FIRST AMERICAN INVESTMENT FUNDS, INC.
EQUITY FUNDS
RETAIL CLASSES
STOCK FUND REGIONAL EQUITY FUND
EQUITY INDEX FUND SPECIAL EQUITY FUND
BALANCED FUND TECHNOLOGY FUND
ASSET ALLOCATION FUND HEALTH SCIENCES FUND
EQUITY INCOME FUND REAL ESTATE SECURITIES FUND
DIVERSIFIED GROWTH FUND INTERNATIONAL FUND
EMERGING GROWTH FUND
PROSPECTUS
JANUARY 31, 1996
As Supplemented June 3, 1996
[LOGO]
FIRST AMERICAN FUNDS
The power of disciplined investing
TABLE OF CONTENTS
PAGE
SUMMARY 4
FEES AND EXPENSES 8
Class A Share Fees and Expenses 8
Class B Share Fees and Expenses 10
Information Concerning Fees and
Expenses 12
FINANCIAL HIGHLIGHTS 14
THE FUNDS 18
INVESTMENT OBJECTIVES AND
POLICIES 18
Stock Fund 19
Equity Index Fund 20
Balanced Fund 21
Asset Allocation Fund 23
Equity Income Fund 24
Diversified Growth Fund 26
Emerging Growth Fund 26
Regional Equity Fund 27
Special Equity Fund 28
Technology Fund 30
Health Sciences Fund 31
Real Estate Securities Fund 32
International Fund 34
Risks to Consider 35
MANAGEMENT 36
Investment Adviser 36
Sub-Adviser to International
Fund 37
Portfolio Managers 38
Custodian 41
Administrator 41
Transfer Agent 42
DISTRIBUTOR 42
INVESTING IN THE FUNDS 43
Share Purchases 43
Minimum Investment Required 44
Alternative Sales Charge Options 44
Systematic Exchange Program 50
Systematic Investment Program 50
Exchanging Securities for Fund
Shares 50
Certificates and Confirmations 50
Dividends and Distributions 51
Exchange Privilege 51
REDEEMING SHARES 53
By Telephone 53
By Mail 54
By Systematic Withdrawal Program 55
Redemption Before Purchase
Instruments Clear 55
Accounts with Low Balances 55
DETERMINING THE PRICE OF SHARES 56
Determining Net Asset Value 56
Foreign Securities 57
FEDERAL INCOME TAXES 57
FUND SHARES 59
CALCULATION OF PERFORMANCE DATA 59
SPECIAL INVESTMENT METHODS 60
Cash Items 61
Repurchase Agreements 61
When-Issued and Delayed-Delivery
Transactions 61
Lending of Portfolio Securities 62
Options Transactions 62
Futures and Options on Futures 63
Fixed Income Securities 64
Foreign Securities 65
Foreign Currency Transactions 67
Mortgage-Backed Securities 68
Asset-Backed Securities 69
Bank Instruments 69
Portfolio Transactions 70
Portfolio Turnover 70
Investment Restrictions 70
FIRST AMERICAN INVESTMENT FUNDS, INC.
680 East Swedesford Road, Wayne, Pennsylvania 19087
RETAIL CLASSES PROSPECTUS
The shares described in this Prospectus represent interests in First American
Investment Funds, Inc., which consists of mutual funds with several different
investment portfolios and objectives. This Prospectus relates to the Class A and
Class B Shares of the following funds (the "Funds"):
* STOCK FUND * REGIONAL EQUITY FUND
* EQUITY INDEX FUND * SPECIAL EQUITY FUND
* BALANCED FUND * TECHNOLOGY FUND
* ASSET ALLOCATION FUND * HEALTH SCIENCES FUND
* EQUITY INCOME FUND * REAL ESTATE SECURITIES FUND
* DIVERSIFIED GROWTH FUND * INTERNATIONAL FUND
* EMERGING GROWTH FUND
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING FIRST BANK NATIONAL ASSOCIATION AND ANY OF ITS
AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUNDS
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, DUE TO
FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated January 31, 1996 for the Funds has
been filed with the Securities and Exchange Commission and is incorporated in
its entirety by reference in this Prospectus. To obtain copies of the Statement
of Additional Information at no charge, or to obtain other information or make
inquiries about the Funds, call (800) 637-2548 or write SEI Financial Services
Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is January 31, 1996, as supplemented June 3, 1996.
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment company
which offers shares in several different mutual funds. This Prospectus provides
information with respect to the Class A and Class B Shares of the following
funds (the "Funds"):
STOCK FUND has a primary objective of capital appreciation and a secondary
objective to provide current income. Under normal market conditions, the Fund
invests at least 80% of its total assets in equity securities diversified among
a broad range of industries and among companies that have a market
capitalization of at least $500 million. In selecting equity securities, the
Fund's adviser employs a value-based selection discipline.
EQUITY INDEX FUND has an objective of providing investment results that
correspond to the performance of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500"). The Fund invests substantially in common stocks included
in the S&P 500. The Fund's adviser believes that its objective can best be
achieved by investing in the common stocks of approximately 250 to 500 of the
issues included in the S&P 500.
BALANCED FUND has an objective of maximizing total return (capital appreciation
plus income). The Fund seeks to achieve its objective by investing in a balanced
portfolio of equity securities and fixed income securities. Over the long term,
it is anticipated that the Fund's asset mix will average approximately 60%
equity securities and 40% fixed income securities, with the asset mix normally
ranging between 40% and 75% equity securities, between 25% and 60% fixed income
securities, and between 0% and 25% money market instruments.
ASSET ALLOCATION FUND has an objective of maximizing total return over the long
term by allocating its assets principally among common stocks, bonds, and
short-term instruments. There are no limitations on the proportions in which the
Fund's adviser may allocate the Fund's investments among these three classes of
assets, and the Fund may at times be fully invested in a single asset class if
the adviser believes that it offers the most favorable total return outlook.
EQUITY INCOME FUND has an objective of long-term growth of capital and income.
Under normal market conditions, the Fund invests at least 80% of its total
assets in equity securities of issuers believed by the Fund's adviser to be
characterized by sound management, the ability to finance expected growth and
the ability to pay above average dividends.
DIVERSIFIED GROWTH FUND has a primary objective of long-term growth of capital
and a secondary objective to provide current income. Under normal market
conditions, the Fund invests at least 80% of its total assets in equity
securities of a diverse group of companies that will provide representation
across all economic sectors included in the S&P 500. The adviser may overweight
the Fund's portfolio holdings in sectors that it believes provide above average
total return potential.
EMERGING GROWTH FUND has an objective of growth of capital. Under normal market
conditions, the Fund invests at least 65% of its total assets in equity
securities of small-sized companies that exhibit, in the adviser's opinion,
outstanding potential for superior growth. Companies that participate in sectors
that are identified by the adviser as having long-term growth potential
generally are expected to make up a substantial portion of the Fund's holdings.
REGIONAL EQUITY FUND has an objective of capital appreciation. The Fund seeks to
achieve its objective by investing, in normal market conditions, at least 65% of
its total assets in equity securities of small-sized companies headquartered in
Minnesota, North and South Dakota, Montana, Wisconsin, Michigan, Iowa, Nebraska,
Colorado and Illinois. The Fund invests in the securities of rapidly growing
companies within this size category and geographic area.
SPECIAL EQUITY FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in equity
securities. The Fund's policy is to invest in equity securities which the Fund's
adviser believes offer the potential for greater than average capital
appreciation. The adviser believes that this policy can best be achieved by
investing in the equity securities of companies where fundamental changes are
occurring, are likely to occur, or have occurred and where, in the opinion of
the adviser, the changes have not been adequately reflected in the price of the
securities.
TECHNOLOGY FUND has an objective of long-term growth of capital. Under normal
market conditions, the Fund invests at least 80% of its total assets in equity
securities of companies which the Fund's adviser believes have, or will develop,
products, processes or services that will provide or will benefit significantly
from technological advances and improvements.
HEALTH SCIENCES FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 80% of its total assets in
equity securities of companies which the Fund's adviser considers to be
principally engaged in the development, production or distribution of products
or services connected with health care or medicine.
REAL ESTATE SECURITIES FUND has an objective of providing above average current
income and long-term capital appreciation by investing primarily in equity
securities of real estate companies. Under normal market conditions, the Fund
invests at least 65% of its total assets in income producing equity securities
of publicly traded companies principally engaged in the real estate industry. A
majority of the Fund's total assets will be invested in securities of real
estate investment trusts ("REITs"), with an expected emphasis on equity REITs.
INTERNATIONAL FUND has an objective of long-term growth of capital. Under normal
market conditions, the Fund invests at least 65% of its total assets in an
internationally diversified portfolio of equity securities which trade in
markets other than the United States. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However, the
Fund also may invest in emerging markets where smaller capitalization companies
are the norm.
INVESTMENT ADVISER AND SUB-ADVISER First Bank National Association (the
"Adviser") serves as investment adviser to each of the Funds. Marvin & Palmer
Associates, Inc. (the "Sub-Adviser") serves as sub-adviser to International
Fund. See "Management."
DISTRIBUTOR; ADMINISTRATOR SEI Financial Services Company (the "Distributor")
serves as the distributor of the Funds' shares. SEI Financial Management
Corporation (the "Administrator") serves as the administrator of the Funds. See
"Management" and "Distributor."
OFFERING PRICES Class A Shares of the Funds are sold at net asset value plus a
maximum sales charge of 4.50%. These sales charges are reduced on purchases of
$50,000 or more. Class A Shares of the Funds are redeemed at net asset value
without any additional charge. Class A Shares of each Fund are subject to a Rule
12b-1 distribution and service fee computed at an annual rate of 0.25% of the
average daily net assets of that class. See "Investing in the Funds -Alternative
Sales Charge Options."
Class B Shares of the Funds are sold at net asset value without an initial sales
charge. Class B Shares of each Fund are subject to Rule 12b-1 distribution and
service fees computed at an annual rate totaling 1.00% of the average daily net
assets of that class. If Class B Shares are redeemed within six years after
purchase, they are subject to a contingent deferred sales charge declining from
5.00% in the first year to zero after six years. Class B Shares automatically
convert into Class A Shares approximately eight years after purchase. See
"Investing in the Funds -- Alternative Sales Charge Options."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS The minimum initial investment is
$1,000 ($250 for IRAs) for each Fund. Subsequent investments must be $100 or
more. Regular investment in the Funds is simplified through the Systematic
Investment Program through which monthly purchases of $100 or more are possible.
See "Investing in the Funds -Minimum Investment Required" and "-- Systematic
Investment Program."
EXCHANGES Shares of any Fund may be exchanged for the same class of shares of
other FAIF funds at the shares' respective net asset values with no additional
charge. See "Investing in the Funds -- Exchange Privilege."
REDEMPTIONS Shares of each Fund may be redeemed at any time at their net asset
value next determined after receipt of a redemption request by the Funds'
transfer agent, less any applicable contingent deferred sales charge. Each Fund
may, upon 60 days written notice, redeem an account if the account's net asset
value falls below $500. See "Investing in the Funds" and "Redeeming Shares."
RISKS TO CONSIDER Each of the Funds is subject to the risk of generally adverse
equity markets. Investors also should recognize that market prices of equity
securities generally, and of particular companies' equity securities, frequently
are subject to greater volatility than prices of fixed income securities.
Because each of the Funds other than Equity Index Fund is actively managed to
a greater or lesser degree, their performance will reflect in part the ability
of the Adviser or Sub-Adviser to select securities which are suited to achieving
their investment objectives. Due to their active management, these Funds could
underperform other mutual funds with similar investment objectives or the market
generally.
In addition, (i) certain of the Funds are subject to risks associated with
investing in smaller-capitalization companies; (ii) Regional Equity Fund is
subject to risks associated with concentrating its investments in a single
geographic region; (iii) Technology Fund, Health Sciences Fund and Real Estate
Securities Fund are subject to risks associated with concentrating their
investments in a single or related economic sectors; (iv) Real Estate Securities
Fund is subject to risks associated with direct investments in REITs; (v)
International Fund is subject to risks associated with investing in foreign
securities and to currency risk; (vi) Equity Income Fund may invest a portion of
its assets in less than investment grade convertible debt obligations; (vii)
certain Funds other than International Fund may invest specified portions of
their assets in securities of foreign issuers which are listed on a United
States stock exchange or represented by American Depository Receipts or, in the
case of Balanced Fund, are debt obligations of foreign issuers denominated in
United States dollars; and (viii) certain Funds may invest (but not for
speculative purposes) in stock index futures contracts, options on stock
indices, options on stock index futures, index participation contracts based on
the S&P 500, and/or exchange traded put and call options on interest rate
futures contracts and on interest rates indices. See "Investment Objectives and
Policies" and "Special Investment Methods."
SHAREHOLDER INQUIRIES Any questions or communications regarding the Funds or a
shareholder account should be directed to the Distributor by calling (800)
637-2548, or to the financial institution which holds shares on an investor's
behalf.
FEES AND EXPENSES RETAIL CLASSES
CLASS A SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
EQUITY ASSET EQUITY
STOCK INDEX BALANCED ALLOCATION INCOME
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on
purchases (as a percentage of
offering price)(1) 4.50% 4.50% 4.50% 4.50% 4.50%
Maximum sales load imposed on
reinvested dividends None None None None None
Deferred sales load None None None None None
Redemption fees None None None None None
Exchange fees None None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fee (after
voluntary fee waivers and
reimbursements)(2) 0.57% 0.12% 0.57% 0.49% 0.40%
Rule 12b-1 fees 0.25% 0.25% 0.25% 0.25% 0.25%
Other expenses (after voluntary fee
waivers and reimbursements)(2) 0.23% 0.23% 0.23% 0.31% 0.35%
Total fund operating expenses
(after voluntary fee waivers
and reimbursements)(2) 1.05% 0.60% 1.05% 1.05% 1.00%
EXAMPLE(3)
You would pay the following expenses on a $1,000 investment, assuming (i) the
maximum applicable sales charge for all funds; (ii) a 5% annual return; and
(iii) redemption at the end of each time period:
1 year $ 55 $ 51 $ 55 $ 55 $ 55
3 years $ 77 $ 63 $ 77 $ 77 $ 75
5 years $ 100 $ 77 $ 100 $ 100 $ 98
10 years $ 167 $ 117 $ 167 $ 167 $ 162
</TABLE>
(table continued)
<TABLE>
<CAPTION>
SPECIAL HEALTH REAL ESTATE
DIVERSIFIED EMERGING REGIONAL EQUITY TECHNOLOGY SCIENCES SECURITIES INTERNATIONAL
GROWTH FUND GROWTH FUND EQUITY FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
None None None None None None None None
None None None None None None None None
None None None None None None None None
None None None None None None None None
0.50% 0.40% 0.66% 0.65% 0.30% 0.23% 0.00% 1.19%
0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
0.30% 0.50% 0.24% 0.25% 0.60% 0.67% 0.80% 0.56%
1.05% 1.15% 1.15% 1.15% 1.15% 1.15% 1.05% 2.00%
$ 55 $ 56 $ 56 $ 56 $ 56 $ 56 $ 55 $ 64
$ 77 $ 80 $ 80 $ 80 $ 80 $ 80 $ 77 $ 105
$ 100 $ 105 $ 105 $ 105 $ 105 $ 100 $ 148
$ 167 $ 178 $ 178 $ 178 $ 178 $ 167 $ 267
</TABLE>
(1) The rules of the Securities and Exchange Commission require that the
maximum sales charge be reflected in the above table. However, certain
investors may qualify for reduced sales charges. See "Investing in the
Funds -- Alternative Sales Charge Options."
(2) The Adviser and the Administrator intend to waive a portion of their
fees and/or reimburse expenses on a voluntary basis, and the amounts
shown reflect these waivers and reimbursements as of the date of this
Prospectus. Each of these persons intends to maintain such waivers and
reimbursements in effect for the current fiscal year but reserves the
right to discontinue such waivers and reimbursements at any time in its
sole discretion. Absent any fee waivers, investment advisory fees as an
annualized percentage of average daily net assets would be 0.70% for
each Fund except International Fund, as to which they would be 1.25%;
and total fund operating expenses calculated on such basis would be
1.19% for Stock Fund, 1.20% for Equity Index Fund, 1.19% for Balanced
Fund, 1.26% for Asset Allocation Fund, 1.31% for Equity Income Fund,
1.26% for Diversified Growth Fund, 1.44% for Emerging Growth Fund,
1.20% for Regional Equity Fund, 1.20% for Special Equity Fund, 1.55%
for Technology Fund, 1.62% for Health Sciences Fund, 2.59% for Real
Estate Securities Fund, and 2.06% for International Fund. Other
expenses includes an administration fee and, in the case of Health
Sciences Fund, is based on estimated amounts for the current fiscal
year.
(3) Absent the fee waivers and reimbursements referred to in (2) above, the
dollar amounts for the 1, 3, 5 and 10-year periods would be as follows:
Stock Fund, $57, $81, $107 and $183; Equity Index Fund, $57, $81, $108
and $184; Balanced Fund, $57, $83, $110 and $188; Asset Allocation
Fund, $57, $83, $111 and $190; Equity Income Fund, $58, $85, $114 and
$196; Diversified Growth Fund, $57, $83, $111 and $190; Emerging Growth
Fund, $59, $89, $120 and $210; Regional Equity Fund, $57, $81, $108 and
$184; Special Equity Fund, $57, $81, $108 and $184; Technology Fund,
$60, $92, $126 and $221; Health Sciences Fund, $61, $94, $129, and
$229; Real Estate Securities Fund, $70, $122, $176 and $324; and
International Fund, $65, $107, $151 and $273.
FEES AND EXPENSES RETAIL CLASSES
CLASS B SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
EQUITY ASSET EQUITY
STOCK INDEX BALANCED ALLOCATION INCOME
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on
purchases (as a percentage of
offering price) None None None None None
Maximum sales load imposed on
reinvested dividends None None None None None
Maximum contingent deferred sales
charge (as a percentage of original
purchase price or redemption
proceeds, as applicable) 5.00% 5.00% 5.00% 5.00% 5.00%
Redemption fees None None None None None
Exchange fees None None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees (after
voluntary fee waivers and
reimbursements)(1) 0.57% 0.12% 0.57% 0.49% 0.40%
Rule 12b-1 fees 1.00% 1.00% 1.00% 1.00% 1.00%
Other expenses (after voluntary fee
waivers and reimbursements)(1) 0.23% 0.23% 0.23% 0.31% 0.35%
Total fund operating expenses
(after voluntary fee waivers
and reimbursements)(1) 1.80% 1.35% 1.80% 1.80% 1.75%
EXAMPLE:
ASSUMING REDEMPTION(2)
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return; (ii) redemption at the end of each time period; and (iii) payment
of the maximum applicable contingent deferred sales charge of 5% in year 1, 4%
in year 3, 2% in year 5, and automatic conversion to Class A shares at the end
of year 8:
1 year $ 68 $ 64 $ 68 $ 68 $ 68
3 years $ 97 $ 83 $ 97 $ 97 $ 95
5 years $ 117 $ 94 $ 117 $ 117 $ 115
10 years $ 192 $ 142 $ 192 $ 192 $ 186
Assuming No Redemption(3)
You would pay the following expenses on the same investment, assuming no
redemption:
1 year $ 18 $ 13 $ 18 $ 18 $ 18
3 years $ 57 $ 43 $ 57 $ 57 $ 55
5 years $ 97 $ 74 $ 97 $ 97 $ 95
10 years $ 192 $ 142 $ 192 $ 192 $ 186
</TABLE>
(table continued)
<TABLE>
<CAPTION>
EMERGING REGIONAL SPECIAL HEALTH REAL ESTATE
DIVERSIFIED GROWTH EQUITY EQUITY TECHNOLOGY SCIENCES SECURITIES INTERNATIONAL
GROWTH FUND FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
None None None None None None None None
None None None None None None None None
5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
None None None None None None None 0.00%
None None None None None None None None
0.50% 0.40% 0.66% 0.65% 0.30% 0.23% 0.00% 1.19%
1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
0.30% 0.50% 0.24% 0.25% 0.60% 0.67% 0.80% 0.56%
1.80% 1.90% 1.90% 1.90% 1.90% 1.90% 1.80% 2.75%
$ 68 $ 69 $ 69 $ 69 $ 69 $ 69 $ 68 $ 78
$ 97 $ 100 $ 100 $ 100 $ 100 $ 100 $ 97 $ 125
$ 117 $ 123 $ 123 $ 123 $ 123 $ 123 $ 117 $ 165
$ 192 $ 202 $ 202 $ 202 $ 202 $ 202 $ 192 $ 290
$ 18 $ 19 $ 19 $ 19 $ 19 $ 19 $ 18 $ 28
$ 57 $ 60 $ 60 $ 60 $ 60 $ 60 $ 57 $ 85
$ 97 $ 103 $ 103 $ 103 $ 103 $ 97 $ 145
$ 192 $ 202 $ 202 $ 202 $ 202 $ 192 $ 290
</TABLE>
(1) The Adviser and the Administrator intend to waive a portion of their
fees and/or reimburse expenses on a voluntary basis, and the amounts
shown reflect these waivers and reimbursements as of the date of this
Prospectus. Each of these persons intends to maintain such waivers and
reimbursements in effect for the current fiscal year but reserves the
right to discontinue such waivers and reimbursements at any time in its
sole discretion. Absent any fee waivers, investment advisory fees for
each Fund as an annualized percentage of average daily net assets would
be 0.70% for each Fund except International Fund, as to which they
would be 1.25%; and total fund operating expenses calculated on such
basis would be 1.94% for Stock Fund, 1.95% for Equity Index Fund, 1.94%
for Balanced Fund, 2.01% for Asset Allocation Fund, 2.06% for Equity
Income Fund, 2.01% for Diversified Growth Fund, 2.19% for Emerging
Growth Fund, 1.95% for Regional Equity Fund, 1.95% for Special Equity
Fund, 2.30% for Technology Fund 2.37% for Health Sciences Fund, 3.34%
for Real Estate Securities Fund, and 2.81% for International Fund.
Other expenses includes an administration fee and, in the case of
Health Sciences Fund, is based on estimated amounts for the current
fiscal year.
