Portfolio.
Bar chart plot points: 1998
13.31%
Best Quarter: 4th qtr `98 11.64%
Worst Quarter: 3rd qtr `98 -5.00%
- --------------------------------------------------------------------------------
Since July 1,
1997 (Date of
One Year Ended commencement
12/31/98 of operations)
- --------------------------------------------------------------------------------
Portfolio average 13.31% 12.97%
annual total return
- --------------------------------------------------------------------------------
Standard & Poor's 500
Stock Index 28.58% 26.44%
- --------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index consisting of the stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
Small Cap Equity Portfolio.
Bar chart plot points: 1998
-0.39%
Best Quarter: 4th qtr `98 20.64%
Worst Quarter: 3rd qtr `98 -21.94%
- --------------------------------------------------------------------------------
Since July 1,
1997 (Date of
One Year Ended commencement
12/31/98 of operations)
- --------------------------------------------------------------------------------
Portfolio average (0.39)% 2.94%
annual total return
- --------------------------------------------------------------------------------
Russell 2000 Index (2.57)% 5.38%
- --------------------------------------------------------------------------------
The Russell 2000 Index is an unmanaged index consisting of the stocks of 2000
U.S.-based companies. The Index does not include fees or expenses and is not
available for direct investment.
Equity Income Portfolio.
Bar chart plot points: 1998
9.35%
Best Quarter: 1st qtr `98 12.31%
Worst Quarter: 3rd qtr `98 -9.34%
- --------------------------------------------------------------------------------
Since July 1,
1997 (Date of
One Year Ended commencement
12/31/98 of operations)
- --------------------------------------------------------------------------------
Portfolio average 9.35% 14.90%
annual total return
- --------------------------------------------------------------------------------
Russell 1000 Index 27.02% 26.49%
- --------------------------------------------------------------------------------
The Russell 1000 Index consists of the largest 1000 companies in the Russell
3000 Index. This Index represents the universe of large capitalization stocks
from which most active money managers typically select. The Index does not
reflect any expenses.
Growth & Income Equity Portfolio.
Bar chart plot points: 1998
14.95%
Best Quarter: 4th qtr `98 20.31%
Worst Quarter: 3rd qtr `98 -13.62%
- --------------------------------------------------------------------------------
Since July 1,
1997 (Date of
One Year Ended commencement
12/31/98 of operations)
- --------------------------------------------------------------------------------
Portfolio average 14.95% 15.65%
annual total return
- --------------------------------------------------------------------------------
Standard & Poor's 500
Stock Index 28.58% 26.44%
- --------------------------------------------------------------------------------
The S&P 500 Index is an unmanaged index consisting of the stocks of 500 of the
largest U.S.-based companies. The Index does not include fees or expenses and is
not available for direct investment.
Quality Bond Portfolio.
Bar chart plot points: 1997 1998
9.06% 8.37%
Best Quarter: 3rd qtr `98 4.15%
Worst Quarter: 1st qtr `97 -0.60%
- --------------------------------------------------------------------------------
Since May 1, 1996
One Year Ended (Date of initial
12/31/98 public offering)
- --------------------------------------------------------------------------------
Portfolio average 8.37% 8.68%
annual total return
- --------------------------------------------------------------------------------
Salomon Brothers Broad
Investment Grade Bond Index 8.72% 9.27%
- --------------------------------------------------------------------------------
The Salomon Brothers Broad Investment Grade Bond Index (BIG) is a
market-capitalized weighted index which includes fixed-rate Treasury, government
sponsored, corporate (Baa3/BBB or better) and mortgage securities. The Index
does not reflect any expenses.
International Equity Portfolio.