(2) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1, 3, 5 and 10-year periods would be as follows:
Stock Fund, $70, $101, $125 and $207; Equity Index Fund, $70, $101,
$125 and $208; Balanced Fund, $70, $101, $125 and $207; Asset
Allocation Fund, $70, $103, $128 and $214; Equity Income Fund; $71,
$105, $131 and $219; Diversified Growth Fund, $70, $103, $128 and $214;
Emerging Growth Fund, $72, $109, $137 and $233; Regional Equity Fund,
$70, $101, $125 and $208; Special Equity Fund, $70, $101, $125 and
$208; Technology Fund, $73, $112, $143 and $244; Health Sciences Fund,
$74, $114, $147 and $252; Real Estate Securities Fund, $84, $143, $194
and $346; and International Fund, $78, $127, $168 and $296.
(3) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1, 3, 5 and 10-year periods would be as follows:
Stock Fund, $20, $61, $105 and $207; Equity Index Fund, $20, $61, $105
and $208; Balanced Fund, $20, $61, $105 and $207; Asset Allocation
Fund, $20, $63, $108 and $214; Equity Income Fund; $21, $65, $111 and
$219; Diversified Growth Fund, $20, $63, $108 and $214; Emerging Growth
Fund, $22, $69, $117 and $233; Regional Equity Fund, $20, $61, $105 and
$207; Special Equity Fund, $20, $61, $105 and $208; Technology Fund,
$23, $72, $123 and $244; Health Sciences Fund, $24, $74, $127 and $252;
Real Estate Securities Fund, $34, $103, $174 and $346; and
International Fund, $28, $87, $148 and $296.
INFORMATION CONCERNING FEES AND EXPENSES
The purpose of the preceding tables is to assist the investor in understanding
the various costs and expenses that an investor in a Fund may bear directly or
indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The information set forth in the foregoing tables and
examples relates only to the Class A and Class B Shares of the Funds. The Funds
also offer Class C Shares which are subject to the same expenses except that
they bear no sales loads and distribution fees.
The examples in the above tables are based on projected annual Fund operating
expenses after voluntary fee waivers and expense reimbursements by the Adviser,
the Distributor and the Administrator. Although these persons intend to maintain
such waivers in effect for the current fiscal year, any such waivers are
voluntary and may be discontinued at any time. Prior to fee waivers, investment
advisory fees accrue at the annual rate as a percentage of average daily net
assets of 0.70% for each of the Funds except International Fund, as to which
they are 1.25%.
The Class A Shares of each Fund may pay distribution and service fees to the
Distributor in an amount equaling 0.25% per year of each such class's average
daily net assets, and the Class B Shares of each Fund bear distribution and
servicing fees totaling 1.00% per year of each such class's average daily net
assets. The Distributor also receives the sales charge for distributing the
Funds' Class A Shares. Due to the distribution fees paid by these classes of
shares, long-term shareholders may pay more than the equivalent of the maximum
front-end sales charges otherwise permitted by NASD rules. For additional
information, see "Distributor."
Other expenses include fees paid by each Fund to the Administrator for providing
various services necessary to operate the Funds. These include shareholder
servicing and certain accounting and other services. The Administrator provides
these services for a fee calculated at an annual rate of 0.12% of average daily
net assets of each Fund subject to a minimum of $50,000 per Fund per fiscal
year; provided, that to the extent that the
aggregate net assets of all First American funds exceed $8 billion, the
percentage stated above is reduced to 0.105%. Other expenses of the Funds also
includes the cost of maintaining shareholder records, furnishing shareholder
statements and reports, and other services. Investment advisory fees,
administrative fees and other expenses are reflected in the Funds' daily
dividends and are not charged to individual shareholder accounts.
FINANCIAL HIGHLIGHTS
The following audited financial highlights should be read in conjunction with
the Funds' financial statements, the related notes thereto and the independent
auditors' report of KPMG Peat Marwick LLP appearing in the Statement of
Additional Information. Further information about the Funds' performance is
contained in FAIF's annual report to shareholders, which may be obtained without
charge by calling (800) 637-2548 or by writing SEI Financial Services Company,
680 East Swedesford Road, Wayne, Pennsylvania 19087.
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET VALUE NET GAINS OR FROM NET
BEGINNING OF INVESTMENT (LOSSES) ON INVESTMENT
PERIOD INCOME INVESTMENTS INCOME
<S> <C> <C> <C> <C>
STOCK FUND
Class A
1995 $16.51 $0.33 $ 3.64 $(0.32)
1994 16.00 0.31 1.00 (0.30)
1993 14.04 0.22 1.99 (0.23)
1992 13.62 0.24 0.81 (0.29)
1991(6) 10.64 0.28 2.95 (0.22)
1990(7) 12.09 0.25 (1.17) (0.25)
1989(7) 10.35 0.25 1.70 (0.20)
1988(7)(8) 10.03 0.27 0.35 (0.30)
Class B
1995 $16.49 $0.26 $ 3.55 $(0.22)
1994(2) 16.65 0.03 (0.10) (0.09)
EQUITY INDEX FUND
Class A
1995 $10.68 $0.25 $ 2.76 $(0.25)
1994 10.60 0.25 0.09 (0.25)
1993(1) 10.00 0.20 0.60 (0.20)
Class B
1995 $10.66 $0.23 $ 2.68 $(0.18)
1994(2) 10.68 0.01 0.04 (0.07)
BALANCED FUND
Class A
1995 $10.54 $0.38 $ 1.72 $(0.37)
1994 10.73 0.34 (0.02) (0.34)
1993(1) 10.00 0.28 0.75 (0.28)
Class B
1995 $10.53 $0.29 $ 1.71 $(0.29)
1994(2) 10.66 0.06 (0.12) (0.07)
ASSET ALLOCATION FUND
Class A
1995 $10.39 $0.36 $ 1.58 $(0.35)
1994 10.60 0.27 (0.08) (0.26)
1993(1) 10.00 0.19 0.60 (0.19)
Class B
1995 $10.37 $0.27 $ 1.57 $(0.28)
1994(2) 10.40 0.05 (0.03) (0.05)
</TABLE>
(table continued)
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
RATIO OF INVESTMENT AVERAGE NET
DISTRIBUTIONS NET ASSET NET ASSETS END EXPENSES TO INCOME TO ASSETS
FROM CAPITAL VALUE END OF PERIOD AVERAGE NET AVERAGE NET (EXCLUDING PORTFOLIO
GAINS OF PERIOD TOTAL RETURN (000) ASSETS ASSETS WAIVERS) TURNOVER RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.59) $19.57 25.26% $ 13,076 1.00% 1.89% 1.19% 52%
(0.50) 16.51 8.35% 8,421 0.76 1.51 1.20 65
(0.02) 16.00 15.82% 134,186 0.75 1.94 1.28 48
(0.34) 14.04 7.88% 3,644 1.45 1.75 4.46 39
(0.03) 13.62 30.49%+ 2,386 1.45 2.47 7.42 76
(0.28) 10.64 (8.22%) 1,161 1.45 2.24 9.47 41
(0.01) 12.09 20.33% 323 1.24 2.26 36.39 74
-- 10.35 6.40%+ 206 1.02 2.67 28.60 80
$(0.59) $19.49 24.20% $ 7,051 1.79% 1.10% 1.94% 52%
-- 16.49 (0.43%)+ 346 1.75 1.58 2.01 65
$(0.09) $13.35 28.90% $ 2,140 0.57% 2.16% 1.20% 9%
(0.01) 10.68 3.25% 758 0.35 2.23 1.23 11
-- 10.60 8.02%+ 139,957 0.35 2.52 1.30 1
$(0.09) $13.30 27.87% $ 1,197 1.35% 1.34% 1.95% 9%
-- 10.66 0.48%+ 29 1.35 1.68 2.03 11
$(0.15) $12.12 20.57% $ 15,288 0.99% 3.41% 1.19% 77%
(0.17) 10.54 3.02% 13,734 0.77 2.63 1.24 98
(0.02) 10.73 10.39%+ 111,225 0.75 3.31 1.29 77
$(0.15) $12.09 19.58% $ 3,120 1.79% 2.60% 1.94% 77%
-- 10.53 (0.55%)+ 270 1.75 2.80 2.05 98
$(0.25) $11.73 19.51% $ 993 0.99% 3.29% 1.26% 87%
(0.14) 10.39 1.81% 707 0.75 2.01 1.29 32
-- 10.60 8.01%+ 56,393 0.75 2.40 1.34 31
$(0.25) $11.68 18.51% $ 571 1.79% 2.35% 2.01% 87%
-- 10.37 0.19% 11 1.75 1.94 2.12 32
</TABLE>
+ Returns, excluding sales charges, are for the period indicated and have
not been annualized.
(1) Commenced operations on December 14, 1992. All ratios for the period
have been annualized.
(2) Class B shares have been offered since August 15, 1994. All ratios for
the period have been annualized.
(3) On April 28, 1994 the Board of Directors approved a change in this
Fund's fiscal year end from November 30 to September 30, effective
September 30, 1994. All ratios for the period have been annualized.
(4) For the period ended November 30.
(5) Commenced operations on December 18, 1992. All ratios for the period
have been annualized.
(6) On September 3, 1991, the Board of Directors of FAIF approved a change
in FAIF's fiscal year end from October 31 to September 30, effective
September 30, 1991. All ratios for the period have been annualized.
(7) For the period ended October 31.
(8) Commenced operations on December 22, 1987. All ratios for the period
have been annualized.
(9) Commenced operations on April 4, 1994. All ratios for the period have
been annualized.
(10) Class A shares have been offered since April 7, 1994. All ratios for
the period have been annualized.
(11) Commenced operations on September 29, 1995. All ratios for the period
have been annualized.
FINANCIAL HIGHLIGHTS
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET VALUE NET GAINS OR FROM NET
BEGINNING OF INVESTMENT (LOSSES) ON INVESTMENT
PERIOD INCOME INVESTMENTS INCOME
<S> <C> <C> <C> <C>
EQUITY INCOME FUND
Class A
1995 $ 9.89 $ 0.41 $ 1.33 $(0.39)
1994(3) 9.87 0.41 -- (0.39)
1993(4)(5) 10.00 0.57 (0.14) (0.56)
Class B
1995 $ 9.88 $ 0.33 $ 1.32 $(0.33)
1994(2) 9.87 0.04 0.02 (0.05)
DIVERSIFIED GROWTH FUND
Class A
1995 $ 9.09 $ 0.15 $ 2.66 $(0.15)
1994(3) 9.39 0.10 (0.29) (0.11)
1993(4)(5) 10.00 0.11 (0.63) (0.09)
Class B
1995 $ 9.09 $ 0.09 $ 2.65 $(0.10)
1994(2) 8.87 0.01 0.23 (0.02)
EMERGING GROWTH FUND
Class A
1995 $10.57 $ 0.01 $ 2.99 $(0.02)
1994(9) 10.00 0.01 0.57 (0.01)
Class B
1995 $10.55 $(0.03) $ 2.92 $ --
1994(2) 9.89 (0.01) 0.67 --
REGIONAL EQUITY FUND
Class A
1995 $12.52 $ 0.08 $ 4.90 $(0.06)
1994 11.96 0.08 0.71 (0.07)
1993(1) 10.00 0.05 1.96 (0.05)
Class B
1995 $12.50 $ 0.04 $ 4.80 $(0.03)
1994(2) 12.19 -- 0.33 (0.02)
SPECIAL EQUITY FUND
Class A
1995 $17.30 $ 0.35 $ 1.60 $(0.34)
1994 15.81 0.28 2.52 (0.28)
1993 13.61 0.23 2.32 (0.25)
1992 12.98 0.21 1.61 (0.27)
1991(6) 10.33 0.30 2.61 (0.26)
1990(7) 12.96 0.47 (2.03) (0.46)
1989(7) 11.55 0.47 1.39 (0.41)
1988(7)(8) 10.03 0.34 1.57 (0.39)
Class B
1995 $17.29 $ 0.29 $ 1.51 $(0.24)
1994(2) 16.51 0.01 0.85 (0.08)
TECHNOLOGY FUND
Class A
1995 $11.19 $(0.03) $ 7.31 $ --
1994(9) 10.00 (0.01) 1.20 --
Class B
1995 $11.17 $(0.04) $ 7.12 $ --
1994(2) 9.85 (0.02) 1.34 --
REAL ESTATE SECURITIES FUND
Class A
1995(11) $10.37 $ -- $ 0.01 $ --
Class B
1995(11) $10.37 $ -- $ -- $ --
INTERNATIONAL FUND
Class A
1995 $10.21 $ -- $ 0.07 $ --
1994(10) 9.98 (0.01) 0.24 --
Class B
1995 $10.21 $(0.03) $ 0.02 $ --
1994(2) 10.23 (0.01) (0.01) --
</TABLE>
(table continued)
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
RATIO OF INVESTMENT AVERAGE NET
DISTRIBUTIONS NET ASSET NET ASSETS END EXPENSES TO INCOME (LOSS) ASSETS
FROM CAPITAL VALUE END OF PERIOD AVERAGE NET TO AVERAGE NET (EXCLUDING PORTFOLIO
GAINS OF PERIOD TOTAL RETURN (000) ASSETS ASSETS WAIVERS) TURNOVER RATE
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $11.24 18.06% $ 1,995 0.92% 3.91% 1.31% 23%
-- 9.89 4.22%+ 1,852 0.88 4.88 1.39 108
-- 9.87 4.44%+ 28,786 0.75 6.09 1.36 68
$ -- $11.20 17.10% $ 1,233 1.75% 3.05% 2.06% 23%
-- 9.88 0.57%+ 1 1.75 4.39 2.14 108
$ -- $11.75 31.21% $ 2,710 0.92% 1.52% 1.26% 28%
-- 9.09 (2.07%)+ 1,900 0.90 1.15 1.33 101
-- 9.39 (5.18%)+ 31,084 0.78 1.26 1.25 5
$ -- $11.73 30.29% $ 819 1.75% 0.58% 2.01% 28%
-- 9.09 2.75%+ 12 1.75 1.20 2.08 101
$(0.15) $13.40 28.82% $ 386 1.04% 0.00% 1.44% 51%
-- 10.57 5.88%+ 91 0.79 0.23 2.84 19
$(0.15) $13.29 27.89% $ 268 1.84% (0.83)% 2.19% 51%
-- 10.55 6.67%+ 18 1.80 (0.85) 3.59 19
$(0.32) $17.12 41.17% $14,917 1.05% 0.58% 1.20% 42%
(0.16) 12.52 6.76% 8,345 0.82 0.59 1.25 41
-- 11.96 20.17%+ 58,427 0.80 0.59 1.30 28
$(0.32) $16.99 39.98% $ 7,630 1.84% (0.25)% 1.95% 42%
-- 12.50 2.73%+ 185 1.80 (0.41) 2.05 41
$(1.02) $17.89 12.63% $11,609 1.09% 2.08% 1.20% 72%
(1.03) 17.30 18.70% 7,333 0.81 1.88 1.23 116
(0.10) 15.81 18.91% 81,899 0.81 2.07 1.31 104
(0.92) 13.61 15.17% 3,586 1.50 1.61 4.18 146
-- 12.98 28.38%+ 3,423 1.50 2.60 5.13 116
(0.61) 10.33 (13.24%) 2,761 1.50 4.09 4.21 113
(0.04) 12.96 17.41% 2,000 1.38 4.07 8.68 102
-- 11.55 19.56%+ 578 1.20 4.02 15.60 51
$(1.02) $17.83 11.64% $ 4,847 1.88% 1.22% 1.95% 72%
-- 17.29 5.22%+ 370 1.68 0.47 2.03 116
$(0.23) $18.24 66.22% $ 1,464 1.13% (0.61)% 1.55% 74%
-- 11.19 11.90%+ 61 0.80 (0.21) 3.37 43
$(0.23) $18.02 64.52% $ 2,031 1.88% (1.41)% 2.30% 74%
-- 11.17 13.40%+ 2 1.80 (1.44) 4.12 43
$ -- $10.38 0.00% $ 1 1.05% 0.00% 2.59% 0%
$ -- $10.37 0.00% $ 1 1.80% 0.00% 3.34% 0%
$ -- $10.28 0.69% $ 876 1.93% (0.13)% 2.06% 57%
-- 10.21 2.30%+ 464 1.75 (0.26) 2.30 16
$ -- $10.20 (0.10)% $ 306 2.76% (0.95)% 2.81% 57%
-- 10.21 (0.20)%+ 22 2.75 (0.71) 3.05 16
</TABLE>
THE FUNDS
FAIF is an open-end management investment company which offers shares in several
different mutual funds (collectively, the "FAIF Funds"), each of which evidences
an interest in a separate and distinct investment portfolio. Shareholders may
purchase shares in each FAIF Fund through three separate classes (Class A, Class
B and Class C) which provide for variations in distribution costs, voting rights
and dividends. Except for these differences among classes, each share of each
FAIF Fund represents an undivided proportionate interest in that fund. FAIF is
incorporated under the laws of the State of Maryland, and its principal offices
are located at 680 East Swedesford Road, Wayne, Pennsylvania 19087.
This Prospectus relates only to the Class A and Class B Shares of the Funds
named on the cover hereof. Information regarding the Class C Shares of these
Funds and regarding the Class A, Class B and Class C Shares of the other FAIF
Funds is contained in separate prospectuses that may be obtained from FAIF's
Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne,
Pennsylvania 19087, or by calling (800) 637-2548. The Board of Directors of FAIF
may authorize additional series or classes of common stock in the future.
INVESTMENT OBJECTIVES AND POLICIES
This section describes the investment objectives and policies of the Funds.
There is no assurance that any of these objectives will be achieved. The Funds'
investment objectives are not fundamental and therefore may be changed without a
vote of shareholders. Such changes could result in a Fund having investment
objectives different from those which shareholders considered appropriate at the
time of their investment in a Fund. Shareholders will receive written
notification at least 30 days prior to any change in a Fund's investment
objectives. Each of the Funds except Technology Fund, Health Sciences Fund, and
Real Estate Securities Fund is a diversified investment company, as defined in
the Investment Company Act of 1940 (the "1940 Act"). Technology Fund, Health
Sciences Fund, and Real Estate Securities Fund are non-diversified companies
under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an investment,
a later increase or decrease in percentage resulting from changes in asset
values will not be deemed to violate the limitation except in the case of the
limitation on illiquid investments. Similarly, if the Fund is required or
permitted to invest a stated percentage of its assets in companies with no more
or no less than a stated market capitalization, deviations from the stated
percentages which result from changes in companies' market capitalizations after
the Fund purchases their shares will not be deemed to violate the limitation. A
Fund which is limited to investing in securities with specified ratings is not
required to sell a security if its rating is reduced or discontinued after
purchase, but the Fund may consider doing so. However, except in the case of
Equity Income Fund, in no event will more than 5% of any Fund's net assets be
invested in non-investment grade securities. Descriptions of the rating
categories of Standard & Poor's Corporation ("Standard & Poor's") and Moody's
Investors Service, Inc. ("Moody's") are contained in the Statement of Additional
Information.
When the term "equity securities" is used in this Prospectus, it refers to
common stock and securities which are convertible into or exchangeable for, or
which carry warrants or other rights to acquire, common stock.
This section also contains information concerning certain investment risks borne
by Fund shareholders under the heading "-- Risks to Consider." Further
information concerning the securities in which the Funds may invest and related
matters is set forth under "Special Investment Methods." Stock Fund
OBJECTIVES. Stock Fund has a primary objective of capital appreciation. A
secondary objective of the Fund is to provide current income.
INVESTMENT POLICIES. Under normal market conditions, Stock Fund invests at least
80% of its total assets in equity securities (and at least 65% in common stocks)
diversified among a broad range of industries and among companies that have a
market capitalization of at least $500 million. In selecting equity securities,
the Adviser employs a value-based selection discipline. The Adviser anticipates
investing in equity securities of companies it believes are selling at less than
fair value and offer the potential for appreciation as a result of improved
profitability reflecting corporate restructuring or elimination of unprofitable
operations, change in management or management goals, or improving demand for
the companies' goods or services.
The Fund also may invest up to 20% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of less than $500
million and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions,
the Fund may without limitation hold cash or invest in cash items of the
kinds described under "Special Investment Methods -- Cash Items." The Fund
also may invest not more than 35% of its total assets in cash and cash items
in order to utilize assets awaiting normal investment.
EQUITY INDEX FUND
OBJECTIVE. Equity Index Fund has an objective of providing investment results
that correspond to the performance of the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500").
INVESTMENT POLICIES. Equity Index Fund invests substantially (at least 65% of
total assets) in common stocks included in the S&P 500. The Adviser believes
that the Fund's objective can best be achieved by investing in the common stocks
of approximately 250 to 500 of the issues included in the S&P 500, depending on
the size of the Fund.
Standard & Poor's designates the stocks included in the S&P 500 on a statistical
basis. A particular stock's weighting in the S&P 500 is based on its total
market value (that is, its market price per share times the number of shares
outstanding) relative to that of all stocks included in the S&P 500. From time
to time, Standard & Poor's may add or delete stocks to or from the S&P 500.
Inclusion of a particular stock in the S&P 500 does not imply any opinion by
Standard & Poor's as to its merits as an investment, nor is Standard & Poor's a
sponsor of or in any way affiliated with the Fund.
The Fund is managed by utilizing a computer program that identifies which stocks
should be purchased or sold in order to replicate, as closely as possible, the
composition of the S&P 500. The Fund includes a stock in its investment
portfolio in the order of the stock's weighting in the S&P 500, starting with
the most heavily weighted stock. Thus, the proportion of Fund assets invested in
a stock or industry closely approximates the percentage of the S&P 500
represented by that stock or industry. Portfolio turnover is expected to be well
below that of actively managed mutual funds. Inasmuch as the common stock of the
Adviser's parent company First Bank System, Inc. is included in the S&P 500,
such stock may be purchased by the Fund consistent with its indexing-based
policies.
Although the Fund will not duplicate the S&P 500's performance precisely, it is
anticipated that there will be a close correlation between the Fund's
performance and that of the S&P 500 in both rising and falling markets. The Fund
will attempt to achieve a correlation between the performance of its portfolio
and that of the S&P 500 of at least 95%, without taking into account expenses of
the Fund. A perfect correlation would be indicated by a figure of 100%, which
would be achieved if the Fund's net asset value, including the value of its
dividends and capital gains distributions, increased or decreased in exact
proportion to changes in the S&P 500. The Fund's ability to replicate the
performance of the S&P 500 may be affected by, among other things, changes in
securities markets, the manner in which Standard & Poor's calculates the S&P
500, and the amount and timing of cash flows into and out of the Fund. Although
cash flows into and out of the Fund will affect the Fund's portfolio turnover
rate and its ability to replicate the S&P 500's performance, investment
adjustments will be made, as practicably as possible, to account for these
circumstances.
The Fund also may invest up to 20% of its total assets in the aggregate in stock
index futures contracts, options on stock indices, options on stock index
futures, and index participation contracts based on the S&P 500. The Fund will
not invest in these types of contracts and options for speculative purposes, but
rather to maintain sufficient liquidity to meet redemption requests; to increase
the level of Fund assets devoted to replicating the composition of the S&P 500;
and to reduce transaction costs. These types of contracts and options and
certain associated risks are described under "Special Investment Methods --
Options Transactions."
In order to maintain liquidity during times of unusual market conditions, the
Fund also may invest temporarily in cash and cash items of the kinds described
under "Special Investment Methods -- Cash Items."
BALANCED FUND
OBJECTIVE. Balanced Fund has an objective of maximizing total return (capital
appreciation plus income).
INVESTMENT POLICIES. Balanced Fund seeks to achieve its objective by investing
in a balanced portfolio of equity securities and fixed income securities. The
asset mix of the Fund normally will range between 40% and 75% equity securities,
between 25% and 60% fixed income securities (including only that portion of the
value of convertible securities attributable to their fixed income
characteristics), and between 0% and 25% money market instruments. Over the long
term, it is anticipated that the Fund's asset mix will average approximately 60%
equity securities and 40% fixed income securities. The Adviser may make moderate
shifts among asset classes in order to attempt to increase returns or reduce
risk.
With respect to the equity security portion of the Fund's portfolio, the Adviser
follows the same investment policies as are described above under "--Stock Fund
- -- Investment Policies."
The fixed income portion of the Fund's portfolio is invested in investment grade
debt securities, at least 65% of which are United States Government obligations
and corporate debt obligations and mortgage-related securities rated at least A
by Standard & Poor's or Moody's or which have been assigned an equivalent rating
by another nationally recognized statistical rating organization. Under normal
market conditions, the weighted average maturity of the fixed income securities
held by the Fund will not exceed 15 years.
The Fund's permitted fixed income investments include notes, bonds and discount
notes of United States Government agencies or instrumentalities; domestic issues
of corporate debt obligations having floating or fixed rates of interest and
rated at least BBB by Standard & Poor's or Baa by Moody's, or which have been
assigned an equivalent rating by another nationally recognized statistical
rating organization, or which are of comparable quality in the judgment of the
Adviser; other investments, including mortgage-backed securities, which are
rated in one of the four highest categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser; and commercial paper which is rated A-1 by Standard &
Poor's or P-1 by Moody's or which has been assigned an equivalent rating by
another nationally recognized statistical rating organization. Unrated
securities will not exceed 10% in the aggregate of the value of the total fixed
income securities held by the Fund.
Subject to the foregoing limitations, the fixed income securities in which the
Fund may invest include (i) mortgage-backed securities (provided that the Fund
will not invest more than 10% of its total fixed income assets in interest-only,
principal-only or inverse floating rate mortgage-backed securities); (ii)
asset-backed securities; and (iii) bank instruments. In addition, the Fund may
invest up to 15% of its total fixed income assets in foreign securities payable
in United States dollars. For information about these kinds of investments and
certain associated risks, see the related headings under "Special Investment
Methods," and for information concerning certain risks associated with investing
in fixed income securities generally, see "Special Investment Methods -- Fixed
Income Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; (v) engage in the lending of portfolio securities;
(vi) in order to attempt to reduce risk, invest in exchange traded put and call
options on interest rate futures contracts and on interest rate indices; and
(vii) in order to attempt to reduce risk, write covered call options on interest
rate indices. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions,
the Fund may without limitation hold cash or invest in cash items of the
kinds described under "Special Investment Methods -- Cash Items." The Fund
also may invest not more than 35% of its total assets in cash and cash items
in order to utilize assets awaiting normal investment.
ASSET ALLOCATION FUND
OBJECTIVE. Asset Allocation Fund has an objective of maximizing total return
over the long term by allocating its assets principally among common stocks,
bonds, and short-term instruments.
INVESTMENT POLICIES. Asset Allocation Fund allocates its investments principally
among (i) common stocks included in the S&P 500, (ii) direct obligations of the
United States Treasury, and (iii) short-term instruments. There are no
limitations on the proportions in which the Adviser may allocate the Fund's
investments among these three classes of assets. The Fund thus is not a
"balanced" fund, in that it is not required to allocate its investments in
specific proportions or ranges among these asset classes.
The Adviser regularly reviews the Fund's investment allocation and varies the
allocation to emphasize the asset class or classes that, in the Adviser's
then-current judgment, provide the most favorable total return outlook. There is
no limitation on the amount that may be invested in any one asset class, and the
Fund may at times be fully invested in a single asset class if the Adviser
believes that it offers the most favorable total return outlook.
In making asset allocation decisions, the Adviser utilizes a proprietary
quantitative model which predicts future asset class returns based on historical
experience using probability theory. By investing in common stocks intended to
approximate the total return of the S&P 500, as described below, the Adviser
attempts to minimize the risk of individual equity security selection in the
common stock class. By limiting the bond class to direct obligations of the
United States Treasury, the Adviser attempts to eliminate credit risk from this
class.
Within the common stock asset class, the Adviser seeks to produce a total return
approximating that of the S&P 500. In order to achieve this result, the Adviser
follows the same indexing-based policies for this asset class as are described
above under "-- Equity Index Fund -- Investment Policies." Inasmuch as the
common stock of the Adviser's parent company First Bank System, Inc. is included
in the S&P 500, such stock may be purchased by the Fund consistent with its
indexing-based policies.
Within the bond asset class, the Fund may invest in any maturity of direct
obligations of the United States Treasury. The Adviser thus has discretion in
determining the weighted average maturity of the investments within this asset
class. For information concerning certain risks associated with investing in
fixed income securities generally, see "Special Investment Methods -- Fixed
Income Securities."
Within the short-term asset class, the Fund may hold cash or invest in cash
items of the kinds described under "Special Investment Methods -- Cash Items."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) purchase securities on a when-issued or delayed-delivery
basis; (iv) engage in the lending of portfolio securities; (v) in order to
attempt to reduce risk, invest in exchange traded put and call options on
interest rate futures contracts and on interest rate indices; and (vi) in order
to manage allocations among asset classes efficiently, invest in interest rate
and stock index futures. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
EQUITY INCOME FUND
OBJECTIVE. Equity Income Fund has an objective of long-term growth of capital
and income.
INVESTMENT POLICIES. Under normal market conditions, Equity Income Fund invests
at least 80% of its total assets in equity securities of issuers believed by the
Adviser to be characterized by sound management, the ability to finance expected
growth and the ability to pay above average dividends.
The Fund invests in equity securities that have relatively high dividend yields
and which, in the Adviser's opinion, will result in a relatively stable Fund
dividend with a growth rate sufficient to maintain the purchasing power of the
income stream. Although the Adviser anticipates that higher yielding equity
securities will generally represent the core holdings of the Fund, the Fund may
invest in lower yielding but higher growth equity securities to the extent that
the Adviser believes such investments are appropriate to achieve portfolio
balance. All securities held by the Fund will provide current income consistent
with the Fund's investment objective.
The "equity securities" in which the Fund may invest include corporate debt
obligations which are convertible into common stock. These convertible debt
obligations may include obligations rated at the time of purchase as low as CCC
by Standard & Poor's or Caa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the Adviser.
Debt obligations rated less than BBB by Standard & Poor's or Baa by Moody's are
considered to be less than "investment grade" and are sometimes referred to as
"junk bonds." Obligations rated CCC by Standard & Poor's or Caa by Moody's are
considered to be of poor standing and are predominantly speculative.
Descriptions of Standard & Poor's and Moody's rating categories are contained in
the Statement of Additional Information. If the rating of an obligation is
reduced below the categories set forth above after purchase or is discontinued,
the Fund is not required to sell the obligation but may consider doing so.
Purchases of less than investment grade convertible debt obligations are
intended to advance the Fund's objective of long-term growth of capital through
the "upside" potential of the obligations' conversion features and to advance
the Fund's objective of income through receipt of interest payable on the
obligations. The Fund will not invest more than 25% of its total assets in
convertible debt obligations which are rated less than investment grade or which
are of comparable quality in the judgment of the Adviser. For the year ended
September 30, 1995, the following weighted average percentages of the Fund's
total assets were invested in convertible and nonconvertible debt obligations
with the indicated Standard & Poor's ratings or their equivalents: AAA, 0%; AA,
0%; A, 0%; BBB, 4%; BB, 0%; B, 7%; and CCC, 0%.
Debt obligations which are rated less than investment grade generally are
subject to greater market fluctuations and greater risk of loss of income and
principal due to default by the issuer than are higher-rated obligations. The
value of these obligations tends to reflect short-term corporate, economic,
interest rate and market developments and investor perceptions of the issuer's
credit quality to a greater extent than investment grade obligations. In
addition, since the market for these obligations is relatively new and does not
have as many participants as the market for higher-rated obligations, it may be
more difficult to dispose of or to determine the value of these obligations. In
the case of a convertible debt obligation, these risks may be present in a
greater degree where the principal amount of the obligation is greater than the
current market value of the common stock into which it is convertible.
The Fund also may invest up to 20% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions,
the Fund may without limitation hold cash or invest in cash items of the
kinds described under "Special Investment Methods -- Cash Items." The Fund
also may invest not more than 35% of its total assets in cash and cash items
in order to utilize assets awaiting normal investment.
DIVERSIFIED GROWTH FUND
OBJECTIVES. Diversified Growth Fund has a primary objective of long-term growth
of capital. A secondary objective of the Fund is to provide current income.
INVESTMENT POLICIES. Under normal market conditions, Diversified Growth Fund
invests at least 80% of its total assets in equity securities of a diverse group
of companies that will provide representation across all economic sectors
included in the S&P 500. The Adviser may overweight the Fund's portfolio
holdings in sectors that it believes provide above average total return
potential and may underweight the Fund's holdings in those sectors that it
believes have a lower total return potential. Within a given sector, the Fund's
assets are invested in securities of those companies that, in the Adviser's
judgment, exhibit a combination of above average growth in revenue and earnings,
strong management and sound and improving financial condition.
The Fund also may invest up to 20% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order
to attempt to reduce risk, purchase put and call options on equity securities
and on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions,
the Fund may without limitation hold cash or invest in cash items of the
kinds described under "Special Investment Methods -- Cash Items." The Fund
also may invest not more than 35% of its total assets in cash and cash items
in order to utilize assets awaiting normal investment.
EMERGING GROWTH FUND
OBJECTIVE. Emerging Growth Fund has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Emerging Growth Fund
invests at least 65% of its total assets in equity securities of small-sized
companies that exhibit, in the Adviser's opinion, outstanding potential for
superior growth. For these purposes, small-sized companies are deemed those with
market capitalizations of less than $1 billion. Companies that participate in
sectors that are identified by the Adviser as having long-term growth potential
generally are expected to make up a substantial portion of the Fund's holdings.
These companies often have established a market niche or have developed unique
products or technologies that are expected by the Adviser to produce superior
growth in revenues and earnings.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $1 billion or more
and in fixed income securities of the kinds described under "Special Investment
Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions,
the Fund may without limitation hold cash or invest in cash items of the
kinds described under "Special Investment Methods -- Cash Items." The Fund
also may invest not more than 35% of its total assets in cash and cash items
in order to utilize assets awaiting normal investment.
REGIONAL EQUITY FUND
OBJECTIVE. Regional Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Regional Equity Fund seeks to achieve its objective by
investing, in normal market conditions, at least 65% of its total assets in
equity securities of small-sized companies headquartered in Minnesota, North and
South Dakota, Montana, Wisconsin, Michigan, Iowa, Nebraska, Colorado and
Illinois.
The Adviser anticipates investing primarily in the securities of rapidly growing
small-sized companies which generally will have the following characteristics,
in the Adviser's opinion: (i) company-specific fundamentals that grow
shareholder value, (ii) experienced, shareholder-oriented management, and (iii)
undervaluation by the market. For these purposes, small-sized companies are
deemed those with market capitalizations of less than $1 billion.
In addition to the risks associated with investing in smaller-capitalization
companies, see "-- Risk Factors -- Smaller-Capitalization Companies" below, the
Fund's policy of concentrating its equity investments in a geographic region
means that it will be subject to adverse economic, political or other
developments in that region. Although the region in which the Fund principally
invests has a diverse industrial base (including, but not limited to,
agriculture, mining, retail, transportation, utilities, heavy and light
manufacturing, financial services, insurance, computer technology and medical
technology), this industrial base is not as diverse as that of the country as a
whole. The Fund therefore may be less diversified by industry and company than
other funds with a similar investment objective and no geographic limitation.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities without regard to the location of the issuer's headquarters or
the issuer's market capitalization and in fixed income securities of the kinds
described under "Special Investment Methods -- Fixed Income Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions,
the Fund may without limitation hold cash or invest in cash items of the
kinds described under "Special Investment Methods -- Cash Items." The Fund
also may invest not more than 35% of its total assets in cash and cash items
in order to utilize assets awaiting normal investment.
SPECIAL EQUITY FUND
OBJECTIVE. Special Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Special Equity Fund invests
at least 65% of its total assets in equity securities. The Fund's policy is to
invest in equity securities which the Adviser believes offer the potential for
greater than average capital appreciation. The Adviser believes that this policy
can best be achieved by investing in the equity securities of companies where
fundamental changes are occurring, are likely to occur, or have occurred and
where, in the opinion of the Adviser, the changes have not been adequately
reflected in the price of the securities and thus are considered by the Adviser
to be undervalued.
Undervalued securities may include securities of companies which (i) have been
unpopular for some time but where, in the Adviser's opinion, recent developments
(such as those listed in the next sentence) suggest the possibility of improved
operating results; (ii) have recently experienced marked popularity but which,
in the opinion of the Adviser, have temporarily fallen out of favor for reasons
that are considered by the Adviser to be non-recurring or short-term; and (iii)
appear to the Adviser to be undervalued in relation to popular securities of
other companies in the same industry. Typically, but not exclusively, the
Adviser will consider investing in undervalued issues in which it sees the
possibility of substantially improved market price due to increasing demand for
an issuer's products or services, the development of new or improved products or
services, the probability of increased operating efficiencies, the elimination
of unprofitable products or operations, changes in management or management
goals, fundamental changes in the industry in which the issuer operates, new or
increased emphasis on research and development, or possible mergers or
acquisitions.
In selecting securities judged to be undervalued and in investing in potential
"turnaround" situations, the Adviser will be acting on opinions and exercising
judgments which may be contrary to those of the majority of investors. These
opinions and judgments involve the risks of either (i) a correct judgment by the
majority, in which case losses may be incurred or profits may be limited, or
(ii) a long delay before majority recognition of the accuracy of the Adviser's
judgment, in which case capital invested by the Fund in an individual security
or group of securities may be nonproductive for an extended period.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions,
the Fund may without limitation hold cash or invest in cash items of the
kinds described under "Special Investment Methods -- Cash Items." The Fund
also may invest not more than 35% of its total assets in cash and cash items
in order to utilize assets awaiting normal investment.
TECHNOLOGY FUND
OBJECTIVE. Technology Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Technology Fund invests at
least 80% of its total assets in equity securities of companies which the
Adviser believes have, or will develop, products, processes or services that
will provide or will benefit significantly from technological advances and
improvements. The description of the technology sector is interpreted broadly by
the Adviser and may include such products or services as inexpensive computing
power, such as personal computers; improved methods of communications, such as
satellite transmission; or labor saving machines or instruments, such as
computer-aided design equipment. The prime emphasis of the Fund is to identify
those companies positioned, in the Adviser's opinion, to benefit from
technological advances in areas such as semiconductors, minicomputers and
peripheral equipment, scientific instruments, computer software, communications,
and future automation trends in both office and factory settings.
The Fund also may invest up to 20% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
Technology Fund operates as a non-diversified investment company, as defined in
the 1940 Act, but intends to conduct its operations so as to qualify as a
regulated investment company for purposes of the Internal Revenue Code of 1986,
as amended. Since a relatively high percentage of the assets of the Fund may be
invested in the securities of a limited number of issuers which will be in the
same or related economic sectors, the Fund's portfolio securities may be more
susceptible to any single economic, technological or regulatory occurrence than
the portfolio securities of diversified investment companies. In addition,
competitive pressures may have a significant effect on the financial condition
of companies in the technology industry. For example, if technology continues to
advance at an accelerated rate, and the number of companies and product
offerings continue to expand, these companies could become increasingly
sensitive to short product cycles and aggressive pricing.
HEALTH SCIENCES FUND
OBJECTIVE. Health Sciences Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Health Sciences Fund
invests at least 80% of its total assets in equity securities of companies which
the Adviser considers to be principally engaged in the development, production
or distribution of products or services connected with health care or medicine.
Examples of these products and services include pharmaceuticals, health care
services and administration, diagnostics, medical equipment and supplies,
medical technology, and medical research and development. The Adviser
anticipates investing in companies that have the potential for above average
growth in revenue and earnings as a result of new or unique products, processes
or services, increasing demand for a company's products or services, established
market leadership, or exceptional management. A company will be deemed
"principally engaged" in the health sciences industries if at the time of
investment the Adviser determines that at least 50% of its assets, revenues or
profits are derived from those industries.
The Fund also may invest up to 20% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
Health Sciences Fund operates as a non-diversified investment company, as
defined in the 1940 Act, but intends to conduct its operations so as to qualify
as a regulated investment company for purposes of the Internal Revenue Code of
1986, as amended. Since a relatively high percentage of the assets of the Fund
may be invested in the securities of a limited number of issuers which will be
in the same or related economic sectors, the Fund's portfolio securities may be
more susceptible to any single economic, technological or regulatory occurrence
than the portfolio securities of diversified investment companies. Many products
and services in the health sciences industries may become rapidly obsolete due
to technological and scientific advances. In addition, the health sciences
industries generally are subject to greater governmental regulation than many
other industries, so that changes in governmental policies may have a material
effect on the demand for products and services in these industries. Regulatory
approvals generally are required before new drugs, medical devices or medical
procedures can be introduced and before health care providers can acquire
additional facilities or equipment.
REAL ESTATE SECURITIES FUND
OBJECTIVE. Real Estate Securities Fund has an objective of providing above
average current income and long-term capital appreciation by investing primarily
in equity securities of real estate companies.
INVESTMENT POLICIES. Under normal market conditions, Real Estate Securities Fund
invests at least 65% of its total assets in income producing equity securities
of publicly traded companies principally engaged in the real estate industry.
For this purpose, a company is deemed to be "principally engaged" in the real
estate industry if (i) it derives at least 50% of its revenues or profits from
the ownership, construction, management, financing or sale of residential,
commercial or industrial real estate, or (ii) has at least 50% of the fair
market value of its assets invested in such real estate. The Fund seeks to
invest in equity securities that provide a dividend yield that exceeds the
composite dividend yield of the securities included in the S&P 500.
A majority of the Fund's total assets will be invested in securities of real
estate investment trusts ("REITs"). REITs are publicly traded corporations or
trusts that specialize in acquiring, holding, and managing residential,
commercial or industrial real estate. A REIT is not taxed at the entity level on
income distributed to its shareholders or unitholders if it distributes to
shareholders or unitholders at least 95% of its taxable income for each taxable
year and complies with regulatory requirements relating to its organization,
ownership, assets and income.
REITs generally can be classified as Equity REITs, Mortgage REITs, and Hybrid
REITs. An Equity REIT invests the majority of its assets directly in real
property and derives its income primarily from rents and from capital gains on
real estate appreciation which are realized through property sales. A Mortgage
REIT invests the majority of its assets in real estate mortgage loans and
derives its income primarily from interest payments. A Hybrid REIT combines the
characteristics of an Equity REIT and a Mortgage REIT. Although the Fund can
invest in all three kinds of REITs, its emphasis is expected to be on
investments in Equity REITs.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
Because Real Estate Securities Fund invests primarily in the real estate
industry, it is particularly subject to risks associated with that industry. The
real estate industry has been subject to substantial fluctuations and declines
on a local, regional and national basis in the past and may continue to be in
the future. Real property values and incomes from real property may decline due
to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, regulatory limitations on rents,
changes in neighborhoods and in demographics, increases in market interest
rates, or other factors. Factors such as these may adversely affect companies
which own and operate real estate directly, companies which lend to such
companies, and companies which service the real estate industry. Although the
Fund will operate as a non-diversified investment company under the 1940 Act, it
intends to conduct its operations so as to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended.
Because the Fund may invest a substantial portion of its assets in REITs, it
also is subject to risks associated with direct investments in REITs. Equity
REITs will be affected by changes in the values of and incomes from the
properties they own, while Mortgage REITs may be affected by the credit quality
of the mortgage loans they hold. In addition, REITs are dependent on specialized
management skills and on their ability to generate cash flow for operating
purposes and to make distributions to shareholders or unitholders. REITs may
have limited diversification and are subject to risks associated with obtaining
financing for real property, as well as to the risk of self-liquidation. REITs
also can be adversely affected by their failure to qualify for tax-free
pass-through treatment of their income under the Code or their failure to
maintain an exemption from registration under the 1940 Act. By investing in
REITs indirectly through the Fund, a shareholder bears not only a proportionate
share of the expenses of the Fund, but also may indirectly bear similar expenses
of some of the REITs in which it invests.
INTERNATIONAL FUND
OBJECTIVE. International Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, International Fund invests
at least 65% of its total assets in an internationally diversified portfolio of
equity securities which trade in markets other than the United States. Generally
these securities are issued by companies (i) domiciled in countries other than
the United States, or (ii) that derive at least 50% of either their revenues or
their pre-tax income from activities outside of the United States. The
securities in which the Fund invests include common and preferred stock,
securities (bonds and preferred stock) convertible into common stock, warrants
and securities representing underlying international securities such as American
Depositary Receipts and European Depositary Receipts. The Fund also may hold
securities of other investment companies (which investments are also subject to
the advisory fee) and depositary or custodial receipts representing beneficial
interests in any of the foregoing securities.
The Fund may invest in securities of issuers in, but not limited to, Argentina,
Australia, Austria, Belgium, Canada, Chile, China, Columbia, the Czech Republic,
Denmark, Finland, France, Germany, Hong Kong, India, Indonesia, Ireland, Israel,
Italy, Japan, Korea, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand,
Norway, Peru, the Philippines, Singapore, Spain, Sweden, Switzerland, Taiwan,
Thailand, the United Kingdom, and Venezuela. Normally, the Fund will invest at
least 65% of its total assets in securities traded in at least three foreign
countries, including the countries listed above. It is possible, although not
currently anticipated, that up to 35% of the Fund's assets could be invested in
United States companies.