Bar chart plot points: 1997 1998
5.96% 14.07%
Best Quarter: 4th qtr `98 19.07%
Worst Quarter: 3rd qtr `98 -16.54%
- --------------------------------------------------------------------------------
Since May 1, 1996
One Year Ended (Date of initial
12/31/98 public offering)
- --------------------------------------------------------------------------------
Portfolio average 14.07% 10.66%
annual total return
- --------------------------------------------------------------------------------
Morgan Stanley Capital
International Europe, Asia,
and Far East (EAFE) Index 20.00% 7.85%
- --------------------------------------------------------------------------------
The Morgan Stanley Capital International Europe, Australia and Far East (EAFE)
Index is an unmanaged index and is an aggregate of 15 individual country indexes
that collectively represent many of the major markets of the world. The Index
does not include fees or expenses and is not available for direct investment.
Bond Debenture Portfolio.
Bar chart plot points: 1997 1998
15.63% 6.26%
Best Quarter: 2nd qtr `97 6.25%
Worst Quarter: 3rd qtr `98 -4.31%
- --------------------------------------------------------------------------------
Since May 1, 1996
One Year Ended (Date of initial
12/31/98 public offering)
- --------------------------------------------------------------------------------
Portfolio average 6.26% 13.03%
annual total return
- --------------------------------------------------------------------------------
First Boston High Yield Index 0.58% 8.40%
- --------------------------------------------------------------------------------
Salomon Brothers Broad
Investment High Grade Index 8.72% 9.27%
- --------------------------------------------------------------------------------
Merrill Lynch
Convertible Index 8.93% 13.17%
- --------------------------------------------------------------------------------
The First Boston High Yield Index is representative of the lower rated debt
(including straight-preferred stocks) investments in the portfolio; the Merrill
Lynch Convertible Index is representative of the equity-related securities in
the portfolio; and Salomon Brothers Broad Investment High Grade Index is
representative of the high-grade debt in the portfolio.
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 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:
o equity securities
o fixed income securities
o 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
o a broad range of fixed and variable rate bonds, debentures, notes, and
securities convertible into or exchangeable for common stock;
o dollar-denominated debt obligations of foreign issuers, including foreign
corporations and governments; and
o 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 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
o current yield
o maturity
o yield to maturity
o anticipated changes in interest rates, and
o 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
o historical and projected earnings
o asset value
o potential for price appreciation and earnings growth and
o 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 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:
o advanced quantitative tools
o analysis of credit risk
o the expertise of a dedicated trading desk
o 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 5
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:
o debentures
o notes
o mortgage securities o equipment trust certificates
o zero coupon securities
o 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
o Treasury securities
o GNMA Certificates
o 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
o municipal obligations that have been issued on a taxable basis or that have
an attractive yield excluding tax considerations
o 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.
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 21% as of December 31, 1998). 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.
Portfolio 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
o secured debt obligations of the issuer (i.e., bonds)
o general unsecured debt obligations of the issuer (i.e., debentures) and
o 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
o investing in debt securities when the trend of interest rates is expected
to be down;
o investing in convertible debt securities or debt securities with warrants
attached entitling the holder to purchase common stock; and
o 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
o 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,
o debt securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities,
o cash or cash equivalents (short-term obligations of banks, corporations or
the U.S. Government), or
o 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.
Principal Risks
o 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.
o Investment 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.
o 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 increases;
however if interest rates go up, the market value of bonds held by the
Portfolio goes down.
o 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. The securities of small companies may be
subject to more volatile market movements than securities of larger, more
established companies. Smaller companies may have limited product lines,
markets or financial resources, and they may depend upon a limited or less
experienced management group.
o 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.
o 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 a Sub-Adviser's ability to
predict correctly the direction of stock prices, interest rates and other
economic factors.
o 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.
o 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.
o 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.
o 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.
o 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.
o Borrowing. All of the Portfolios may borrow money for temporary or
emergency purposes. Certain Portfolios may engage in borrowing by investing
in dollar roll transactions, repurchase agreements or similar securities.