In investing the Fund's assets, the Sub-Adviser expects to place primary
emphasis on country selection, followed by selection of industries or sectors
within or across countries and by selection of individual stocks corresponding
to the industries or sectors selected. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However, the
Fund also may invest in emerging markets where smaller capitalization companies
are the norm.
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 50% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; (v) engage in the lending of portfolio securities;
(vi) engage in foreign currency transactions; (vii) in order to attempt to
reduce risk, purchase put and call options on foreign currencies; (viii) write
covered call options on foreign currencies owned by the Fund; and (ix) enter
into contracts for the future purchase or delivery of securities, foreign
currencies, and indices, purchase or sell options on any such futures contracts
and engage in related closing transactions. For information about these
investment methods, restrictions on their use, and certain associated risks, see
the related headings under "Special Investment Methods."
Under normal market conditions, it is expected that the Fund will be fully
invested in equity securities and related hedging instruments (except for
short-term investments of cash for liquidity purposes and pending investment).
However, for temporary defensive purposes during times of unusual market
conditions, the Fund may without limitation hold cash or invest in cash items of
the kinds described under "Special Investment Methods -- Cash Items."
International Fund is subject to special risks associated with investing in
foreign securities and to declines in net asset value resulting from changes in
exchange rates between the United States dollar and foreign currencies. These
risks are discussed under "Special Investment Methods -- Foreign Securities" and
"-- Foreign Currency Transactions" elsewhere here. Because of the special risks
associated with foreign investing and the Sub-Adviser's ability to invest
substantial portions of the Fund's assets in a small number of countries, the
Fund may be subject to greater volatility than most mutual funds which invest
principally in domestic securities.
RISKS TO CONSIDER
An investment in any of the Funds involves certain risks in addition to those
noted above with respect to particular Funds. These include the following:
EQUITY SECURITIES GENERALLY. Market prices of equity securities generally, and
of particular companies' equity securities, frequently are subject to greater
volatility than prices of fixed income securities. Market prices of equity
securities as a group have dropped dramatically in a short period of time on
several occasions in the past, and they may do so again in the future. Each of
the Funds is subject to the risk of generally adverse equity markets.
SMALLER-CAPITALIZATION COMPANIES. Emerging Growth Fund and Regional Equity Fund
emphasize investments in companies with relatively small market capitalizations,
and the remaining Funds (excluding Equity Index Fund and Asset Allocation Fund)
are permitted to invest in equity securities of such companies. The equity
securities of smaller-capitalization companies frequently have experienced
greater price volatility in the past than those of larger-capitalization
companies, and they may be expected to do so in the future. To the extent that
the Funds invest in smaller-capitalization companies, they are subject to this
risk of greater volatility.
ACTIVE MANAGEMENT. All of the Funds other than Equity Index Fund are actively
managed to a greater or lesser degree by the Adviser or, in the case of
International Fund, the Sub-Adviser. The performance of these Funds therefore
will reflect in part the ability of the Adviser or Sub-Adviser to select
securities which are suited to achieving the Funds' investment objectives. Due
to their active management, these Funds could underperform other mutual funds
with similar investment objectives or the market generally.
OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by the Funds.
MANAGEMENT
The Board of Directors of FAIF has the primary responsibility for overseeing
the overall management and electing the officers of FAIF. Subject to the
overall direction and supervision of the Board of Directors, the Adviser acts
as investment adviser for and manages the investment portfolios of FAIF.
INVESTMENT ADVISER
First Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55480, acts as the Funds' investment adviser through its First Asset Management
group. The Adviser has acted as an investment adviser to FAIF since its
inception in 1987 and has acted as investment adviser to First American Funds,
Inc. since 1982. As of September 30, 1995, the Adviser was managing accounts
with an aggregate value of approximately $29 billion, including mutual fund
assets in excess of $7 billion. First Bank System, Inc., 601 Second Avenue
South, Minneapolis, Minnesota 55480, is the holding company for the Adviser.
Each of the Funds other than International Fund has agreed to pay the Adviser
monthly fees calculated on an annual basis equal to 0.70% of its average daily
net assets. International Fund pays the Adviser a monthly fee calculated on the
same basis equal to 1.25% of its average daily net assets, out of which the
Adviser pays the Sub-Adviser's fee. The Adviser may, at its option, waive any or
all of its fees, or reimburse expenses, with respect to any Fund from time to
time. Any such waiver or reimbursement is voluntary and may be discontinued at
any time. The Adviser also may absorb or reimburse expenses of the Funds from
time to time, in its discretion, while retaining the ability to be reimbursed by
the Funds for such amounts prior to the end of the fiscal year. This practice
would have the effect of lowering a Fund's overall expense ratio and of
increasing yield to investors, or the converse, at the time such amounts are
absorbed or reimbursed, as the case may be.
While the advisory fee payable to the Adviser with respect to International Fund
is higher than the advisory fee paid by most mutual funds, the Adviser believes
it is comparable to that paid by many funds having similar investment objectives
and policies.
The Glass-Steagall Act generally prohibits banks from engaging in the business
of underwriting, selling or distributing securities and from being affiliated
with companies principally engaged in those activities. In addition,
administrative and judicial interpretations of the Glass-Steagall Act prohibit
bank holding companies and their bank and nonbank subsidiaries from organizing,
sponsoring or controlling registered open-end investment companies that are
continuously engaged in distributing their shares. Bank holding companies and
their bank and nonbank subsidiaries may serve, however, as investment advisers
to registered investment companies, subject to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the appropriate
regulatory agencies, the Funds have received an opinion from their counsel that
the Adviser is not prohibited from performing the investment advisory services
described above, and that FBS Investment Services, Inc. ("ISI"), a wholly owned
broker-dealer subsidiary of the Adviser, is not prohibited from serving as a
Participating Institution as described herein. In the event of changes in
federal or state statutes or regulations or judicial and administrative
interpretations or decisions pertaining to permissible activities of bank
holding companies and their bank and nonbank subsidiaries, the Adviser and ISI
might be prohibited from continuing these arrangements. In that event, it is
expected that the Board of Directors would make other arrangements and that
shareholders would not suffer adverse financial consequences.
SUB-ADVISER TO INTERNATIONAL FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Adviser to International Fund under an
agreement with the Adviser (the "Sub-Advisory Agreement"). The Sub-Adviser is
responsible for the investment and reinvestment of International Fund's assets
and the placement of brokerage transactions in connection therewith. For its
services under the Sub-Advisory Agreement, the Sub-Adviser is paid a monthly fee
by the Adviser calculated on an annual basis equal to 0.75% of the first $100
million of International Fund's average daily net assets, 0.70% of the second
$100 million of International Fund's average daily net assets, 0.65% of the
third $100 million of International Fund's average daily net assets, and 0.60%
of International Fund's average daily net assets in excess of $300 million.
The Sub-Adviser, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the Sub-Adviser is owned by Mr. Marvin,
Mr. Palmer and 21 other holders. The Sub-Adviser is engaged in the management of
global, non-United States and emerging markets equity portfolios for
institutional accounts. At September 30, 1995, the Sub-Adviser managed a total
of $3.1 billion in investments for 55 institutional investors.
PORTFOLIO MANAGERS
Stock Fund, Equity Index Fund and Balanced Fund are managed by a committee
comprised of Mr. Doak, Mr. Murphy, Mr. Rovner, Mr. Dubiak, Mr. Whitcomb and Mr.
Shields, whose backgrounds are set forth below. Asset Allocation Fund, Equity
Income Fund and Diversified Growth Fund are managed by a committee comprised of
Mr. Bren, Mr. Doak, Mr. Dubiak, Ms. Hoyme, Ms. Johnson, Mr. Murphy, Mr.
Whitcomb, and Mr. Johnson, whose backgrounds also are set forth below. The
remaining Funds are managed or co-managed as indicated below.
JAMES DOAK is a member of the committees which manage six of the Funds, as set
forth above. Jim joined the Adviser in 1982 after serving for two years as vice
president of INA Capital Advisors and ten years as Vice President of
Loomis-Sayles & Co. He has managed assets for individual and institutional
clients, specializing in equity investments, and served as the analyst and
portfolio manager for Stock Fund since its inception in December 1987. Jim
received his bachelor's degree from Brown University and his master's degree in
business administration from the Wharton School of Business. He is a Chartered
Financial Analyst.
JOHN M. MURPHY, JR. is a member of the committees which manage six of the
Funds, as set forth above. John is Chief Investment Officer of the Adviser's
First Asset Management group, having joined the Adviser in 1984. He has more
than 30 years in the investment management field and served with Investment
Advisers, Inc. and Blyth, Eastman, Dillon & Co. before joining the Adviser.
He received his bachelor's degree from Regis College.
JAMES S. ROVNER is a member of the committee which manages three of the Funds,
as set forth above, and he is portfolio manager for Special Equity Fund. Jim
joined the Adviser in 1986 and has managed assets for institutional and
individual clients for over 15 years, specializing in equity and balanced
investment strategies. Jim received his bachelor's degree and his master's
degree in business administration from the University of Wisconsin. He is a
Chartered Financial Analyst.
GERALD C. BREN is a member of the committee which manages three of the Funds, as
set forth above, and he is portfolio co-manager for Emerging Growth Fund and
Health Sciences Fund. Gerald joined the Adviser in 1972 as an investment
analyst. He received his master's degree in business administration from the
University of Chicago in 1972 and his Chartered Financial Analyst certification
in 1977.
ALBIN S. DUBIAK is a member of the committees which manage six of the Funds, as
set forth above, and he is portfolio co-manager for Emerging Growth Fund,
Regional Equity Fund, and Health Sciences Fund. Al began his investment career
as a security trader with The First National Bank of Chicago in 1963 before
joining the Adviser as an investment analyst in 1969. Al received his bachelor's
degree from Indiana University in 1962 and his master's degree in business
administration from the University of Arizona in 1969.
MARY M. HOYME is a member of the committee which manages three of the Funds, as
set forth above, and she is portfolio co-manager for Real Estate Securities
Fund. Mary joined the Adviser in 1989 as a research analyst, prior to which she
was employed for seven years as an equity and economic analyst with IDS
Financial Services. She received her bachelor's degree from the University of
Wisconsin -- Eau Claire and her master's degree in business administration from
the College of St. Thomas. She is a Chartered Financial Analyst.
CORI B. JOHNSON is a member of the committee which manages three of the Funds,
as set forth above, and she is portfolio co-manager for Real Estate Securities
Fund. Cori has been managing assets using quantitative analysis techniques since
1992. She joined the Adviser in 1991 as a securities analyst. Cori received her
bachelor's degree from Concordia College and her master's degree in business
administration from the University of Minnesota. She is a Chartered Financial
Analyst.
ROLAND P. WHITCOMB is a member of the committees which manage six of the Funds,
as set forth above, and he is portfolio co-manager for Regional Equity Fund and
Technology Fund. Roland joined the Adviser in 1986 after serving as an account
executive with Smith Barney & Co. since 1979. He received his bachelor's degree
from the University of Chicago and is a Chartered Financial Analyst.
JEFF A. JOHNSON is a member of the committee which manages three of the Funds,
as set forth above, and he is portfolio co-manager for Regional Equity Fund and
Technology Fund. Jeff has been employed by the Adviser in investment management
since 1991 and in commercial lending from 1985 to 1991. He received his master
of arts degree from the University of Iowa.
KEVIN SHIELDS is a member of the committee which manages three of the Funds, as
set forth above. Kevin, who joined the Adviser in 1993, received his bachelor's
degree from Marquette University and his master's degree from the University of
Wisconsin -- Madison.
A committee comprised of the following five individuals shares the management of
International Fund on behalf of the Sub-Adviser:
DAVID F. MARVIN is Chairman of the Sub-Adviser and founded the firm together
with Mr. Palmer in 1986. Before founding the Sub-Adviser, Mr. Marvin was Vice
President in charge of DuPont Corporation's $10 billion internally-managed
pension fund. Prior to that Mr. Marvin was Associate Portfolio Manager, and then
Head Portfolio Manager, for Investors Diversified Services' IDS Stock Fund. Mr.
Marvin started in the investment business in 1965 as a securities analyst for
Chicago Title & Trust. He received his bachelor's degree from the University of
Illinois and his master's degree in business administration from Northwestern
University. He is a Chartered Financial Analyst and a member of the Financial
Analysts Federation.
STANLEY PALMER is President of the Sub-Adviser and co-founder of the firm. Mr.
Palmer was Equity Portfolio Manager for DuPont Corporation from 1978 through
1986, an analyst and portfolio manager at Investors Diversified Services from
1971 through 1978, and an analyst at Harris Trust & Savings Bank from 1964
through 1971. He received his bachelor's degree from Gustavus Adolphus College
and his master's degree in business administration from the University of Iowa.
He is a Chartered Financial Analyst and a member of the Financial Analysts
Federation.
TERRY B. MASON is a Vice President and Portfolio Manager of the Sub-Adviser.
Before joining the Sub-Adviser, Mr. Mason was employed for 14 years by DuPont
Corporation, the last five as international equity analyst and international
trader. He received his bachelor's degree from Glassboro State College and his
master's degree in business administration from Widener University.
JAY F. MIDDLETON is a Vice President and Portfolio Manager for the Sub-Adviser
and joined the firm in 1989. He received his bachelor's degree from Wesleyan
University.
TODD D. MARVIN is a Vice President and Portfolio Manager for the Sub-Adviser
and joined the firm in 1991. Before joining the Sub-Adviser, Mr. Marvin was
employed by Oppenheimer & Company as an analyst in investment banking. Mr.
Marvin received his bachelor's degree from Wesleyan University.
CUSTODIAN
The custodian of the Funds' assets is First Trust National Association (the
"Custodian"), First Trust Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of First Bank System, Inc., which also
controls the Adviser.
As compensation for its services to Stock Fund, Equity Index Fund, Balanced
Fund, Asset Allocation Fund, Regional Equity Fund, and Special Equity Fund, the
Custodian is paid the following fees: (i) an annual administration fee of $750
per Fund; (ii) an issue held fee, computed as of the end of each month, at the
annual rate of $30 per securities issue held by each Fund; (iii) transaction
fees, consisting of (a) a securities buy/sell/maturity fee of $15 per each such
transaction, and (b) a payment received fee of $12 for each principal pay down
payment received on collateralized mortgage pass-through instruments; (iv) a
wire transfer fee of $10 per transaction; (v) a cash management fee, for
"sweeping" cash into overnight investments, at an annual rate of 0.25% of the
amounts so invested; and (vi) a remittance fee, for payment of each Fund's
expenses, of $3.50 per each check drawn for such remittances. The Custodian is
paid monthly fees equal to 0.03% of the average daily net assets of Equity
Income Fund, Diversified Growth Fund, Emerging Growth Fund, Technology Fund,
Health Sciences Fund, and Real Estate Securities Fund and 0.25% of the average
daily net assets of International Fund. Sub-custodian fees with respect to
International Fund are paid by the Custodian out of this amount. In addition,
the Custodian is reimbursed for its out-of-pocket expenses incurred while
providing its services to the Funds.
Rules adopted under the 1940 Act permit International Fund to maintain its
securities and cash in the custody of certain eligible foreign banks and
depositories. International Fund's portfolio of non-United States securities are
held by sub-custodians which are approved by the directors of FAIF in accordance
with these rules. This determination is made pursuant to these rules following a
consideration of a number of factors including, but not limited to, the
reliability and financial stability of the institution; the ability of the
institution to perform custodian services for International Fund; the reputation
of the institution in its national market; the political and economic stability
of the country in which the institution is located; and the risks of potential
nationalization or expropriation of International Fund's assets.
ADMINISTRATOR
The administrator for the Funds is SEI Financial Management Corporation (the
"Administrator"), 680 East Swedesford Road, Wayne, Pennsylvania 19087. The
Administrator, a wholly-owned subsidiary of SEI Corporation, provides the Funds
with certain administrative services necessary to operate the Funds. These
services include shareholder servicing and certain accounting and other
services. The Administrator provides these services for a fee calculated at an
annual rate of 0.12% of each Fund's average daily net assets, subject to a
minimum administrative fee during each fiscal year of $50,000 per Fund;
provided, that to the extent that the aggregate net assets of all First American
funds exceed $8 billion, the percentage stated above is reduced to 0.105%. From
time to time, the Administrator may voluntarily waive its fees or reimburse
expenses with respect to any of the Funds. Any such waivers or reimbursements
may be made at the Administrator's discretion and may be terminated at any time.
TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent is
210 West 10th Street, Kansas City, Missouri 64105. The Transfer Agent is not
affiliated with the Distributor, the Administrator or the Adviser.
DISTRIBUTOR
SEI Financial Services Company is the principal distributor for shares of the
Funds and of the other FAIF Funds. The Distributor is a Pennsylvania corporation
and is the principal distributor for a number of investment companies. The
Distributor is a wholly-owned subsidiary of SEI Corporation and is located at
680 East Swedesford Road, Wayne, Pennsylvania 19087. The Distributor is not
affiliated with the Adviser, First Bank System, Inc., the Custodian or their
respective affiliates.
Shares of the Funds are distributed through the Distributor and securities
firms, financial institutions (including, without limitation, banks) and other
industry professionals (the "Participating Institutions") which enter into sales
agreements with the Distributor to perform share distribution or shareholder
support services.
FAIF has adopted a Plan of Distribution for the Class A Shares pursuant to Rule
12b-1 under the 1940 Act (the "Class A Distribution Plan"). The Class A
Distribution Plan authorizes the Distributor to retain the sales charge paid
upon purchase of Class A Shares, except that portion which is reallowed to
Participating Institutions. See "Investing in the Funds -- Alternative Sales
Charge Options." Under the Class A Distribution Plan, each Fund also pays the
Distributor a distribution fee monthly at an annual rate of 0.25% of the Fund's
Class A Shares' average daily net assets, which fee may be used by the
Distributor to provide compensation for sales support and distribution
activities with respect to Class A Shares of the Funds. From time to time, the
Distributor may voluntarily waive its distribution fees with respect to the
Class A Shares of any of the Funds. Any such waivers may be made at the
Distributor's discretion and may be terminated at any time.
Under another distribution plan (the "Class B Distribution Plan") adopted in
accordance with Rule 12b-1 under the 1940 Act, the Funds may pay to the
Distributor a sales support fee at an annual rate of up to 0.75% of the average
daily net assets of the Class B Shares of the Funds, which fee may be used by
the Distributor to provide compensation for sales support and distribution
activities with respect to Class B Shares of the Funds. This fee is calculated
and paid each month based on the average daily net assets for that month. In
addition to this fee, the Distributor may be paid a shareholder servicing fee of
0.25% of the average daily net assets of the Class B Shares pursuant to a
service plan (the "Class B Service Plan"), which fee may be used by the
Distributor to provide compensation for personal, ongoing servicing and/or
maintenance of shareholder accounts with respect to Class B Shares of the Funds.
Although Class B Shares are sold without an initial sales charge, the
Distributor pays a total of 4.25% of the amount invested (including a prepaid
service fee of 0.25% of the amount invested) to dealers who sell Class B Shares
(excluding exchanges from other Class B Shares in the First American family).
The service fee payable under the Class B Service Plan is prepaid for the first
year as described above.
The Class A and Class B Distribution Plans recognize that the Adviser, the
Administrator, the Distributor, and any Participating Institution may in their
discretion use their own assets to pay for certain additional costs of
distributing Fund shares. Any arrangement to pay such additional costs may be
commenced or discontinued by any of these persons at any time. In addition,
while there is no sales charge on purchases of Class A Shares of $1 million and
more, the Adviser may pay amounts to broker-dealers from its own assets with
respect to such sales. ISI, a subsidiary of the Adviser, is a Participating
Institution.
INVESTING IN THE FUNDS
SHARE PURCHASES
Shares of the Funds are sold at their net asset value, next determined after an
order is received, plus any applicable sales charge, on days on which the New
York Stock Exchange is open for business. Shares may be purchased as described
below. The Funds reserve the right to reject any purchase request.
THROUGH A FINANCIAL INSTITUTION. Shares may be purchased through a financial
institution which has a sales agreement with the Distributor. An investor may
call his or her financial institution to place an order. Purchase orders must be
received by the financial institution by the time specified by the institution
to be assured same day processing, and purchase orders must be transmitted to
and received by the Funds by 3:00 p.m. Central time in order for shares to be
purchased at that day's price. It is the financial institution's responsibility
to transmit orders promptly.
BY MAIL. An investor may place an order to purchase shares of the Funds directly
through the Transfer Agent. Orders by mail will be executed upon receipt of
payment by the Transfer Agent. If an investor's check does not clear, the
purchase will be cancelled and the investor could be liable for any losses or
fees incurred. In order to purchase shares by mail, an investor must:
* complete and sign the new account form;
* enclose a check made payable to (Fund name); and
* mail both to DST Systems, Inc., P.O. Box 419382, Kansas City,
Missouri 64141-6382.
After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.
BY WIRE. To purchase shares of a Fund by wire, call (800) 637-2548 before 3:00
p.m. Central time. All information needed will be taken over the telephone, and
the order will be considered placed when the Custodian receives payment by wire.
If the Custodian does not receive the wire by 3:00 p.m. Central time, the order
will be executed the next business day. Federal funds should be wired as
follows: First Bank National Association, Minneapolis, Minnesota, ABA Number
091000022; For Credit to: DST Systems: Account Number 6023458026; For Further
Credit To: (Investor Name and Fund Name). Shares cannot be purchased by Federal
Reserve wire on days on which the New York Stock Exchange is closed and on
federal holidays upon which wire transfers are restricted.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment for each Fund is $1,000 unless the investment
is in a retirement plan, in which case the minimum investment is $250. The
minimum subsequent investment is $100. The Funds reserve the right to waive
the minimum investment requirement for employees of First Bank National
Association, First Trust National Association and First Bank System, Inc. and
their respective affiliates.
ALTERNATIVE SALES CHARGE OPTIONS
THE TWO ALTERNATIVES: OVERVIEW. An investor may purchase shares of a Fund at a
price equal to its net asset value per share plus a sales charge which, at the
investor's election, may be imposed either (i) at the time of the purchase (the
Class A "initial sales charge alternative"), or (ii) on a contingent deferred
basis (the Class B "deferred sales charge alternative"). Each of Class A and
Class B represents a Fund's interest in its portfolio of investments. The
classes have the same rights and are identical in all respects except that (i)
Class B Shares bear the expenses of the contingent deferred sales charge
arrangement and distribution and service fees resulting from such sales
arrangement; (ii) each class has exclusive voting rights with respect to
approvals of any Rule 12b-1 distribution plan related to that specific class
(although Class B shareholders may vote on any distribution fees imposed on
Class A Shares as long as Class B Shares convert into Class A Shares); (iii)
only Class B Shares carry a conversion feature; and (iv) each class has
different exchange privileges. Sales personnel of financial institutions
distributing the Funds' shares, and other persons entitled to receive
compensation for selling shares, may receive differing compensation for selling
Class A and Class B Shares.
These alternative purchase arrangements permit an investor to choose the method
of purchasing shares that is more beneficial to that investor. The amount of a
purchase, the length of time an investor expects to hold the shares, and whether
the investor wishes to receive dividends in cash or in additional shares, will
all be factors in determining which sales charge option is best for a particular
investor. An investor should consider whether, over the time he or she expects
to maintain the investment, the accumulated sales charges on Class B Shares
prior to conversion would be less than the initial sales charge on Class A
Shares, and to what extent the differential may be offset by the expected higher
yield of Class A Shares. Class A Shares will normally be more beneficial to an
investor if he or she qualifies for reduced sales charges as described below.
Accordingly, orders for Class B Shares for $250,000 or more ordinarily will be
treated as orders for Class A Shares or declined.
The Directors of FAIF have determined that no conflict of interest currently
exists between the Class A and Class B Shares. On an ongoing basis, the
Directors, pursuant to their fiduciary duties under the 1940 Act and state laws,
will seek to ensure that no such conflict arises.
CLASS A SHARES.
What Class A Shares Cost. Class A Shares of each Fund are offered on a
continuous basis at their next determined offering price, which is net asset
value, plus a sales charge as set forth below:
EACH FUND:
<TABLE>
<CAPTION>
SALES CHARGE MAXIMUM AMOUNT
AS PERCENTAGE SALES CHARGE AS OF SALES
OF OFFERING PERCENTAGE OF CHARGE REALLOWED TO
PRICE NET ASSET VALUE PARTICIPATING INSTITUTIONS
<S> <C> <C> <C>
Less than $50,000 4.50% 4.75% 4.05%
$50,000 but less than $100,000 4.00% 4.17% 3.60%
$100,000 but less than $250,000 3.50% 3.63% 3.15%
$250,000 but less than $500,000 2.75% 2.83% 2.47%
$500,000 but less than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over 0.00% 0.00% 0.00%
</TABLE>
Net asset value is determined at 3:00 p.m. Central time Monday through Friday
except on (i) days on which there are not sufficient changes in the value of a
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; and (iii) on the following federal
holidays: New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day. In addition, net asset value will not
be calculated on Good Friday.
Dealer Concession. A dealer will normally receive up to 90% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the Distributor. In addition, the Distributor may, from time to
time in its sole discretion, institute one or more promotional incentive
programs which will be paid by the Distributor from the sales charge it receives
or from any other source available to it. Under any such program, the
Distributor will provide promotional incentives, in the form of cash or other
compensation including merchandise, airline vouchers, trips and vacation
packages, to all dealers selling shares of the Funds. Promotional incentives of
these kinds will be offered uniformly to all dealers and predicated upon the
amount of shares of the Funds sold by the dealer. Whenever 90% or more of a
sales charge is paid to a dealer, that dealer may be deemed to be an underwriter
as defined in the Securities Act of 1933.
The sales charge for shares sold other than through registered broker/dealers
will be retained by the Distributor. The Distributor may pay fees to financial
institutions out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the institution's customers in connection with
the initiation of customer accounts and purchases of Fund shares.
Reducing the Class A Sales Charge. The sales charge can be reduced on the
purchase of Class A Shares through (i) quantity discounts and accumulated
purchases, or (ii) signing a 13-month letter of intent:
* Quantity Discounts and Accumulated Purchases: As shown in the table
above, larger purchases of Class A Shares reduce the percentage sales
charge paid. Each Fund will combine purchases made on the same day by
an investor, the investor's spouse, and the investor's children under
age 21 when it calculates the sales charge. In addition, the sales
charge, if applicable, is reduced for purchases made at one time by a
trustee or fiduciary for a single trust estate or a single fiduciary
account.
The sales charge discount applies to the total current market value of
any Fund, plus the current market value of any other FAIF Fund and any
other mutual funds having a sales charge and distributed as part of the
First American family of funds. Prior purchases and concurrent
purchases of Class A Shares of any FAIF Fund will be considered in
determining the sales charge reduction. In order for an investor to
receive the sales charge reduction on Class A Shares, the Transfer
Agent must be notified by the investor in writing or by his or her
financial institution at the time the purchase is made that Fund shares
are already owned or that purchases are being combined.
* Letter of Intent: If an investor intends to purchase at least $50,000
of Class A Shares in a Fund and other FAIF Funds over the next 13
months, the sales charge may be reduced by signing a letter of intent
to that effect. This letter of intent includes a provision for a sales
charge adjustment depending on the amount actually purchased within the
13-month period and a provision for the Custodian to hold a percentage
equal to the particular FAIF Fund's maximum sales charge rate of the
total amount intended to be purchased in escrow (in shares) for all
FAIF Funds until the purchase is completed.
The amount held in escrow for all FAIF Funds will be applied to the
investor's account at the end of the 13-month period after deduction of
the sales load applicable to the dollar value of shares actually
purchased. In this event, an appropriate number of escrowed shares may
be redeemed in order to realize the difference in the sales charge.
A letter of intent will not obligate the investor to purchase shares,
but if he or she does, each purchase during the period will be at the
sales charge applicable to the total amount intended to be purchased.
This letter may be dated as of a prior date to include any purchases
made within the past 90 days.
Sales of Class A Shares at Net Asset Value. Purchases of a Fund's Class A Shares
by the Adviser, the Sub-Adviser or any of their affiliates, or any of their or
FAIF's officers, directors, employees, retirees, sales representatives and
partners, registered representatives of any broker/dealer authorized to sell
Fund shares, and full-time employees of FAIF's general counsel, and members of
their immediate families (i.e., parent, child, spouse, sibling, step or adopted
relationships, and UTMA accounts naming qualifying persons), may be made at net
asset value without a sales charge. A Fund's Class A Shares also may be
purchased at net asset value without a sales charge by fee-based registered
investment advisers, financial planners and registered broker/dealers who are
purchasing shares on behalf of their customers.
If Class A Shares of a Fund have been redeemed, the shareholder has a one-time
right, within 30 days, to reinvest the redemption proceeds in Class A Shares of
any FAIF Fund at the next-determined net asset value without any sales charge.
The Transfer Agent must be notified by the shareholder in writing or by his or
her financial institution of the reinvestment in order to eliminate a sales
charge. If the shareholder redeems his or her shares of a Fund, there may be tax
consequences.
In addition, purchases of Class A Shares of a Fund that are funded by proceeds
received upon the redemption (within 60 days of the purchase of Fund shares) of
shares of any unrelated open-end investment company that charges a sales load
and rollovers from retirement plans that utilize the Funds as investment options
may be made at net asset value. To make such a purchase at net asset value, an
investor or the investor's broker must, at the time of purchase, submit a
written request to the Transfer Agent that the purchase be processed at net
asset value pursuant to this privilege, accompanied by a photocopy of the
confirmation (or similar evidence) showing the redemption from the unrelated
fund. The redemption of the shares of the non-related fund is, for federal
income tax purposes, a sale upon which a gain or loss may be realized.
CLASS B SHARES.
Contingent Deferred Sales Charge. Class B Shares are sold at net asset value
without any initial sales charge. If an investor redeems Class B Shares within
eight years of purchase, he or she will pay a contingent deferred sales charge
at the rates set forth below. This charge is assessed on an amount equal to the
lesser of the then-current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price or on shares derived from reinvestment of
dividends or capital gain distributions.
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
AMOUNT SUBJECT TO
YEAR SINCE PURCHASE CHARGE
First 5.00%
Second 5.00%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Eighth None
In determining whether a particular redemption is subject to a contingent
deferred sales charge, it is assumed that the redemption is first of any Class A
Shares in the shareholder's Fund account; second, of any Class B Shares held for
more than eight years and Class B Shares acquired pursuant to reinvestment of
dividends or other distributions; and third, of Class B Shares held longest
during the eight-year period. This method should result in the lowest possible
sales charge.
The contingent deferred sales charge is waived on redemption of Class B Shares
(i) within one year following the death or disability (as defined in the
Internal Revenue Code) of a shareholder, and (ii) to the extent that the
redemption represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who has attained
the age of 70 1/2 . A shareholder or his or her representative must notify the
Transfer Agent prior to the time of redemption if such circumstances exist and
the shareholder is eligible for this waiver.
Conversion Feature. At the end of the period ending eight years after the
beginning of the month in which the shares were issued, Class B Shares will
automatically convert to Class A Shares and will no longer be subject to the
Class B distribution and service fees. This conversion will be on the basis of
the relative net asset values of the two classes.
SYSTEMATIC EXCHANGE PROGRAM
Shares of a Fund may also be purchased through automatic monthly deductions from
a shareholder's account in the same class of shares of Prime Obligations Fund of
First American Funds, Inc. Under a systematic exchange program, a shareholder
enters an agreement to purchase a specified class of shares of one or more Funds
over a specified period of time, and initially purchases Prime Obligations Fund
shares of the same class in an amount equal to the total amount of the
investment. On a monthly basis a specified dollar amount of shares of Prime
Obligations Fund is exchanged for shares of the same class of the Funds
specified. The systematic exchange program of investing a fixed dollar amount at
regular intervals over time has the effect of reducing the average cost per
share of the Funds. This effect also can be achieved through the systematic
investment program described below. Because purchases of Class A Shares are
subject to an initial sales charge, it may be beneficial for an investor to
execute a Letter of Intent in connection with the systematic exchange program. A
shareholder may apply for participation in this program through his or her
financial institution or by calling (800) 637-2548.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received, plus any applicable sales charge. A shareholder may apply for
participation in this program through his or her financial institution or call
(800) 637-2548.
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow such
exchanges only upon the prior approval by the Fund and a determination by the
Fund and the Adviser that the securities to be exchanged are acceptable.
Securities accepted by a Fund will be valued in the same manner that a Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued.
CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder.
In addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly with respect to Stock Fund, Equity Index
Fund, Balanced Fund, Asset Allocation Fund, Equity Income Fund, Diversified
Growth Fund and Special Equity Fund, to all shareholders of record on the record
date. Dividends are declared paid quarterly with respect to Emerging Growth
Fund, Regional Equity Fund, Technology Fund, Health Sciences Fund, and Real
Estate Securities Fund, and annually with respect to International Fund.
Distributions of any net realized long-term capital gains will be made at least
once every 12 months. A portion of the quarterly distributions paid by Real
Estate Securities Fund may be a return of capital. Dividends and distributions
are automatically reinvested in additional shares of the Fund paying the
dividend on payment dates at the ex-dividend date net asset value without a
sales charge, unless shareholders request cash payments on the new account form
or by writing to the Fund.
All shareholders on the record date are entitled to the dividend. If shares are
purchased before a record date for a dividend or a distribution of capital
gains, a shareholder will pay the full price for the shares and will receive
some portion of the purchase price back as a taxable dividend or distribution
(to the extent, if any, that the dividend or distribution is otherwise taxable
to holders of Fund shares). If shares are redeemed or exchanged before the
record date for a dividend or distribution or are purchased after the record
date, those shares are not entitled to the dividend or distribution.
The amount of dividends payable on Class A and Class B Shares generally will be
less than the dividends payable on Class C Shares because of the distribution
expenses charged to Class A and Class B Shares. The amount of dividends payable
on Class A Shares generally will be more than the dividends payable on the Class
B Shares because of the distribution and service fees paid by Class B Shares.
EXCHANGE PRIVILEGE
Shareholders may exchange Class A or Class B Shares of a Fund for currently
available Class A or Class B Shares, respectively, of the other FAIF Funds or of
other funds in the First American family. Class A Shares of the Funds, whether
acquired by direct purchase, reinvestment of dividends on such shares, or
otherwise, may be exchanged for Class A Shares of other funds without the
payment of any sales charge (i.e., at net asset value). Exchanges of shares
among the FAIF Funds must meet any applicable minimum investment of the fund for
which shares are being exchanged.
For purposes of calculating the Class B Shares' eight-year conversion period or
contingent deferred sales charges payable upon redemption, the holding period of
Class B Shares of the "old" fund and the holding period of Class B Shares of the
"new" fund are aggregated.
The ability to exchange shares of the Funds does not constitute an offering or
recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares being
acquired may be sold. An investor who is considering acquiring shares in another
First American fund pursuant to the exchange privilege should obtain and
carefully read a prospectus of the fund to be acquired. Exchanges may be
accomplished by a written request, or by telephone if a preauthorized exchange
authorization is on file with the Transfer Agent, shareholder servicing agent,
or financial institution.
Written exchange requests must be signed exactly as shown on the authorization
form, and the signatures may be required to be guaranteed as for a redemption of
shares by an entity described below under "Redeeming Shares -- Directly From the
Funds -- Signatures." Neither the Funds, the Distributor, the Transfer Agent,
any shareholder servicing agent, or any financial institution will be
responsible for further verification of the authenticity of the exchange
instructions.
Telephone exchange instructions made by an investor may be carried out only if a
telephone authorization form completed by the investor is on file with the
Transfer Agent, shareholder servicing agent, or financial institution. Shares
may be exchanged between two FAIF Funds by telephone only if both FAIF Funds
have identical shareholder registrations.
Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 3:00 p.m. Central time, or by a shareholder's shareholder servicing agent
or financial institution by the time specified by it, in order for shares to be
exchanged the same day. Neither the Transfer Agent nor any Fund will be
responsible for the authenticity of exchange instructions received by telephone
if it reasonably believes those instructions to be genuine. The Funds and the
Transfer Agent will each employ reasonable procedures to confirm that telephone
instructions are genuine, and they may be liable for losses resulting from
unauthorized or fraudulent telephone instructions if they do not employ these
procedures.
Shareholders of the Funds may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his or her broker or
financial institution by telephone, it is recommended that an exchange request
be made in writing and sent by overnight mail to DST Systems, Inc., 210 West
10th Street, Kansas City, Missouri 64105.
Shareholders who become eligible to purchase Class C Shares may exchange Class A
Shares for Class C Shares. An example of such an exchange would be a situation
in which an individual holder of Class A Shares subsequently opens a custody or
agency account with a financial institution which invests in Class C Shares.
The terms of any exchange privilege may be modified or terminated by the Funds
at any time. There are currently no additional fees or charges for the exchange
service. The Funds do not contemplate establishing such fees or charges, but
they reserve the right to do so. Shareholders will be notified of any
modification or termination of the exchange privilege and of the imposition of
any additional fees or changes.
REDEEMING SHARES
Each Fund redeems shares at their net asset value next determined after the
Transfer Agent receives the redemption request, reduced by any applicable
contingent deferred sales charge. Redemptions will be made on days on which
the Fund computes its net asset value. Redemption requests can be made as
described below and must be received in proper form.
BY TELEPHONE
A shareholder may redeem shares of a Fund by calling his or her financial
institution to request the redemption. Shares will be redeemed at the net asset
value next determined after the Fund receives the redemption request from the
financial institution. Redemption requests must be received by the financial
institution by the time specified by the institution in order for shares to be
redeemed at that day's net asset value, and redemption requests must be
transmitted to and received by the Funds by 3:00 p.m. Central time in order for
shares to be redeemed at that day's net asset value. Pursuant to instructions
received from the financial institution, redemptions will be made by check or by
wire transfer. It is the financial institution's responsibility to transmit
redemption requests promptly.
Shareholders who did not purchase their shares of a Fund through a financial
institution may redeem their shares by telephoning (800) 637-2548. At the
shareholder's request, redemption proceeds will be paid by check mailed to the
shareholder's address of record or wire transferred to the shareholder's account
at a domestic commercial bank that is a member of the Federal Reserve System,
normally within one business day, but in no event more than seven days after the
request. The minimum amount for a wire transfer is $1,000. If at any time the
Funds determine it necessary to terminate or modify this method of redemption,
shareholders will be promptly notified.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming shares by telephone. If this should occur, another
method of redemption should be considered. Neither the Transfer Agent nor any
Fund will be responsible for the authenticity of redemption instructions
received by telephone if it reasonably believes those instructions to be
genuine. The Funds and the Transfer Agent will each employ reasonable procedures
to confirm that telephone instructions are genuine, and they may be liable for
losses resulting from unauthorized or fraudulent telephone instructions if they
do not employ these procedures. These procedures may include taping of telephone
conversations.
BY MAIL
Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should call
the Fund, shareholder servicing agent or financial institution for assistance in
redeeming by mail. A check for redemption proceeds normally is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record, must have signatures
on written redemption requests guaranteed by:
* a trust company or commercial bank the deposits of which are insured by
the Bank Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation ("FDIC");
* a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchanges or of the National Association of Securities Dealers;
* a savings bank or savings and loan association the deposits of which
are insured by the Savings Association Insurance Fund, which is
administered by the FDIC; or
* any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantees to institutions that are
members of a signature guarantee program. The Funds and the Transfer Agent
reserve the right to amend these standards at any time without notice.
BY SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders whose account value is at least $5,000 may elect to participate in
the Systematic Withdrawal Program. Under this program, Fund shares are redeemed
to provide for periodic withdrawal payments in an amount directed by the
shareholder. A shareholder may apply to participate in this program through his
or her financial institution. It is generally not in a shareholder's best
interest to participate in the Systematic Withdrawal Program at the same time
that the shareholder is purchasing additional shares if a sales charge must be
paid in connection with such purchases. Because automatic withdrawals with
respect to Class B Shares are subject to the contingent deferred sales charge,
it may not be in the best interest of a Class B shareholder to participate in
the Systematic Withdrawal Program.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
When shares are purchased by check or with funds transmitted through the
Automated Clearing House, the proceeds of redemptions of those shares are not
available until the Transfer Agent is reasonably certain that the purchase
payment has cleared, which could take up to ten calendar days from the purchase
date.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account, except retirement plans, and pay the proceeds,
less any applicable contingent deferred sales charge, to the shareholder if the
account balance falls below the required minimum value of $500. Shares will not
be redeemed in this manner, however, if the balance falls below $500 because of
changes in a Fund's net asset value. Before shares are redeemed to close an
account, the shareholder will be notified in writing and allowed 60 days to
purchase additional shares to meet the minimum account requirement.
DETERMINING THE PRICE OF SHARES
Class A Shares of the Funds are sold at net asset value plus a sales charge,
while Class B Shares are sold without a front-end sales charge. Shares are
redeemed at net asset value less any applicable contingent deferred sales
charge. See "Investing in the Funds -- Alternative Sales Charge Options."
The net asset value per share is determined as of the earlier of the close of
the New York Stock Exchange or 3:00 p.m. Central time on each day the New York
Stock Exchange is open for business, provided that net asset value need not be
determined on days when no Fund shares are tendered for redemption and no order
for that Fund's shares is received and on days on which changes in the value of
portfolio securities will not materially affect the current net asset value of
the Fund's shares. The price per share for purchases or redemptions is such
value next computed after the Transfer Agent receives the purchase order or
redemption request.
It is the responsibility of Participating Institutions promptly to forward
purchase and redemption orders to the Transfer Agent. In the case of redemptions
and repurchases of shares owned by corporations, trusts or estates, the Transfer
Agent or Fund may require additional documents to evidence appropriate authority
in order to effect the redemption, and the applicable price will be that next
determined following the receipt of the required documentation.
DETERMINING NET ASSET VALUE
The net asset value per share for each of the Funds is determined by dividing
the value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected), less all
liabilities, by the number of Fund shares outstanding. For the purpose of
determining the aggregate net assets of the Funds, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued and dividends
will be recorded on the ex-dividend date. Investments in equity securities which
are traded on a national securities exchange (or reported on the NASDAQ national
market system) are stated at the last quoted sales price if readily available
for such equity securities on each business day; other equity securities traded
in the over-the-counter market and listed equity securities for which no sale
was reported on that date are stated at the last quoted bid price. Debt
obligations exceeding 60 days to maturity which are actively traded are valued
by an independent pricing service at the most recently quoted bid price. Debt
obligations with 60 days or less remaining until maturity may be valued at their
amortized cost. Foreign securities are valued based upon quotation from the
primary market in which they are traded. When market quotations are not readily
available, securities are valued at fair value as determined in good faith by
procedures established and approved by the Board of Directors.
Portfolio securities underlying actively traded options are valued at their
market price as determined above. The current market value of any exchange
traded option held or written by a Fund is its last sales price on the exchange
prior to the time when assets are valued, unless the bid price is higher or the
asked price is lower, in which event the bid or asked price is used. In the
absence of any sales that day, options will be valued at the current closing bid
price.
Although the methodology and procedures for determining net asset value are
identical for all classes of shares, the net asset value per share of
different classes of shares of the same Fund may differ because of the
distribution expenses charged to Class A and Class B Shares.
FOREIGN SECURITIES
Any assets or liabilities of the Funds initially expressed in terms of foreign
currencies are translated into United States dollars using current exchange
rates. Trading in securities on foreign markets may be completed before the
close of business on each business day of the Funds. Thus, the calculation of
the Funds' net asset value may not take place contemporaneously with the
determination of the prices of foreign securities held in the Funds' portfolios.
If events materially affecting the value of foreign securities occur between the
time when their price is determined and the time when the Funds' net asset value
is calculated, such securities will be valued at fair value as determined in
good faith by or under the direction of the Board of Directors. In addition,
trading in securities on foreign markets may not take place on all days on which
the New York Stock Exchange is open for business or may take place on days on
which the Exchange is not open for business. Therefore, the net asset value of a
Fund which holds foreign securities might be significantly affected on days when
an investor has no access to the Fund.
FEDERAL INCOME TAXES
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"), during its
current taxable year in order to be relieved of payment of federal income taxes
on amounts of taxable income it distributes to shareholders.
Dividends paid from each Fund's net investment income and net short-term capital
gains will be taxable to shareholders as ordinary income, whether or not the
shareholder elects to have such dividends automatically reinvested in additional
shares. Dividends paid by the Funds attributable to investments in the
securities of foreign issuers or REITs will not be eligible for the 70%
deduction for dividends received by corporations.