Certain Portfolios may 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.
o 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.
o 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.
o 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.
o 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. A Portfolio
might be forced to sell the securities at a discount or be unable to sell
securities at all that are losing value.
o 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.
o 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.
o 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 herein under the Financial Highlights.
o 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."
When the Year 2000 arrives, the Trust's operations could be adversely
affected if the computer systems used by its managers, its service
providers and other third parties it does business with are not Year 2000
ready. For example, the Trust's portfolio and operational areas could be
impacted, including securities trade processing, securities pricing,
reporting, custody functions and others. The Trust could experience
difficulties in effecting transactions if any of its foreign subcustodians,
or foreign broker/dealers or foreign markets are not ready for Year 2000.
When evaluating current and potential portfolio positions, Year 2000 is one of
the factors that a Portfolio's Sub-Adviser may consider. Sub-Advisers may rely
upon public filings and other statements made by companies regarding their Year
2000 readiness. Issuers in countries outside of the U.S., particularly in
emerging markets, may be more susceptible to Year 2000 problems and may not be
required to make the same level of disclosure regarding Year 2000 readiness as
is required in the U.S. The Sub-Advisers, of course, cannot audit any company or
their major suppliers to verify their Year 2000 readiness. If a company in which
any Portfolio is invested is adversely affected by Year 2000 problems, it is
likely that the price of its security will also be adversely affected. A
decrease in the value of one or more of a Portfolio's holdings will have a
similar impact on the Portfolio's performance.
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 to 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 assurance 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
$451 billion of life insurance in force and approximately $29 billion in assets.
The Adviser has acted as the investment adviser to the Trust, its sole account,
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 most
recent fiscal year of the Portfolios, 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:
Balanced 1.00%
Small Cap Equity 1.00%
Equity Income 1.00%
Growth & Income Equity 1.00%
Bond Debenture 0.75%
Quality Bond 0.55%
International Equity. 0.81%
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:
Average Daily
Portfolio Net Assets % Per Annum
Balanced _______________ 1.00%
Small Cap Equity _______________ 1.00%
Equity Income _______________ 1.00%
Growth & Income
Equity _______________ 1.00%
Bond Debenture _______________ .75%
Quality Bond First $75 million .55%
Over $75 million .50%
International First $50 million .85%
Equity Over $50 million .75%
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-Adviser(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.
Expense Reimbursement. Since May 1, 1996, Cova has been reimbursing the
investment portfolios of Cova Series Trust for all operating expenses (exclusive
of the management fees) in excess of approximately .10%. Beginning May 1, 1999,
Cova will discontinue this reimbursement arrangement for the International
Equity Portfolio.
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 most recent 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:
Balanced 0.75%
Small Cap Equity 0.75%
Equity Income 0.75%
Growth & Income Equity 0.75%
Bond Debenture 0.50%
Quality Bond 0.30%
International Equity 0.56%
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:
Average Daily Sub-Advisory
Portfolio Net Assets Fee
Balanced _______________ .75%
Small Cap Equity _______________ .75%
Equity Income _______________ .75%
Growth & Income
Equity _______________ .75%
Bond Debenture _______________ .50%
Quality Bond First $75 million .30%
Over $75 million .25%
International First $50 million .60%
Equity Over $50 million .50%
Portfolio Managers
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 National Association
("Mercantile"). As of December 31, 1998, MVA had approximately $9 billion in
assets under investment management.
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 25 years.
MVA's Equity Committee is responsible for the day-to-day management of the
Growth & Income Equity and Equity Income Portfolios. The Committee has managed
the Portfolios since 1998.
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 and International
Equity Portfolios of the Trust.
Quality Bond Portfolio
Harriet T. Huber, Vice President of the Sub-Adviser. Ms. Huber is a portfolio
manager in the U.S. Fixed Income Group responsible for pension and other
institutional clients. 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. Ms. Huber
received a B.A. in mathematics from the University of Wisconsin, Madison, and an
M.B.A. from the University of Chicago.