Dividends paid from the net capital gains of each Fund and designated as capital
gain dividends will be taxable to shareholders as long-term capital gains,
regardless of the length of time for which they have held their shares in the
Fund. Long-term capital gains of individuals are currently subject to a maximum
tax rate of 28%.
Gain or loss realized upon the sale of shares in the Funds will be treated as
capital gain or loss, provided that the shares represented a capital asset in
the hands of the shareholder. Such gain or loss will be long-term gain or loss
if the shares were held for more than one year.
International Fund may be required to pay withholding and other taxes imposed by
foreign countries, generally at rates from 10% to 40%, which would reduce the
Fund's investment income. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. If at the end of International
Fund's taxable year more than 50% of its total assets consist of securities of
foreign corporations, it will be eligible to file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund will be required to
include their respective pro rata portions of such foreign taxes in gross
income, treat such amounts as foreign taxes paid by them, and deduct such
amounts in computing their taxable income or, alternatively, use them as foreign
tax credits against their federal income taxes. If such an election is filed for
a year, International Fund shareholders will be notified of the amounts which
they may deduct as foreign taxes paid or use as foreign tax credits.
Alternatively, if the amount of foreign taxes paid by International Fund is not
large enough to warrant its making the election described above, the Fund may
claim the amount of foreign taxes paid as a deduction against its own gross
income. In that case, shareholders would not be required to include any amount
of foreign taxes paid by the Fund in their income and would not be permitted
either to deduct any portion of foreign taxes from their own income or to claim
any amount of foreign tax credit for taxes paid by the Fund.
Each Fund is required by federal law to withhold 31% of reportable payments
(including dividends, capital gain distributions, and redemptions) paid to
certain accounts whose owners have not complied with IRS regulations. In order
to avoid this withholding requirement, each shareholder will be asked to certify
on the shareholder's account application that the social security or taxpayer
identification number provided is correct and that the shareholder is not
subject to backup withholding for previous underreporting to the IRS.
This is a general summary of the federal tax laws applicable to the Funds and
their shareholders as of the date of this Prospectus. See the Statement of
Additional Information for further details. Before investing in the Funds, an
investor should consult his or her tax adviser about the consequences of state
and local tax laws.
FUND SHARES
Each share of a Fund is fully paid, nonassessable, and transferable. Shares may
be issued as either full or fractional shares. Fractional shares have pro rata
the same rights and privileges as full shares. Shares of the Funds have no
preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FAIF Funds vote together as one series. The shares
do not have cumulative voting rights. Consequently, the holders of more than 50%
of the shares voting for the election of directors are able to elect all of the
directors if they choose to do so. On issues affecting only a particular Fund or
Class, the shares of that Fund or Class will vote as a separate series. Examples
of such issues would be proposals to alter a fundamental investment restriction
pertaining to a Fund or to approve, disapprove or alter a distribution plan
pertaining to a Class.
Under the laws of the State of Maryland and FAIF's Articles of Incorporation,
FAIF is not required to hold shareholder meetings unless they (i) are required
by the 1940 Act, or (ii) are requested in writing by the holders of 25% or more
of the outstanding shares of FAIF.
CALCULATION OF PERFORMANCE DATA
From time to time, any of the Funds may advertise information regarding its
performance. Each Fund may publish its "yield," its "cumulative total return,"
its "average annual total return" and its "distribution rate." Distribution
rates may only be used in connection with sales literature and shareholder
communications preceded or accompanied by a Prospectus. Each of these
performance figures is based upon historical results and is not intended to
indicate future performance, and, except for "distribution rate," is
standardized in accordance with Securities and Exchange Commission ("SEC")
regulations.
"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day period
(which period will be stated in the advertisement) by the maximum offering price
per share on the last day of the period. Yield is an annualized figure, in that
it assumes that the same level of net investment income is generated over a one
year period. The yield formula annualizes net investment income by providing for
semi-annual compounding.
"Total return" is based on the overall dollar or percentage change in value of a
hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses, including, as
applicable, the maximum sales charge imposed on Class A Shares or the contingent
deferred sales charge imposed on Class B Shares redeemed at the end of the
specified period covered by the total return figure. "Cumulative total return"
reflects a Fund's performance over a stated period of time. "Average annual
total return" reflects the hypothetical annually compounded rate that would have
produced the same cumulative total return if performance had been constant over
the entire period. Because average annual returns tend to smooth out variations
in a Fund's performance, they are not the same as actual year-by-year results.
As a supplement to total return computations, a Fund may also publish "total
investment return" computations which do not assume deduction of the maximum
sales charge imposed on Class A Shares or the contingent deferred sales charge
imposed on Class B Shares.
"Distribution rate" is determined by dividing the income dividends per share for
a stated period by the maximum offering price per share on the last day of the
period. All distribution rates published for the Funds are measures of the level
of income dividends distributed during a specified period. Thus, these rates
differ from yield (which measures income actually earned by a Fund) and total
return (which measures actual income, plus realized and unrealized gains or
losses of a Fund's investments). Consequently, distribution rates alone should
not be considered complete measures of performance.
The performance of the Class A and Class B Shares of a Fund will normally be
lower than for the Class C Shares because Class C Shares are not subject to the
sales charges and distribution expenses applicable to Class A and Class B
Shares. In addition, the performance of Class A and Class B Shares of a Fund
will differ because of the different sales charge structures of the classes and
because of the higher distribution and service fees charged to Class B Shares.
In reports or other communications to shareholders and in advertising material,
the performance of each Fund may be compared to recognized unmanaged indices or
averages of the performance of similar securities. Also, the performance of each
Fund may be compared to that of other funds of similar size and objectives as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
independent mutual fund rating services, and each Fund may include in such
reports, communications and advertising material evaluations published by
nationally recognized independent ranking services and publications. For further
information regarding the Funds' performance, see "Fund Performance" in the
Statement of Additional Information.
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in
which the Funds may invest and related topics. Further information concerning
these matters is contained in the Statement of Additional Information.
CASH ITEMS
The "cash items" in which the Funds may invest, as described under
"Investment Objectives and Policies," include short-term obligations such as
rated commercial paper and variable amount master demand notes; United States
dollar-denominated time and savings and time deposits (including certificates
of deposit); bankers acceptances; obligations of the United States Government
or its agencies or instrumentalities; repurchase agreements collateralized by
eligible investments of a Fund; securities of other mutual funds which invest
primarily in debt obligations with remaining maturities of 13 months or less
(which investments also are subject to the advisory fee); and other similar
high-quality short-term United States dollar-denominated obligations.
REPURCHASE AGREEMENTS
Each of the Funds may enter into repurchase agreements. A repurchase agreement
involves the purchase by a Fund of securities with the agreement that after a
stated period of time, the original seller will buy back the same securities
("collateral") at a predetermined price or yield. Repurchase agreements involve
certain risks not associated with direct investments in securities. If the
original seller defaults on its obligation to repurchase as a result of its
bankruptcy or otherwise, the purchasing Fund will seek to sell the collateral,
which could involve costs or delays. Although collateral (which may consist of
any fixed income security which is an eligible investment for the Fund entering
into the repurchase agreement) will at all times be maintained in an amount
equal to the repurchase price under the agreement (including accrued interest),
a Fund would suffer a loss if the proceeds from the sale of the collateral were
less than the agreed-upon repurchase price. The Adviser or, in the case of
International Fund, the Sub-Adviser will monitor the creditworthiness of the
firms with which the Funds enter into repurchase agreements.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
Each of the Funds (excluding Equity Index Fund) may purchase securities on a
when-issued or delayed-delivery basis. When such a transaction is negotiated,
the purchase price is fixed at the time the purchase commitment is entered, but
delivery of and payment for the securities take place at a later date. A Fund
will not accrue income with respect to securities purchased on a when-issued or
delayed-delivery basis prior to their stated delivery date. Pending delivery of
the securities, each Fund will maintain in a segregated account cash or liquid
high-grade securities in an amount sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed-delivery basis exposes a
Fund to risk because the securities may decrease in value prior to delivery. In
addition, a Fund's purchase of securities on a when-issued or delayed-delivery
basis while remaining substantially fully invested could increase the amount of
the Fund's total assets that are subject to market risk, resulting in increased
sensitivity of net asset value to changes in market prices. However, the Funds
will engage in when-issued and delayed-delivery transactions only for the
purpose of acquiring portfolio securities consistent with their investment
objectives, and not for the purpose of investment leverage. A seller's failure
to deliver securities to a Fund could prevent the Fund from realizing a price or
yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds (excluding Equity
Index Fund) may lend portfolio securities representing up to one-third of the
value of its total assets to broker-dealers, banks or other institutional
borrowers of securities. As with other extensions of credit, there may be risks
of delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the Funds will
only enter into loan arrangements with broker-dealers, banks, or other
institutions which the Adviser or, in the case of International Fund, the
Sub-Adviser has determined are creditworthy under guidelines established by the
Board of Directors. In these loan arrangements, the Funds will receive
collateral in the form of cash, United States Government securities or other
high-grade debt obligations equal to at least 100% of the value of the
securities loaned. Collateral is marked to market daily. The Funds will pay a
portion of the income earned on the lending transaction to the placing broker
and may pay administrative and custodial fees in connection with these loans.
OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Funds may purchase put and call options.
These transactions will be undertaken only for the purpose of reducing risk to
the Funds; that is, for "hedging" purposes. Depending on the Fund, these
transactions may include the purchase of put and call options on equity
securities, on stock indices, on interest rate indices, or (only in the case of
International Fund) on foreign currencies. Options on futures contracts are
discussed below under "Futures and Options on Futures."
A put option on a security gives the purchaser of the option the right (but not
the obligation) to sell, and the writer of the option the obligation to buy, the
underlying security at a stated price (the "exercise price") at any time before
the option expires. A call option on a security gives the purchaser the right
(but not the obligation) to buy, and the writer the obligation to sell, the
underlying security at the exercise price at any time before the option expires.
The purchase price for a put or call option is the "premium" paid by the
purchaser for the right to sell or buy.
Options on indices are similar to options on securities except that, rather than
the right to take or make delivery of a specific security at a stated price, an
option on an index gives the holder the right to receive, upon exercise of the
option, a defined amount of cash if the closing value of the index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
None of the Funds other than International Fund will invest more than 5% of the
value of its total assets in purchased options, provided that options which are
"in the money" at the time of purchase may be excluded from this 5% limitation.
A call option is "in the money" if the exercise price is lower than the current
market price of the underlying security or index, and a put option is "in the
money" if the exercise price is higher than the current market price. A Fund's
loss exposure in purchasing an option is limited to the sum of the premium paid
and the commission or other transaction expenses associated with acquiring the
option.
The use of purchased put and call options involves certain risks. These include
the risk of an imperfect correlation between market prices of securities held by
a Fund and the prices of options, and the risk of limited liquidity in the event
that a Fund seeks to close out an options position before expiration by entering
into an offsetting transaction.
WRITING OF COVERED CALL OPTIONS. The Funds may write (sell) covered call options
to the extent specified with respect to particular Funds under "Investment
Objectives and Policies." These transactions would be undertaken principally to
produce additional income. Depending on the Fund, these transactions may include
the writing of covered call options on equity securities or (only in the case of
International Fund) on foreign currencies which a Fund owns or has the right to
acquire or on interest rate indices.
When a Fund sells a covered call option, it is paid a premium by the purchaser.
If the market price of the security covered by the option does not increase
above the exercise price before the option expires, the option generally will
expire without being exercised, and the Fund will retain both the premium paid
for the option and the security. If the market price of the security covered by
the option does increase above the exercise price before the option expires,
however, the option is likely to be exercised by the purchaser. In that case the
Fund will be required to sell the security at the exercise price, and it will
not realize the benefit of increases in the market price of the security above
the exercise price of the option.
FUTURES AND OPTIONS ON FUTURES
Equity Index Fund, Balanced Fund, Asset Allocation Fund and International Fund
may engage in futures transactions and purchase options on futures to the extent
specified with under "Investment Objectives and Policies." Depending on the
Fund, these transactions may include the purchase of stock index futures and
options on stock index futures, and the purchase of interest rate futures and
options on interest rate futures. In addition, International Fund may enter into
contracts for the future delivery of securities or foreign currencies and
futures contracts based on a specific security, class of securities, or foreign
currency.
A futures contract on a security obligates one party to purchase, and the other
to sell, a specified security at a specified price on a date certain in the
future. A futures contract on an index obligates the seller to deliver, and
entitles the purchaser to receive, an amount of cash equal to a specific dollar
amount times the difference between the value of the index at the expiration
date of the contract and the index value specified in the contract. The
acquisition of put and call options on futures contracts will, respectively,
give a Fund the right (but not the obligation), for a specified exercise price,
to sell or to purchase the underlying futures contract at any time during the
option period.
A Fund may use futures contracts and options on futures in an effort to hedge
against market risks and, in the case of International Fund, as part of its
management of foreign currency transactions. In addition, Equity Index Fund may
use stock index futures and options on futures to maintain sufficient liquidity
to meet redemption requests, to increase the level of Fund assets devoted to
replicating the composition of the S&P 500, and to reduce transaction costs.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of a Fund's total assets, and the value of
securities that are the subject of such futures and options (both for receipt
and delivery) may not exceed 1/3 of the market value of a Fund's total assets.
Futures transactions will be limited to the extent necessary to maintain each
Fund's qualification as a regulated investment company under the Internal
Revenue Code of 1986, as amended.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if the Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities or foreign currencies,
limiting the Fund's ability to hedge effectively against interest rate, exchange
rate and/or market risk and giving rise to additional risks. There is no
assurance of liquidity in the secondary market for purposes of closing out
futures positions.
FIXED INCOME SECURITIES
The fixed income securities in which Stock Fund, Equity Income Fund, Diversified
Growth Fund, Emerging Growth Fund, Regional Equity Fund, Special Equity Fund,
Technology Fund, Health Sciences Fund, and Real Estate Securities Fund may
invest include securities issued or guaranteed by the United States Government
or its agencies or instrumentalities, nonconvertible preferred stocks,
nonconvertible corporate debt securities, and short-term obligations of the
kinds described above under "-- Cash Items." Investments in nonconvertible
preferred stocks and nonconvertible corporate debt securities will be limited to
securities which are rated at the time of purchase not less than BBB by Standard
& Poor's or Baa by Moody's (or equivalent short-term ratings), or which have
been assigned an equivalent rating by another nationally recognized statistical
rating organization, or which are of comparable quality in the judgment of the
Adviser. Obligations rated BBB, Baa or their equivalent, although investment
grade, have speculative characteristics and carry a somewhat higher risk of
default than obligations rated in the higher investment grade categories.
Equity Income Fund also may invest a portion of its assets in less than
investment grade convertible debt obligations. For a description of such
obligations and the risks associated therewith, see "Investment Objectives and
Policies -- Equity Income Fund."
The fixed income securities specified above, as well as the fixed income
securities in which Balanced Fund and Asset Allocation Fund may invest as
described under "Investment Objectives and Policies," are subject to (i)
interest rate risk (the risk that increases in market interest rates will cause
declines in the value of debt securities held by a Fund); (ii) credit risk (the
risk that the issuers of debt securities held by a Fund default in making
required payments); and (iii) call or prepayment risk (the risk that a borrower
may exercise the right to prepay a debt obligation before its stated maturity,
requiring a Fund to reinvest the prepayment at a lower interest rate).
FOREIGN SECURITIES
GENERAL. Under normal market conditions International Fund invests at least 65%
of its total assets in equity securities which trade in markets other than the
United States. In addition, the other Funds (excluding Equity Index Fund, Asset
Allocation Fund, Regional Equity Fund and Real Estate Securities Fund) may
invest lesser proportions of their assets in securities of foreign issuers which
are either listed on a United States securities exchange or represented by
American Depositary Receipts.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities also may be subject to greater
fluctuations in price than securities issued by United States corporations. The
principal markets on which these securities trade may have less volume and
liquidity, and may be more volatile, than securities markets in the United
States.
In addition, there may be less publicly available information about a foreign
company than about a United States domiciled company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to United States domestic
companies. There is also generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of United States banks, foreign
banks and foreign issuers may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting, and recordkeeping standards
than those applicable to domestic branches of United States banks and United
States domestic issuers.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. For many foreign
securities, United States dollar-denominated American Depositary Receipts, which
are traded in the United States on exchanges or over-the-counter, are issued by
domestic banks. American Depositary Receipts represent the right to receive
securities of foreign issuers deposited in a domestic bank or a correspondent
bank. American Depositary Receipts do not eliminate all the risk inherent in
investing in the securities of foreign issuers. However, by investing in
American Depositary Receipts rather than directly in foreign issuers' stock, a
Fund can avoid currency risks during the settlement period for either purchases
or sales. In general, there is a large, liquid market in the United States for
many American Depositary Receipts. The information available for American
Depositary Receipts is subject to the accounting, auditing and financial
reporting standards of the domestic market or exchange on which they are traded,
which standards are more uniform and more exacting than those to which many
foreign issuers may be subject. International Fund also may invest in European
Depositary Receipts, which are receipts evidencing an arrangement with a
European bank similar to that for American Depositary Receipts and which are
designed for use in the European securities markets. European Depositary
Receipts are not necessarily denominated in the currency of the underlying
security.
Certain American Depositary Receipts and European Depositary Receipts, typically
those denominated as unsponsored, require the holders thereof to bear most of
the costs of the facilities while issuers of sponsored facilities normally pay
more of the costs thereof. The depository of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights to
facility holders in respect to the deposited securities, whereas the depository
of a sponsored facility typically distributes shareholder communications and
passes through voting rights.
FOREIGN CURRENCY TRANSACTIONS
International Fund invests in securities which are purchased and sold in foreign
currencies. The value of its assets as measured in United States dollars
therefore may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations. International Fund
also will incur costs in converting United States dollars to local currencies,
and vice versa.
International Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date certain at a
specified price. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
International Fund may enter into forward currency contracts in order to hedge
against adverse movements in exchange rates between currencies. It may engage in
"transaction hedging" to protect against a change in the foreign currency
exchange rate between the date the Fund contracts to purchase or sell a security
and the settlement date, or to "lock in" the United States dollar equivalent of
a dividend or interest payment made in a foreign currency. It also may engage in
"portfolio hedging" to protect against a decline in the value of its portfolio
securities as measured in United States dollars which could result from changes
in exchange rates between the United States dollar and the foreign currencies in
which the portfolio securities are purchased and sold. International Fund also
may hedge its foreign currency exchange rate risk by engaging in currency
financial futures and options transactions.
Although a foreign currency hedge may be effective in protecting the Fund from
losses resulting from unfavorable changes in exchanges rates between the United
States dollar and foreign currencies, it also would limit the gains which might
be realized by the Fund from favorable changes in exchange rates. The
Sub-Adviser's decision whether to enter into currency hedging transactions will
depend in part on its view regarding the direction and amount in which exchange
rates are likely to move. The forecasting of movements in exchange rates is
extremely difficult, so that it is highly uncertain whether a hedging strategy,
if undertaken, would be successful. To the extent that the Sub-Adviser's view
regarding future exchange rates proves to have been incorrect, International
Fund may realize losses on its foreign currency transactions.
International Fund does not intend to enter into forward currency contracts
or maintain a net exposure in such contracts where it would be obligated to
deliver an amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency.
MORTGAGE-BACKED SECURITIES
With respect to the fixed income portion of its portfolio, Balanced Fund may
invest in mortgage-backed securities which are Agency Pass-Through Certificates
or collateralized mortgage obligations ("CMOs"), as described below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
The obligation of GNMA with respect to such certificates is backed by the full
faith and credit of the United States, while the obligations of FNMA and FHLMC
with respect to such certificates rely solely on the assets and credit of those
entities. The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.
CMOs are debt obligations typically issued by a private special-purpose entity
and collateralized by residential or commercial mortgage loans or Agency
Pass-Through Certificates. Balanced Fund will invest only in CMOs which are
rated in one of the four highest rating categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser. Because CMOs are debt obligations of private entities,
payments on CMOs generally are not obligations of or guaranteed by any
governmental entity, and their ratings and creditworthiness typically depend,
among other factors, on the legal insulation of the issuer and transaction from
the consequences of a sponsoring entity's bankruptcy. CMOs generally are issued
in multiple classes, with holders of each class entitled to receive specified
portions of the principal payments and prepayments and/or of the interest
payments on the underlying mortgage loans. These entitlements can be specified
in a wide variety of ways, so that the payment characteristics of various
classes may differ greatly from one another. Examples of the more common classes
are provided in the Statement of Additional Information. The CMOs in which the
Fund may invest include classes which are subordinated in right of payment to
other classes, as long as they have the required rating referred to above.
It generally is more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict the
effect of such changes on the return of a conventional fixed-rate debt
instrument, and the magnitude of such effects may be greater in some cases. The
return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. Balanced Fund will
not invest more than 10% of its total fixed income assets in interest-only,
principal-only or inverse floating rate mortgage backed securities.
ASSET-BACKED SECURITIES
With respect to the fixed income portion of its portfolio, Balanced Fund may
invest in asset-backed securities. Asset-backed securities generally constitute
interests in, or obligations secured by, a pool of receivables other than
mortgage loans, such as automobile loans and leases, credit card receivables,
home equity loans and trade receivables. Asset-backed securities generally are
issued by a private special-purpose entity. Their ratings and creditworthiness
typically depend on the legal insulation of the issuer and transaction from the
consequences of a sponsoring entity's bankruptcy, as well as on the credit
quality of the underlying receivables and the amount and credit quality of any
third-party credit enhancement supporting the underlying receivables or the
asset-backed securities. Asset-backed securities and their underlying
receivables generally are not issued or guaranteed by any governmental entity.
BANK INSTRUMENTS
The bank instruments in which Balanced Fund may invest include time and savings
deposits, deposit notes and bankers acceptances (including certificates of
deposit) in commercial or savings banks. They also include Eurodollar
Certificates of Deposit issued by foreign branches of United States or foreign
banks; Eurodollar Time Deposits, which are United States dollar-denominated
deposits in foreign branches of United States or foreign banks; and Yankee
Certificates of Deposit, which are United States dollar-denominated certificates
of deposit issued by United States branches of foreign banks and held in the
United States. For a description of certain risks of investing in foreign
issuers' securities, see "-- Foreign Securities" above. In each instance,
Balanced Fund may only invest in bank instruments issued by an institution which
has capital, surplus and undivided profits of more than $100 million or the
deposits of which are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund.
PORTFOLIO TRANSACTIONS
Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are
available through a brokerage transaction. It is anticipated that most portfolio
transactions involving debt securities will be executed on a principal basis.
Also, with respect to the placement of portfolio transactions with securities
firms, subject to the overall policy to seek to place portfolio transactions as
efficiently as possible and at the best price, research services and placement
of orders by securities firms for a Fund's shares may be taken into account as a
factor in placing portfolio transactions for the Fund.
PORTFOLIO TURNOVER
Although the Funds do not intend generally to trade for short-term profits, they
may dispose of a security without regard to the time it has been held when such
action appears advisable to the Adviser or, in the case of International Fund,
the Sub-Adviser. The portfolio turnover rate for a Fund may vary from year to
year and may be affected by cash requirements for redemptions of shares. High
portfolio turnover rates generally would result in higher transaction costs and
could result in additional tax consequences to a Fund's shareholders.
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds are set
forth in full in the Statement of Additional Information. The fundamental
restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets, except for Asset Allocation Fund,
which may borrow in amounts not to exceed 33-1/3% of its total assets.
None of the Funds will borrow money for leverage purposes. For the
purpose of this investment restriction, the use of options and futures
transactions and the purchase of securities on a when-issued or
delayed-delivery basis shall not be deemed the borrowing of money. If a
Fund engages in borrowing, its share price may be subject to greater
fluctuation, and the interest expense associated with the borrowing may
reduce the Fund's net income.
* None of the Funds will mortgage, pledge or hypothecate its assets,
except in an amount not exceeding 15% of the value of its total assets
to secure temporary or emergency borrowing.
* None of the Funds will make short sales of securities.
* None of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary for the clearance of
transactions and except, in the case of Emerging Growth Fund,
Technology Fund, and International Fund as may be necessary to make
margin payments in connection with foreign currency futures and other
derivative transactions.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
As a nonfundamental policy, none of the Funds will invest more than 15% of its
net assets in all forms of illiquid investments, as determined pursuant to
applicable Securities and Exchange Commission rules and interpretations. Section
4(2) commercial paper may be determined to be "liquid" under guidelines adopted
by the Board of Directors. Rule 144A securities may in the future be determined
to be "liquid" under guidelines adopted by the Board of Directors if the current
position of certain state securities regulators regarding such securities is
modified. Investing in Rule 144A securities could have the effect of increasing
the level of illiquidity in a Fund to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing these securities.
Pursuant to an undertaking to certain state securities regulators, Real Estate
Securities Fund will purchase securities that meet the investment objectives and
policies of the Fund, are acquired for investment and not for resale, that are
liquid and not restricted as to transfer, and that have a value that is readily
ascertainable as evidenced by a listing on the New York Stock Exchange, the
American Stock Exchange, or NASDAQ.
FIRST AMERICAN INVESTMENT FUNDS, INC.
680 East Swedesford Road
Wayne, Pennsylvania 19087
INVESTMENT ADVISER
FIRST BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
CUSTODIAN
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
DISTRIBUTOR
SEI FINANCIAL SERVICES COMPANY
680 East Swedesford Road
Wayne, Pennsylvania 19087
ADMINISTRATOR
SEI FINANCIAL MANAGEMENT
CORPORATION
680 East Swedesford Road
Wayne, Pennsylvania 19087
TRANSFER AGENT
DST SYSTEMS, INC.
210 West 10th Street
Kansas City, Missouri 64105
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
COUNSEL
DORSEY & WHITNEY P.L.L.P.
220 South Sixth Street
Minneapolis, Minnesota 55402
FAIF-1003 (1/96)R
FIRST AMERICAN INVESTMENT FUNDS, INC.
EQUITY FUNDS
INSTITUTIONAL CLASS
STOCK FUND REGIONAL EQUITY FUND
EQUITY INDEX FUND SPECIAL EQUITY FUND
BALANCED FUND TECHNOLOGY FUND
ASSET ALLOCATION FUND HEALTH SCIENCES FUND
EQUITY INCOME FUND REAL ESTATE SECURITIES FUND
DIVERSIFIED GROWTH FUND INTERNATIONAL FUND
EMERGING GROWTH FUND
PROSPECTUS
JANUARY 31, 1996
As Supplemented June 3, 1996
[LOGO]
FIRST AMERICAN FUNDS
The power of disciplined investing
TABLE OF CONTENTS
PAGE
SUMMARY 4
FEES AND EXPENSES 8
Class C Share Fees and Expenses 8
Information Concerning Fees and
Expenses 10
FINANCIAL HIGHLIGHTS 12
THE FUNDS 16
INVESTMENT OBJECTIVES AND POLICIES 16
Stock Fund 17
Equity Index Fund 18
Balanced Fund 19
Asset Allocation Fund 21
Equity Income Fund 22
Diversified Growth Fund 23
Emerging Growth Fund 24
Regional Equity Fund 25
Special Equity Fund 26
Technology Fund 27
Health Sciences Fund 28
Real Estate Securities Fund 29
International Fund 31
Risks to Consider 32
MANAGEMENT 33
Investment Adviser 33
Sub-Adviser to International Fund 34
Portfolio Managers 35
Custodian 38
Administrator 38
Transfer Agent 39
DISTRIBUTOR 39
PURCHASES AND REDEMPTIONS OF SHARES 39
Share Purchases and Redemptions 39
What Shares Cost 40
Exchanging Securities for Fund Shares 41
Certificates and Confirmations 41
Dividends and Distributions 41
Exchange Privilege 42
FEDERAL INCOME TAXES 43
FUND SHARES 44
CALCULATION OF PERFORMANCE DATA 44
SPECIAL INVESTMENT METHODS 45
Cash Items 45
Repurchase Agreements 46
When-Issued and Delayed-Delivery
Transactions 46
Lending of Portfolio Securities 46
Options Transactions 47
Futures and Options on Futures 48
Fixed Income Securities 49
Foreign Securities 50
Foreign Currency Transactions 51
Mortgage-Backed Securities 52
Asset-Backed Securities 53
Bank Instruments 53
Portfolio Transactions 54
Portfolio Turnover 54
Investment Restrictions 54
FIRST AMERICAN INVESTMENT FUNDS, INC.
680 East Swedesford Road, Wayne, Pennsylvania 19087
INSTITUTIONAL CLASS PROSPECTUS
The shares described in this Prospectus represent interests in First American
Investment Funds, Inc., which consists of mutual funds with several different
investment portfolios and objectives. This Prospectus relates to the Class C
Shares of the following funds (the "Funds"):
* STOCK FUND * REGIONAL EQUITY FUND
* EQUITY INDEX FUND * SPECIAL EQUITY FUND
* BALANCED FUND * TECHNOLOGY FUND
* ASSET ALLOCATION FUND * HEALTH SCIENCES FUND
* EQUITY INCOME FUND * REAL ESTATE SECURITIES FUND
* DIVERSIFIED GROWTH FUND * INTERNATIONAL FUND
* EMERGING GROWTH FUND
Class C Shares of the Funds are offered through banks and certain other
institutions for the investment of their own funds and funds for which they act
in a fiduciary, agency or custodial capacity.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING FIRST BANK NATIONAL ASSOCIATION AND ANY OF ITS
AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUNDS
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, DUE TO
FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.
A Statement of Additional Information dated January 31, 1996 for the Funds has
been filed with the Securities and Exchange Commission and is incorporated in
its entirety by reference in this Prospectus. To obtain copies of the Statement
of Additional Information at no charge, or to obtain other information or make
inquiries about the Funds, call (800) 637-2548 or write SEI Financial Services
Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is January 31, 1996, as supplemented June 3, 1996.
SUMMARY
First American Investment Funds, Inc. ("FAIF") is an open-end investment company
which offers shares in several different mutual funds. This Prospectus provides
information with respect to the Class C Shares of the following funds (the
"Funds"):
STOCK FUND has a primary objective of capital appreciation and a secondary
objective to provide current income. Under normal market conditions, the Fund
invests at least 80% of its total assets in equity securities diversified among
a broad range of industries and among companies that have a market
capitalization of at least $500 million. In selecting equity securities, the
Fund's adviser employs a value-based selection discipline.
EQUITY INDEX FUND has an objective of providing investment results that
correspond to the performance of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500"). The Fund invests substantially in common stocks included
in the S&P 500. The Fund's adviser believes that its objective can best be
achieved by investing in the common stocks of approximately 250 to 500 of the
issues included in the S&P 500.
BALANCED FUND has an objective of maximizing total return (capital appreciation
plus income). The Fund seeks to achieve its objective by investing in a balanced
portfolio of equity securities and fixed income securities. Over the long term,
it is anticipated that the Fund's asset mix will average approximately 60%
equity securities and 40% fixed income securities, with the asset mix normally
ranging between 40% and 75% equity securities, between 25% and 60% fixed income
securities, and between 0% and 25% money market instruments.
ASSET ALLOCATION FUND has an objective of maximizing total return over the long
term by allocating its assets principally among common stocks, bonds, and
short-term instruments. There are no limitations on the proportions in which the
Fund's adviser may allocate the Fund's investments among these three classes of
assets, and the Fund may at times be fully invested in a single asset class if
the adviser believes that it offers the most favorable total return outlook.
EQUITY INCOME FUND has an objective of long-term growth of capital and income.
Under normal market conditions, the Fund invests at least 80% of its total
assets in equity securities of issuers believed by the Fund's adviser to be
characterized by sound management, the ability to finance expected growth and
the ability to pay above average dividends.
DIVERSIFIED GROWTH FUND has a primary objective of long-term growth of capital
and a secondary objective to provide current income. Under normal market
conditions, the Fund invests at least 80% of its total assets in equity
securities of a diverse group of companies that will provide representation
across all economic sectors included in the S&P 500. The adviser may overweight
the Fund's portfolio holdings in sectors that it believes provide above average
total return potential.
EMERGING GROWTH FUND has an objective of growth of capital. Under normal market
conditions, the Fund invests at least 65% of its total assets in equity
securities of small-sized companies that exhibit, in the adviser's opinion,
outstanding potential for superior growth. Companies that participate in sectors
that are identified by the adviser as having long-term growth potential
generally are expected to make up a substantial portion of the Fund's holdings.
REGIONAL EQUITY FUND has an objective of capital appreciation. The Fund seeks to
achieve its objective by investing, in normal market conditions, at least 65% of
its total assets in equity securities of small-sized companies headquartered in
Minnesota, North and South Dakota, Montana, Wisconsin, Michigan, Iowa, Nebraska,
Colorado and Illinois. The Fund invests in the securities of rapidly growing
companies within this size category and geographic area.
SPECIAL EQUITY FUND has an objective of capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its total assets in equity
securities. The Fund's policy is to invest in equity securities which the Fund's
adviser believes offer the potential for greater than average capital
appreciation. The adviser believes that this policy can best be achieved by
investing in the equity securities of companies where fundamental changes are
occurring, are likely to occur, or have occurred and where, in the opinion of
the adviser, the changes have not been adequately reflected in the price of the
securities.
TECHNOLOGY FUND has an objective of long-term growth of capital. Under normal
market conditions, the Fund invests at least 80% of its total assets in equity
securities of companies which the Fund's adviser believes have, or will develop,
products, processes or services that will provide or will benefit significantly
from technological advances and improvements.
HEALTH SCIENCES FUND has an objective of long-term growth of capital. Under
normal market conditions, the Fund invests at least 80% of its total assets
in equity securities of companies which the Fund's adviser considers to be
principally engaged in the development, production or distribution of products
or services connected with health care or medicine.
REAL ESTATE SECURITIES FUND has an objective of providing above average current
income and long-term capital appreciation by investing primarily in equity
securities of real estate companies. Under normal market conditions, the Fund
invests at least 65% of its total assets in income producing equity securities
of publicly traded companies principally engaged in the real estate industry. A
majority of the Fund's total assets will be invested in securities of real
estate investment trusts ("REITs"), with an expected emphasis on equity REITs.
INTERNATIONAL FUND has an objective of long-term growth of capital. Under normal
market conditions, the Fund invests at least 65% of its total assets in an
internationally diversified portfolio of equity securities which trade in
markets other than the United States. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However, the
Fund also may invest in emerging markets where smaller capitalization companies
are the norm.
INVESTMENT ADVISER AND SUB-ADVISER First Bank National Association (the
"Adviser") serves as investment adviser to each of the Funds. Marvin & Palmer
Associates, Inc. (the "Sub-Adviser") serves as sub-adviser to International
Fund. See "Management."
DISTRIBUTOR; ADMINISTRATOR SEI Financial Services Company (the
"Distributor") serves as the distributor of the Funds' shares. SEI Financial
Management Corporation (the "Administrator") serves as the administrator of
the Funds. See "Management" and "Distributor."
ELIGIBLE INVESTORS; OFFERING PRICES Class C Shares are offered through banks and
certain other institutions for the investment of their own funds and funds for
which they act in a fiduciary, agency or custodial capacity. Class C Shares are
sold at net asset value without any front-end or deferred sales charges. See
"Purchases and Redemptions of Shares."
EXCHANGES Class C Shares of any Fund may be exchanged for Class C Shares of
other FAIF funds at the shares' respective net asset values with no
additional charge. See "Purchases and Redemptions of Shares -- Exchange
Privilege."
REDEMPTIONS Shares of each Fund may be redeemed at any time at their net
asset value next determined after receipt of a redemption request by the
Funds' transfer agent, with no additional charge. See "Purchases and
Redemptions of Shares."
RISKS TO CONSIDER Each of the Funds is subject to the risk of generally adverse
equity markets. Investors also should recognize that market prices of equity
securities generally, and of particular companies' equity securities, frequently
are subject to greater volatility than prices of fixed income securities.
Because each of the Funds other than Equity Index Fund is actively managed to a
greater or lesser degree, their performance will reflect in part the ability of
the Adviser or Sub-Adviser to select securities which are suited to achieving
their investment objectives. Due to their active management, these Funds could
underperform other mutual funds with similar investment objectives or the market
generally.
In addition, (i) certain of the Funds are subject to risks associated with
investing in smaller-capitalization companies; (ii) Regional Equity Fund is
subject to risks associated with concentrating its investments in a single
geographic region; (iii) Technology Fund, Health Sciences Fund and Real Estate
Securities Fund are subject to risks associated with concentrating their
investments in a single or related economic sectors; (iv) Real Estate Securities
Fund is subject to risks associated with direct investments in REITs; (v)
International Fund is subject to risks associated with investing in foreign
securities and to currency risk; (vi) Equity Income Fund may invest a portion of
its assets in less than investment grade convertible debt obligations; (vii)
certain Funds other than International Fund may invest specified portions of
their assets in securities of foreign issuers which are listed on a United
States stock exchange or represented by American Depository Receipts or, in the
case of Balanced Fund, are debt obligations of foreign issuers denominated in
United States dollars; and (viii) certain Funds may invest (but not for
speculative purposes) in stock index futures contracts, options on stock
indices, options on stock index futures, index participation contracts based on
the S&P 500, and/or exchange traded put and call options on interest rate
futures contracts and on interest rate indices. See "Investment Objectives and
Policies" and "Special Investment Methods."
SHAREHOLDER INQUIRIES Any questions or communications regarding the Funds or a
shareholder account should be directed to the Distributor by calling (800)
637-2548, or to the financial institution which holds shares on an investor's
behalf.
FEES AND EXPENSES INSTITUTIONAL CLASSES
CLASS C SHARE FEES AND EXPENSES
<TABLE>
<CAPTION>
EQUITY ASSET
STOCK INDEX BALANCED ALLOCATION
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases None None None None
Maximum sales load imposed on
reinvested dividends None None None None
Deferred sales load None None None None
Redemption fees None None None None
Exchange fees None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment advisory fees
(after voluntary fee waivers and
reimbursements)(1) 0.57% 0.12% 0.57% 0.49%
Rule 12b-1 fees None None None None
Other expenses (after voluntary fee
waivers)(1) 0.23% 0.23% 0.23% 0.31%
Total fund operating expenses
(after voluntary fee waivers
and reimbursements)(1) 0.80% 0.35% 0.80% 0.80%
EXAMPLE(2)
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return, and (ii) redemption at the end of each time period:
1 year $ 8 $ 4 $ 8 $ 8
3 years $ 26 $ 11 $ 26 $ 26
5 years $ 44 $ 20 $ 44 $ 44
10 years $ 99 $ 44 $ 99 $ 99
</TABLE>
(table continued)
<TABLE>
<CAPTION>
EQUITY SPECIAL HEALTH
INCOME DIVERSIFIED EMERGING REGIONAL EQUITY TECHNOLOGY SCIENCES REAL ESTATE INTERNATIONAL
FUND GROWTH FUND GROWTH FUND EQUITY FUND FUND FUND FUND SECURITIES FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
0.40% 0.50% 0.40% 0.66% 0.65% 0.30% 0.23% 0.00% 1.19%
None None None None None None None None None
0.35% 0.30% 0.50% 0.24% 0.25% 0.60% 0.67% 0.80% 0.56%
0.75% 0.80% 0.90% 0.90% 0.90% 0.90% 0.90% 0.80% 1.75%
$ 8 $ 8 $ 9 $ 9 $ 9 $ 9 $ 9 $ 8 $ 18
$ 24 $ 26 $ 29 $ 29 $ 29 $ 29 $ 29 $ 26 $ 55
$ 42 $ 44 $ 50 $ 50 $ 50 $ 50 $ 44 $ 95
$ 93 $ 99 $ 111 $ 111 $ 111 $ 111 $ 99 $ 206
</TABLE>
(1) The Adviser and the Administrator intend to waive a portion of their
fees and/or reimburse expenses on a voluntary basis, and the amounts
shown reflect these waivers and reimbursements as of the date of this
Prospectus. Each of these persons intends to maintain such waivers and
reimbursements in effect for the current fiscal year but reserves the
right to discontinue such waivers and reimbursements at any time in its
sole discretion. Absent any fee waivers, investment advisory fees as an
annualized percentage of average daily net assets would be 0.70% for
each Fund except International Fund, as to which they would be 1.25%;
and total fund operating expenses calculated on such basis would be
0.94% for Stock Fund, 0.95% for Equity Index Fund, 0.94% for Balanced
Fund, 1.01% for Asset Allocation Fund, 1.06% for Equity Income Fund,
1.01% for Diversified Growth Fund, 1.19% for Emerging Growth Fund,
0.95% for Regional Equity Fund, 0.95% for Special Equity Fund, 1.30%
for Technology Fund, 1.37% for Health Sciences Fund, 2.34% for Real
Estate Securities Fund, and 1.81% for International Fund. Other
expenses includes an administration fee and, in the case of Health
Sciences Fund, is based on estimated amounts for the current fiscal
year.
(2) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1, 3, 5 and 10-year periods would be as follows:
Stock Fund, $10, $30, $52 and $115; Equity Index Fund, $10, $30, $53
and $117; Balanced Fund, $10, $30, $52 and $115; Asset Allocation Fund,
$10, $32, $56 and $124; Equity Income Fund, $11, $34, $58 and $129;
Diversified Growth Fund, $10, $32, $56 and $124; Emerging Growth Fund,
$12, $36, $65 and $144; Regional Equity Fund, $10, $30, $53 and $117;
Special Equity Fund, $10, $30, $53 and $117; Technology Fund, $13, $41,
$71 and $157; Health Sciences Fund, $14, $43, $75 and $165; Real Estate
Securities Fund, $24, $73, $125 and $268; and International Fund, $18,
$57, $98 and $213.
INFORMATION CONCERNING FEES AND EXPENSES
The purpose of the preceding tables is to assist the investor in understanding
the various costs and expenses that an investor in a Fund may bear directly or
indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The information set forth in the foregoing tables and
examples relates only to the Class C Shares of the Funds. The Funds also offer
Class A and Class B Shares which are subject to the same expenses and, in
addition, to a front-end or contingent deferred sales load and certain
distribution expenses.
The examples in the above tables are based on projected annual Fund operating
expenses after voluntary fee waivers and expense reimbursements by the Adviser
and the Administrator. Although these persons intend to maintain such waivers in
effect for the current fiscal year, any such waivers are voluntary and may be
discontinued at any time. Prior to fee waivers, investment advisory fees accrue
at the annual rate as a percentage of average daily net assets of 0.70% for each
of the Funds except International Fund, as to which they are 1.25%.
Other expenses include fees paid by each Fund to the Administrator for providing
various services necessary to operate the Funds. These include shareholder
servicing and certain accounting and other services. The Administrator provides
these services for a fee calculated at an annual rate of 0.12% of average daily
net assets of each Fund subject to a minimum of $50,000 per Fund per fiscal
year; provided, that to the extent that the aggregate net assets of all First
American funds exceed $8 billion, the percentage stated above is reduced to
0.105%. Other expenses of the Funds also includes the cost of maintaining
shareholder records, furnishing shareholder statements and reports, and other
services. Investment advisory fees, administrative fees and other expenses are
reflected in the Funds' daily dividends and are not charged to individual
shareholder accounts.
FINANCIAL HIGHLIGHTS
The following audited financial highlights should be read in conjunction with
the Funds' financial statements, the related notes thereto and the independent
auditors' report of KPMG Peat Marwick LLP appearing in the Statement of
Additional Information. Further information about the Funds' performance is
contained in FAIF's annual report to shareholders, which may be obtained without
charge by calling (800) 637-2548 or by writing SEI Financial Services Company,
680 East Swedesford Road, Wayne, Pennsylvania 19087. The Financial Highlights
for the Class A shares of the Funds have been provided below along with the
Financial Highlights for Class C shares. Class A shares are subject to sales
charges and fees that may differ from those applicable to Class C shares.