William G. Tennille, Vice President of the Sub-Adviser. Mr. Tennille is a fixed
income manager for separately managed accounts and commingled funds with an
emphasis on mortgage securities and derivatives. Prior to joining J.P. Morgan in
1992, he managed a portfolio of mortgage securities for Manufacturers
Hanover/Chemical Bank's proprietary account and investment portfolios at Deposit
Guarantee National Bank, and First Florida Banks. Mr. Tennille has also managed
a regional sales and trading office for Donaldson, Lufkin, & Jenrette. He is a
graduate of the University of North Carolina.
International Equity Portfolio
Nigel F. Emmett, Vice President of the Sub-Adviser. Mr. Emmett is a portfolio
manager with the International Equity Group. He joined J.P. Morgan in 1997.
Previously, he was employed by Brown Brothers Harriman & Co. in New York and
Gartmore Investment in London. He earned a B.A. degree in Economics from
Manchester University, is an Associate Member of the Institute of Investment
Management and Research (AIMR), and is a Chartered Financial Analyst.
Paul Quinsee, Managing Director of the Sub-Adviser. Mr. Quinsee, an
international equity portfolio manager and Chairman of the International Equity
Strategy Group, relocated to our New York office in 1996. He joined J. P. Morgan
Investment Management's London office in 1992 as an international portfolio
manager. Previously, he spent five years as an equity portfolio manager with
Citibank and two years with Schroder Capital Management in London. Mr. Quinsee
has an honours degree from the University of Durham and is an Associate of the
Society of Investment Analysts.
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 Portfolio.
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.
PORTFOLIO SHARES
Distribution and Redemption
All Portfolios of the Trust sell shares to the separate accounts ("Variable
Accounts") of Cova Financial Services Life Insurance Company and its affiliated
life insurance companies (collectively, "Cova Life") as a funding vehicle for
the 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 Variable 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 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 "Bar Charts and
Tables."
COMPARABLE PERFORMANCE
Public Fund Performance
The Bond Debenture Portfolio has a substantially similar investment objective
and follows substantially the same investment strategies as another mutual fund
whose shares are sold to the public and which is managed by Lord, Abbett & Co.
The historical performance of this public mutual fund is shown below. This
performance data should not be considered as an indication of future performance
of the Bond Debenture Portfolio. The public mutual fund performance figures
shown below:
o reflect the deduction of the historical fees and expenses paid by the
public mutual fund and not those to be paid by the Portfolio.
o 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 Portfolio and its corresponding public mutual fund are expected to hold
similar securities. However, their investment results are expected to differ for
the following reasons:
o differences in asset size and cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security selections
o differences in the relative weightings of securities
o differences in the price paid for particular portfolio holdings
o differences relating to certain tax matters
The following table shows average annualized total returns for the comparable
public mutual fund for its fiscal 1998 year (ended December 31, 1998).
Bond Debenture Portfolio
Corresponding 1 5 10
Public Fund Year Year Year
- --------------------------------------------------------------------------------
Lord Abbett Bond -
Debenture Fund, Inc. 4.76% 8.19% 10.36%
Private Account Performance
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 Quality Bond Portfolio, which is managed by J.P. Morgan Investment
Management Inc., commenced public sale of its shares on May 1, 1996. The
Portfolio has an investment objective, policies and strategies which are
substantially similar to those employed by J.P. Morgan Investment Management
Inc. 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
o each Portfolio will be actively managed and its investments will vary from
time to time
o each Portfolio's investments will not be identical to the past portfolio
investments of the Private Accounts
o the Private Accounts are not subject to certain investment limitations,
diversification requirements and other restrictions imposed by federal tax
and securities laws
o 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:
o differences in asset size and cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security selections
o differences in the relative weightings of securities
o 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 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
10 Years
or Since
Portfolio 1 year 5 years Inception
- --------------------------------------------------------------------------------
Balanced
Composite 11.60% 12.80% 12.70%
(Balanced
Portfolio)
Small Cap Equity
Composite (5.70)% 8.80% 14.10%
(Small Cap Equity
Portfolio)
Equity Income
Composite 10.00% 19.50% 17.50%
(Equity Income
Portfolio)
Growth & Income
Equity Composite 14.70% 18.80% 17.20%
(Growth & Income
Equity Portfolio)
Public Bond
Composite 7.55% 6.77% 8.90%
(Quality Bond
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.
<TABLE>
<CAPTION>
PERFORMANCE RECAP
As of December 31, 1998
Performance
Portfolio Type 1 Yr 5 Yrs 10 Yrs or
Since
Inception
- -----------------------------------------------------------------------------------------------------------------------------------
Managed by Mississippi
Valley Advisors Inc.
<S> <C> <C> <C>
Balanced Private Account 11.60% 12.80% 12.70%
Composite
Existing Portfolio 13.31% - - 12.97%*
Small Cap Equity Private Account (5.70)% 8.80% 14.10%
Composite
Existing Portfolio (0.39)% - - 2.94%*
Equity Income Private Account 10.00% 19.50% 17.50%
Composite
Existing Portfolio 9.35% - - 14.90%*
Growth & Income Equity Private Account 14.70% 18.80% 17.20%
Composite
Existing Portfolio 14.95% - - 15.65%*
Managed by J. P. Morgan
Investment Management Inc.
Quality Bond Private Account 7.55% 6.77% 8.90%
Composite
Existing Portfolio 8.37% - - 8.68%*
International Equity Existing Portfolio 14.07% - - 10.66%*
- -----------------------------------------------------------------------------------------------------------------------------------
Managed by
Lord, Abbett & Co.
Bond Debenture Public Fund 4.76% 8.19% 10.36%
Existing Portfolio 6.26% - - 13.03%*
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
o The inception date for the Quality Bond, 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. 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.
</FN>
</TABLE>
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 KPMG LLP,
independent auditors, whose report, along with the Portfolios' financial
statements, are 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.
<TABLE>
<CAPTION>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
For a Share Held Throughout the Periods Indicated
Balanced Equity Income
Portfolio Portfolio
--------------------------------- ----------------------------------
For the period For the period
from July 1, 1997 from July 1, 1997
(commencement (commencement
Year ended of operations) Year ended of operations)
12/31/98 to 12/31/97 12/31/98 to 12/31/97
------------ ----------------- ------------ ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.389 $10.000 $11.047 $10.000
------------ ----------------- ------------ ----------------
Income from Investment Operations
Net investment income 0.223 0.123 0.167 0.074
Net realized and unrealized gains 1.152 0.477 0.862 1.192
------------ ----------------- ------------ ----------------
Total from investment operations 1.375 0.600 1.029 1.266
------------ ----------------- ------------ ----------------
Distributions
Dividends from net investment income (0.222) (0.124) (0.167) (0.074)
Distributions from net realized gains (0.144) (0.087) (0.283) (0.145)
Distributions in excess of net investment income _ _ _ _ _ _ _ _
Return of capital distributions _ _ _ _ _ _ _ _
------------ ----------------- ------------ ----------------
Total distributions (0.366) (0.211) (0.450) (0.219)
------------ ----------------- ------------ ----------------
Net Asset Value, End of Period $11.398 $10.389 $11.626 $11.047
------------ ----------------- ------------ ----------------
Total Return 13.31% 6.01%* 9.35% 12.69%*
------------ ----------------- ------------ ----------------
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $4.6 $1.5 $4.7 $1.7
Ratios to Average Net Assets (1):
Operating Expenses 1.10% 1.10%** 1.10% 1.10%**
Interest Expense _ _ _ _ _ _ _ _
Net investment income 2.54% 2.74%** 1.79% 1.65%**
Portfolio Turnover Rate 36.0% 13.6%* 79.4% 17.9%*
(1) If certain expenses had not been reimbursed by
the Adviser, total return would have been lower and the ratios would have been
as follows:
Ratio of Operating Expenses to Average Net Assets: 3.08% 3.81%** 2.69% 3.58%**
Ratio of Net Investment Income to Average Net Assets: 0.56% 0.03%** 0.20% (0.83%)**
* Non-Annualized **Annualized
</TABLE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
For a Share Held Throughout the Periods Indicated
Growth & Income Equity Portfolio
----------------------------------------
For the period
from July 1, 1997
(commencement
Year ended of operations)
12/31/98 to 12/31/97
-------------- ------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $10.710 $10.000
-------------- ------------------------
Income from Investment Operations
Net investment income 0.057 0.033
Net realized and unrealized gains 1.538 0.793
-------------- ------------------------
Total from investment operations 1.595 0.826
-------------- ------------------------
Distributions
Dividends from net investment income (0.058) (0.032)
Distributions from net realized gains (0.252) (0.084)
Distributions in excess of net investment income _ _ - -
Return of capital distributions _ _ _ _
-------------- ------------------------
Total distributions (0.310) (0.116)
-------------- ------------------------
Net Asset Value, End of Period $11.995 $10.710
-------------- ------------------------
Total Return 14.95% 8.26%*
-------------- ------------------------
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $9.1 $2.4
Ratios to Average Net Assets (1):
Operating Expenses 1.10% 1.10%**
Interest Expense _ _ _ _
Net investment income 0.65% 0.87%**
Portfolio Turnover Rate 57.5% 18.1%*
(1) If certain expenses had not been reimbursed by
the Adviser, total return would have been lower and the ratios would have been
as follows:
Ratio of Operating Expenses to Average Net Assets: 2.00% 3.51%**
Ratio of Net Investment Income to Average Net Assets: (0.25%) (1.54%)**
* Non-Annualized **Annualized
</TABLE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
For a Share Held Throughout the Periods Indicated
Quality Bond International Equity
Portfolio Portfolio
_________________________________________ _______________________________________
For the period For the period
from May 1, 1996 from May 1, 1996
(date of initial (date of initial
Year ended Year ended public offering) Year ended Year ended public offering)
12/31/98 12/31/97 to 12/31/96 12/31/98 12/31/97 to 12/31/96
----------- ---------- ---------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.405 $10.082 $9.897 $11.472 $10.959 $10.215
----------- ---------- ---------------- ----------- ----------- ---------------
Income from Investment Operations
Net investment income 0.490 0.446 0.459 0.117 0.122 0.096
Net realized and unrealized gains 0.365 0.452 0.102 1.491 0.539 0.755
----------- ---------- ---------------- ----------- ----------- ---------------
Total from investment operations 0.855 0.898 0.561 1.608 0.661 0.851
----------- ---------- ---------------- ----------- ----------- ---------------
Distributions
Dividends from net investment income (0.240) (0.531) (0.376) (0.220) (0.137) (0.086)
Distributions from net realized gains - - (0.044) - - (0.003) (0.011) (0.021)
Distributions in excess of net investment income _ _ _ _ _ _ _ _ _ _ _ _
Return of capital distributions _ _ _ _ _ _ _ _ _ _ _ _
----------- ---------- ---------------- ----------- ----------- ---------------
Total distributions (0.240) (0.575) (0.376) (0.223) (0.148) (0.107)
----------- ---------- ---------------- ----------- ----------- ---------------
Net Asset Value, End of Period $11.020 $10.405 $10.082 $12.857 $11.472 $10.959
----------- ---------- ---------------- ----------- ----------- ---------------
Total Return 8.37% 9.06% 5.68%* 14.07% 5.96% 8.44%*
----------- ---------- ---------------- ----------- ----------- ---------------
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $45.8 $18.6 $5.8 $104.5 $68.8 $15.6
Ratios to Average Net Assets (1):
Operating Expenses 0.65% 0.65% 0.65%** 0.91% 0.95% 0.95%**
Interest Expense _ _ _ _ _ _ _ _*** _ _ _ _
Net investment income 5.59% 5.92% 5.94%** 0.97% 1.35% 1.43%**
Portfolio Turnover Rate 255.4% 163.7% 181.3%* 74.0% 74.1% 48.2%*
(1) If certain expenses had not been reimbursed by
the Adviser, total return would have been lower and the ratios would have been
as follows:
Ratio of Operating Expenses to Average Net Assets: 0.86% 1.08% 1.52%** 1.09% 1.53% 3.80%**
Ratio of Net Investment Income to Average Net Assets: 5.38% 5.49% 5.07%** 0.79% 0.77%
(1.42%)**
* Non-Annualized **Annualized ***Amount is less than 0.00%
</TABLE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
For a Share Held Throughout the Periods Indicated
Bond Debenture Portfolio
---------------------------------------------------------
For the period
from May 1, 1996
(date of initial
Year ended Year ended public offering)
12/31/98 12/31/97 to 12/31/96
----------------- ----------------- --------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $12.112 $10.970 $10.098
----------------- ----------------- --------------------
Income from Investment Operations
Net investment income 0.682 0.544 0.345
Net realized and unrealized gains 0.072 1.147 0.949
----------------- ----------------- --------------------
Total from investment operations 0.754 1.691 1.294
----------------- ----------------- --------------------
Distributions
Dividends from net investment income (0.349) (0.549) (0.342)
Distributions from net realized gains (0.136) _ _ (0.080)
Distributions in excess of net investment income _ _ _ _ _ _
Return of capital distributions _ _ _ _ _ _
----------------- ----------------- --------------------
Total distributions (0.485) (0.549) (0.422)
----------------- ----------------- --------------------
Net Asset Value, End of Period $12.381 $12.112 $10.970
----------------- ----------------- --------------------
Total Return 6.26% 15.63% 12.89%*
----------------- ----------------- --------------------
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $120.0 $55.4 $7.7
Ratios to Average Net Assets (1):
Operating Expenses 0.85% 0.85% 0.85%**
Interest Expense _ _*** _ _ _ _
Net investment income 6.58% 6.68% 7.26%**
Portfolio Turnover Rate 84.7% 100.3% 58.1%*
(1) If certain expenses had not been reimbursed by
the Adviser, total return would have been lower and the ratios would have been
as follows:
Ratio of Operating Expenses to Average Net Assets: 0.93% 1.07% 2.05%**
Ratio of Net Investment Income to Average Net Assets: 6.50% 6.46% 6.06%**
* Non-Annualized **Annualized ***Amount is less than 0.00%
</TABLE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
COVA SERIES TRUST
FINANCIAL HIGHLIGHTS
For a Share Held Throughout the Periods Indicated
Small Cap Equity
Portfolio
--------------------------------------
For the period
from July 1, 1997
(commencement
Year ended of operations)
12/31/98 to 12/31/97
--------------- ---------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $10.419 $10.000
--------------- ---------------------
Income from Investment Operations
Net investment income (0.014) (0.001)
Net realized and unrealized gains (0.012) 0.485
--------------- ---------------------
Total from investment operations (0.026) 0.484
--------------- ---------------------
Distributions
Dividends from net investment income _ _ _ _
Distributions from net realized gains (0.218) (0.065)
Distributions in excess of net investment income _ _ _ _
Return of capital distributions _ _ _ _
--------------- ---------------------
Total distributions (0.218) (0.065)
--------------- ---------------------
Net Asset Value, End of Period $10.175 $10.419
--------------- ---------------------
Total Return (0.39%) 4.86%*
--------------- ---------------------
Ratios/Supplemental Data:
Net Assets, end of period (in millions) $2.4 $1.3
Ratios to Average Net Assets (1):
Operating Expenses 1.10% 1.10%**
Investment Expense _ _ _ _
Net investment income (0.19%) (0.02%)**
Portfolio Turnover Rate 62.0% 36.2%*
(1) If certain expenses had not been reimbursed by
the Adviser, total return would have been lower and the ratios would have been
as follows:
Ratio of Operating Expenses to Average Net Assets: 4.19% 3.97%**
Ratio of Net Investment Income to Average Net Assets: (3.28%) (2.89%)**
* Non-Annualized **Annualized
</TABLE>
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
o securities,
o financial futures,
o 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
o currency forward contracts,
o currency futures contracts,
o currency swaps or options on currencies or currency futures,
o stock index futures contracts, and
o 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
o attempt to protect against possible changes in the market value of
securities held in or to be purchased for a Portfolio,
o to protect a Portfolio's unrealized gains in the value of its portfolio
securities,
o to facilitate the sale of such securities for investment purposes,
o to manage the effective interest rate exposure of a Portfolio,
o to protect against changes in currency exchange rates, or
o 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 a 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 established 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:
o notes and bills, the obligations of Federal Home Loan Banks,
o Federal Farm Credit Banks,
o Federal Land Banks,
o the Federal Housing Administration,
o Farmers Home Administration,
o Export-Import Bank of the United States,
o Small Business Administration,
o Government National Mortgage Association ("GNMA"),
o Federal National Mortgage Association ("FNMA"),
o Federal Home Loan Mortgage Corporation ("FHLMC"),
o General Services Administration,
o Student Loan Marketing Association,
o Central Bank for Cooperatives,
o Federal Intermediate Credit Banks,
o Resolution Trust Corporation, and
o 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;
o others such as the Export-Import Bank of the United States, are supported
by the right of the issuer to borrow from the Treasury;
o others, such as those of FNMA, are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations;
o 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
o bills,
o notes and bonds (including zero coupon bonds) issued by the U.S. Treasury,
o 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.
Participation Interests. Certain Portfolios may purchase participation interests
from financial institutions (such as commercial banks, savings associations, and
insurance companies), or from single-purpose, stand-alone finance subsidiaries
or trusts of such institutions, or from other special purpose entities.
Single-purpose, stand-alone finance subsidiaries or trusts and special purpose
entities generally do not have any significant assets other than the receivables
securing the participation interests. Participation interests give a Portfolio
an undivided fractional ownership interest in debt obligations. The debt
obligations may include
o pools of credit card receivables
o automobile installment loan contracts
o corporate loans or debt securities
o corporate receivables or other types of debt obligations
In addition to being supported by the stream of payments generated by the debt
obligations, payments of principal and interest on the participation interests
may be supported up to certain amounts and for certain periods of time by
o irrevocable letters of credit
o insurance policies and/or
o other credit agreements issued by financial institutions unaffiliated with
the issuers and by monies on deposit in certain bank accounts of the
issuer.
Payments of interest on the participation interests may also rely on payments
made pursuant to interest rate swap agreements made with other unaffiliated
financial institutions.
If the participation interests include the unconditional written right to demand
payment at par value plus accrued interest from the issuer, the Demand Feature
will be used in determining the maturity of the participation interest. So long
as the Demand Feature can require payment by the issuer within seven days, the
participation interest will not be deemed to be illiquid. The secondary market,
if any, for certain of these obligations may be extremely limited and any such
obligations purchased by a Portfolio will be regarded as illiquid, unless they
include the seven-day Demand Feature. Such illiquid obligations will be included
within the percentage limitation of each Portfolio on investment of its net
assets in illiquid securities.
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
federal securities laws - 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 331/3% with respect to the Portfolios managed by
Mississippi Valley Advisors Inc.). 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 Quality Bond and International 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.
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: 811-05252