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET VALUE NET GAINS OR FROM NET
BEGINNING OF INVESTMENT (LOSSES) ON INVESTMENT
PERIOD INCOME INVESTMENTS INCOME
<S> <C> <C> <C> <C>
STOCK FUND
Class C
1995 $16.50 $0.36 $ 3.64 $(0.35)
1994(1) 16.47 0.25 0.03 (0.25)
Class A
1995 $16.51 $0.33 $ 3.64 $(0.32)
1994 16.00 0.31 1.00 (0.30)
1993 14.04 0.22 1.99 (0.23)
1992 13.62 0.24 0.81 (0.29)
1991(7) 10.64 0.28 2.95 (0.22)
1990(8) 12.09 0.25 (1.17) (0.25)
1989(8) 10.35 0.25 1.70 (0.20)
1988(8)(9) 10.03 0.27 0.35 (0.30)
EQUITY INDEX FUND
Class C
1995 $10.67 $0.28 $ 2.75 $(0.27)
1994(1) 10.85 0.20 (0.18) (0.20)
Class A
1995 $10.68 $0.25 $ 2.76 $(0.25)
1994 10.60 0.25 0.09 (0.25)
1993(2) 10.00 0.20 0.60 (0.20)
BALANCED FUND
Class C
1995 $10.54 $0.40 $ 1.73 $(0.39)
1994(1) 10.86 0.25 (0.32) (0.25)
Class A
1995 $10.54 $0.38 $ 1.72 $(0.37)
1994 10.73 0.34 (0.02) (0.34)
1993(2) 10.00 0.28 0.75 (0.28)
ASSET ALLOCATION FUND
Class C
1995 $10.38 $0.38 $ 1.58 $(0.37)
1994(1) 10.68 0.20 (0.30) (0.20)
Class A
1995 $10.39 $0.36 $ 1.58 $(0.35)
1994 10.60 0.27 (0.08) (0.26)
1993(2) 10.00 0.19 0.60 (0.19)
</TABLE>
(table continued)
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
RATIO OF INVESTMENT AVERAGE NET
DISTRIBUTIONS NET ASSET NET ASSETS END EXPENSES TO INCOME TO ASSETS
FROM CAPITAL VALUE END OF PERIOD AVERAGE NET AVERAGE NET (EXCLUDING PORTFOLIO
GAINS OF PERIOD TOTAL RETURN (000) ASSETS ASSETS WAIVERS) TURNOVER RATE
<S> <C> <C> <C> <C> <C> <C> <C>
$(0.59) $19.56 25.50% $312,559 0.79% 2.10% 0.94% 52%
-- 16.50 1.70%+ 154,949 0.75 2.28 1.01 65
$(0.59) $19.57 25.26% $ 13,076 1.00% 1.89% 1.19% 52%
(0.50) 16.51 8.35% 8,421 0.76 1.51 1.20 65
(0.02) 16.00 15.82% 134,186 0.75 1.94 1.28 48
(0.34) 14.04 7.88% 3,644 1.45 1.75 4.46 39
(0.03) 13.62 30.49%+ 2,386 1.45 2.47 7.42 76
(0.28) 10.64 (8.22%) 1,161 1.45 2.24 9.47 41
(0.01) 12.09 20.33% 323 1.24 2.26 36.39 74
-- 10.35 6.40%+ 206 1.02 2.67 28.60 80
$(0.09) $13.34 29.17% $218,932 0.35% 2.41% 0.95% 9%
-- 10.67 0.18%+ 163,688 0.35 2.59 1.03 11
$(0.09) $13.35 28.90% $ 2,140 0.57% 2.16% 1.20% 9%
(0.01) 10.68 3.25% 758 0.35 2.23 1.23 11
-- 10.60 8.02%+ 139,957 0.35 2.52 1.30 1
$(0.15) $12.13 20.89% $192,145 0.79% 3.61% 0.94% 77%
-- 10.54 (0.64%)+ 125,285 0.75 3.51 1.05 98
$(0.15) $12.12 20.57% $ 15,288 0.99% 3.41% 1.19% 77%
(0.17) 10.54 3.02% 13,734 0.77 2.63 1.24 98
(0.02) 10.73 10.39%+ 111,225 0.75 3.31 1.29 77
$(0.25) $11.72 19.75% $ 43,210 0.79% 3.53% 1.01% 87%
-- 10.38 (0.90%)+ 47,227 0.75 2.91 1.12 32
$(0.25) $11.73 19.51% $ 993 0.99% 3.29% 1.26% 87%
(0.14) 10.39 1.81% 707 0.75 2.01 1.29 32
-- 10.60 8.01%+ 56,393 0.75 2.40 1.34 31
</TABLE>
+ Returns, excluding sales charges, are for the period indicated and have
not been annualized.
(1) Class C shares have been offered since February 4, 1994. All ratios for
the period have been annualized.
(2) Commenced operations on December 14, 1992. All ratios for the period
have been annualized.
(3) Class C shares have been offered since August 2, 1994. All ratios for
the period have been annualized.
(4) On April 28, 1994 the Board of Directors approved a change in this
Fund's fiscal year end from November 30 to September 30, effective
September 30, 1994. All ratios for the period have been annualized.
(5) For the period ended November 30.
(6) Commenced operations on December 18, 1992. All ratios for the period
have been annualized.
(7) On September 3, 1991, the Board of Directors of FAIF approved a change
in FAIF's fiscal year end from October 31 to September 30, effective
September 30, 1991. All ratios for the period have been annualized.
(8) For the period ended October 31.
(9) Commenced operations on December 22, 1987. All ratios for the period
have been annualized.
(10) Commenced operations on April 4, 1994. All ratios for the period have
been annualized.
(11) Commenced operations on June 30, 1995. All ratios for the period have
been annualized.
FINANCIAL HIGHLIGHTS (CONTINUED)
For the periods ended September 30,
For a share outstanding throughout the period
<TABLE>
<CAPTION>
REALIZED AND
UNREALIZED DIVIDENDS
NET ASSET VALUE NET GAINS OR FROM NET DISTRIBUTIONS
BEGINNING OF INVESTMENT (LOSSES) ON INVESTMENT FROM CAPITAL
PERIOD INCOME INVESTMENTS INCOME GAINS
<S> <C> <C> <C> <C> <C>
EQUITY INCOME FUND
Class C
1995 $ 9.89 $ 0.41 $ 1.35 $(0.41) $ --
1994(3) 9.90 0.07 (0.03) (0.05) --
Class A
1995 $ 9.89 $ 0.41 $ 1.33 $(0.39) $ --
1994(4) 9.87 0.41 -- (0.39) --
1993(5)(6) 10.00 0.57 (0.14) (0.56) --
DIVERSIFIED GROWTH FUND
Class C
1995 $ 9.10 $ 0.17 $ 2.67 $(0.16) $ --
1994(3) 8.92 0.03 0.18 (0.03) --
Class A
1995 $ 9.09 $ 0.15 $ 2.66 $(0.15) $ --
1994(4) 9.39 0.10 (0.29) (0.11) --
1993(5)(6) 10.00 0.11 (0.63) (0.09) --
EMERGING GROWTH FUND
Class C
1995 $10.56 $ 0.03 $ 2.99 $(0.02) $(0.15)
1994(10) 10.00 0.01 0.56 (0.01) --
REGIONAL EQUITY FUND
Class C
1995 $12.52 $ 0.11 $ 4.90 $(0.08) $(0.32)
1994(1) 12.41 0.07 0.11 (0.07) --
Class A
1995 $12.52 $ 0.08 $ 4.90 $(0.06) $(0.32)
1994 11.96 0.08 0.71 (0.07) (0.16)
1993(2) 10.00 0.05 1.96 (0.05) --
SPECIAL EQUITY FUND
Class C
1995 $17.30 $ 0.38 $ 1.61 $(0.38) $(1.02)
1994(1) 16.34 0.22 0.96 (0.22) --
Class A
1995 $17.30 $ 0.35 $ 1.60 $(0.34) $(1.02)
1994 15.81 0.28 2.52 (0.28) (1.03)
1993 13.61 0.23 2.32 (0.25) (0.10)
1992 12.98 0.21 1.61 (0.27) (0.92)
1991(7) 10.33 0.30 2.61 (0.26) --
1990(8) 12.96 0.47 (2.03) (0.46) (0.61)
1989(8) 11.55 0.47 1.39 (0.41) (0.04)
1988(8)(9) 10.03 0.34 1.57 (0.39) --
TECHNOLOGY FUND
Class C
1995 $11.19 $(0.03) $ 7.31 $ -- $(0.23)
1994(10) 10.00 (0.01) 1.20 -- --
REAL ESTATE SECURITIES FUND
Class C
1995(11) $10.00 $ 0.13 $ 0.39 $(0.11) $ --
INTERNATIONAL FUND
Class C
1995 $10.22 $ 0.01 $ 0.07 $ -- $ --
1994(10) 10.00 (0.01) 0.23 -- --
</TABLE>
(table continued)
<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
RATIO OF INVESTMENT AVERAGE NET
DISTRIBUTIONS NET ASSET NET ASSETS END EXPENSES TO INCOME (LOSS) ASSETS
FROM RETURN OF VALUE END OF PERIOD AVERAGE NET TO AVERAGE NET (EXCLUDING PORTFOLIO
CAPITAL OF PERIOD TOTAL RETURN (000) ASSETS ASSETS WAIVERS) TURNOVER RATE
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $11.24 18.24% $ 52,126 0.75% 4.11% 1.06% 23%
-- 9.89 0.45%+ 17,489 0.75 5.61 1.14 108
$ -- $11.24 18.06% $ 1,995 0.92% 3.91% 1.31% 23%
-- 9.89 4.22%+ 1,852 0.88 4.88 1.39 108
-- 9.87 4.44%+ 28,786 0.75 6.09 1.36 68
$ -- $11.78 31.57% $132,854 0.75% 1.69% 1.01% 28%
-- 9.10 2.36%+ 31,875 0.75 2.37 1.08 101
$ -- $11.75 31.21% $ 2,710 0.92% 1.52% 1.26% 28%
-- 9.09 (2.07%)+ 1,900 0.90 1.15 1.33 101
-- 9.39 (5.18%)+ 31,084 0.78 1.26 1.25 5
$ -- $13.41 29.16% $ 41,716 0.84% 0.20% 1.19% 51%
-- 10.56 5.68%+ 6,849 0.80 0.23 2.59 19
$ -- $17.13 41.40% $188,583 0.84% 0.78% 0.95% 42%
-- 12.52 1.46%+ 96,045 0.80 0.82 1.05 41
$ -- $17.12 41.17% $ 14,917 1.05% 0.58% 1.20% 42%
-- 12.52 6.76% 8,345 0.82 0.59 1.25 41
-- 11.96 20.17%+ 58,427 0.80 0.59 1.30 28
$ -- $17.89 12.84% $201,786 0.88% 2.30% 0.95% 72%
-- 17.30 7.31%+ 128,806 0.79 1.93 1.03 116
$ -- $17.89 12.63% $ 11,609 1.09% 2.08% 1.20% 72%
-- 17.30 18.70% 7,333 0.81 1.88 1.23 116
-- 15.81 18.91% 81,899 0.81 2.07 1.31 104
-- 13.61 15.17% 3,586 1.50 1.61 4.18 146
-- 12.98 28.38%+ 3,423 1.50 2.60 5.13 116
-- 10.33 (13.24%) 2,761 1.50 4.09 4.21 113
-- 12.96 17.41% 2,000 1.38 4.07 8.68 102
-- 11.55 19.56%+ 578 1.20 4.02 15.60 51
$ -- $18.24 66.22% $ 29,272 0.88% (0.35)% 1.30% 74%
-- 11.19 11.90%+ 6,491 0.80 (0.21) 3.12 43
$(0.04) $10.37 5.19%+ $ 5,756 0.80% 6.01% 2.34% 0%
$ -- $10.30 0.78% $ 94,400 1.74% 0.12% 1.81% 57%
-- 10.22 2.20%+ 47,963 1.75 (0.19) 2.05 16
</TABLE>
THE FUNDS
FAIF is an open-end management investment company which offers shares in several
different mutual funds (collectively, the "FAIF Funds"), each of which evidences
an interest in a separate and distinct investment portfolio. Shareholders may
purchase shares in each FAIF Fund through three separate classes (Class A, Class
B and Class C) which provide for variations in distribution costs, voting rights
and dividends. Except for these differences among classes, each share of each
FAIF Fund represents an undivided proportionate interest in that fund. FAIF is
incorporated under the laws of the State of Maryland, and its principal offices
are located at 680 East Swedesford Road, Wayne, Pennsylvania 19087.
This Prospectus relates only to the Class C Shares of the Funds named on the
cover hereof. Information regarding the Class A and Class B Shares of these
Funds and regarding the Class A, Class B and Class C Shares of the other FAIF
Funds is contained in separate prospectuses that may be obtained from FAIF's
Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne,
Pennsylvania 19087, or by calling (800) 637-2548. The Board of Directors of FAIF
may authorize additional series or classes of common stock in the future.
INVESTMENT OBJECTIVES AND POLICIES
This section describes the investment objectives and policies of the Funds.
There is no assurance that any of these objectives will be achieved. The Funds'
investment objectives are not fundamental and therefore may be changed without a
vote of shareholders. Such changes could result in a Fund having investment
objectives different from those which shareholders considered appropriate at the
time of their investment in a Fund. Shareholders will receive written
notification at least 30 days prior to any change in a Fund's investment
objectives. Each of the Funds except Technology Fund, Health Sciences Fund, and
Real Estate Securities Fund is a diversified investment company, as defined in
the Investment Company Act of 1940 (the "1940 Act"). Technology Fund, Health
Sciences Fund, and Real Estate Securities Fund are non-diversified companies
under the 1940 Act.
If a percentage limitation on investments by a Fund stated below or in the
Statement of Additional Information is adhered to at the time of an investment,
a later increase or decrease in percentage resulting from changes in asset
values will not be deemed to violate the limitation except in the case of the
limitation on illiquid investments. Similarly, if the Fund is required or
permitted to invest a stated percentage of its assets in companies with no more
or no less than a stated market capitalization, deviations from the stated
percentages which result from changes in companies' market capitalizations after
the Fund purchases their shares will not be deemed to violate the limitation. A
Fund which is limited to investing in securities with specified ratings is not
required to sell a security if its rating is reduced or discontinued after
purchase, but the Fund may consider doing so. However, except in the case of
Equity Income Fund, in no event will more than 5% of any Fund's net assets be
invested in non-investment grade securities. Descriptions of the rating
categories of Standard & Poor's Corporation ("Standard & Poor's") and Moody's
Investors Service, Inc. ("Moody's") are contained in the Statement of Additional
Information.
When the term "equity securities" is used in this Prospectus, it refers to
common stock and securities which are convertible into or exchangeable for, or
which carry warrants or other rights to acquire, common stock.
This section also contains information concerning certain investment risks borne
by Fund shareholders under the heading "-- Risks to Consider." Further
information concerning the securities in which the Funds may invest and related
matters is set forth under "Special Investment Methods."
STOCK FUND
OBJECTIVES. Stock Fund has a primary objective of capital appreciation. A
secondary objective of the Fund is to provide current income.
INVESTMENT POLICIES. Under normal market conditions, Stock Fund invests at least
80% of its total assets in equity securities (and at least 65% in common stocks)
diversified among a broad range of industries and among companies that have a
market capitalization of at least $500 million. In selecting equity securities,
the Adviser employs a value-based selection discipline. The Adviser anticipates
investing in equity securities of companies it believes are selling at less than
fair value and offer the potential for appreciation as a result of improved
profitability reflecting corporate restructuring or elimination of unprofitable
operations, change in management or management goals, or improving demand for
the companies' goods or services.
The Fund also may invest up to 20% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of less than $500
million and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
EQUITY INDEX FUND
OBJECTIVE. Equity Index Fund has an objective of providing investment results
that correspond to the performance of the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500").
INVESTMENT POLICIES. Equity Index Fund invests substantially (at least 65% of
total assets) in common stocks included in the S&P 500. The Adviser believes
that the Fund's objective can best be achieved by investing in the common stocks
of approximately 250 to 500 of the issues included in the S&P 500, depending on
the size of the Fund.
Standard & Poor's designates the stocks included in the S&P 500 on a statistical
basis. A particular stock's weighting in the S&P 500 is based on its total
market value (that is, its market price per share times the number of shares
outstanding) relative to that of all stocks included in the S&P 500. From time
to time, Standard & Poor's may add or delete stocks to or from the S&P 500.
Inclusion of a particular stock in the S&P 500 does not imply any opinion by
Standard & Poor's as to its merits as an investment, nor is Standard & Poor's a
sponsor of or in any way affiliated with the Fund.
The Fund is managed by utilizing a computer program that identifies which stocks
should be purchased or sold in order to replicate, as closely as possible, the
composition of the S&P 500. The Fund includes a stock in its investment
portfolio in the order of the stock's weighting in the S&P 500, starting with
the most heavily weighted stock. Thus, the proportion of Fund assets invested in
a stock or industry closely approximates the percentage of the S&P 500
represented by that stock or industry. Portfolio turnover is expected to be well
below that of actively managed mutual funds. Inasmuch as the common stock of the
Adviser's parent company First Bank System, Inc. is included in the S&P 500,
such stock may be purchased by the Fund consistent with its indexing-based
policies.
Although the Fund will not duplicate the S&P 500's performance precisely, it is
anticipated that there will be a close correlation between the Fund's
performance and that of the S&P 500 in both rising and falling markets. The Fund
will attempt to achieve a correlation between the performance of its portfolio
and that of the S&P 500 of at least 95%, without taking into account expenses of
the Fund. A perfect correlation would be indicated by a figure of 100%, which
would be achieved if the Fund's net asset value, including the value of its
dividends and capital gains distributions, increased or decreased in exact
proportion to changes in the S&P 500. The Fund's ability to replicate the
performance of the S&P 500 may be affected by, among other things, changes in
securities markets, the manner in which Standard & Poor's calculates the S&P
500, and the amount and timing of cash flows into and out of the Fund. Although
cash flows into and out of the Fund will affect the Fund's portfolio turnover
rate and its ability to replicate the S&P 500's performance, investment
adjustments will be made, as practicably as possible, to account for these
circumstances.
The Fund also may invest up to 20% of its total assets in the aggregate in stock
index futures contracts, options on stock indices, options on stock index
futures, and index participation contracts based on the S&P 500. The Fund will
not invest in these types of contracts and options for speculative purposes, but
rather to maintain sufficient liquidity to meet redemption requests; to increase
the level of Fund assets devoted to replicating the composition of the S&P 500;
and to reduce transaction costs. These types of contracts and options and
certain associated risks are described under "Special Investment Methods --
Options Transactions."
In order to maintain liquidity during times of unusual market conditions, the
Fund also may invest temporarily in cash and cash items of the kinds described
under "Special Investment Methods -- Cash Items."
BALANCED FUND
OBJECTIVE. Balanced Fund has an objective of maximizing total return (capital
appreciation plus income).
INVESTMENT POLICIES. Balanced Fund seeks to achieve its objective by investing
in a balanced portfolio of equity securities and fixed income securities. The
asset mix of the Fund normally will range between 40% and 75% equity securities,
between 25% and 60% fixed income securities (including only that portion of the
value of convertible securities attributable to their fixed income
characteristics), and between 0% and 25% money market instruments. Over the long
term, it is anticipated that the Fund's asset mix will average approximately 60%
equity securities and 40% fixed income securities. The Adviser may make moderate
shifts among asset classes in order to attempt to increase returns or reduce
risk.
With respect to the equity security portion of the Fund's portfolio, the Adviser
follows the same investment policies as are described above under "-Stock Fund
- -- Investment Policies."
The fixed income portion of the Fund's portfolio is invested in investment grade
debt securities, at least 65% of which are United States Government obligations
and corporate debt obligations and mortgage-related securities rated at least A
by Standard & Poor's or Moody's or which have been assigned an equivalent rating
by another nationally recognized statistical rating organization. Under normal
market conditions, the weighted average maturity of the fixed income securities
held by the Fund will not exceed 15 years.
The Fund's permitted fixed income investments include notes, bonds and discount
notes of United States Government agencies or instrumentalities; domestic issues
of corporate debt obligations having floating or fixed rates of interest and
rated at least BBB by Standard & Poor's or Baa by Moody's, or which have been
assigned an equivalent rating by another nationally recognized statistical
rating organization, or which are of comparable quality in the judgment of the
Adviser; other investments, including mortgage-backed securities, which are
rated in one of the four highest categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser; and commercial paper which is rated A-1 by Standard &
Poor's or P-1 by Moody's or which has been assigned an equivalent rating by
another nationally recognized statistical rating organization. Unrated
securities will not exceed 10% in the aggregate of the value of the total fixed
income securities held by the Fund.
Subject to the foregoing limitations, the fixed income securities in which the
Fund may invest include (i) mortgage-backed securities (provided that the Fund
will not invest more than 10% of its total fixed income assets in interest-only,
principal-only or inverse floating rate mortgage-backed securities); (ii)
asset-backed securities; and (iii) bank instruments. In addition, the Fund may
invest up to 15% of its total fixed income assets in foreign securities payable
in United States dollars. For information about these kinds of investments and
certain associated risks, see the related headings under "Special Investment
Methods," and for information concerning certain risks associated with investing
in fixed income securities generally, see "Special Investment Methods -- Fixed
Income Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; (v) engage in the lending of portfolio securities;
(vi) in order to attempt to reduce risk, invest in exchange traded put and call
options on interest rate futures contracts and on interest rate indices; and
(vii) in order attempt to to reduce risk, write covered call options on interest
rate indices. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
ASSET ALLOCATION FUND
OBJECTIVE. Asset Allocation Fund has an objective of maximizing total return
over the long term by allocating its assets principally among common stocks,
bonds, and short-term instruments.
INVESTMENT POLICIES. Asset Allocation Fund allocates its investments principally
among (i) common stocks included in the S&P 500, (ii) direct obligations of the
United States Treasury, and (iii) short-term instruments. There are no
limitations on the proportions in which the Adviser may allocate the Fund's
investments among these three classes of assets. The Fund thus is not a
"balanced" fund, in that it is not required to allocate its investments in
specific proportions or ranges among these asset classes.
The Adviser regularly reviews the Fund's investment allocation and varies the
allocation to emphasize the asset class or classes that, in the Adviser's
then-current judgment, provide the most favorable total return outlook. There is
no limitation on the amount that may be invested in any one asset class, and the
Fund may at times be fully invested in a single asset class if the Adviser
believes that it offers the most favorable total return outlook.
In making asset allocation decisions, the Adviser utilizes a proprietary
quantitative model which predicts future asset class returns based on historical
experience using probability theory. By investing in common stocks intended to
approximate the total return of the S&P 500, as described below, the Adviser
attempts to minimize the risk of individual equity security selection in the
common stock class. By limiting the bond class to direct obligations of the
United States Treasury, the Adviser attempts to eliminate credit risk from this
class.
Within the common stock asset class, the Adviser seeks to produce a total return
approximating that of the S&P 500. In order to achieve this result, the Adviser
follows the same indexing-based policies for this asset class as are described
above under "-- Equity Index Fund -- Investment Policies." Inasmuch as the
common stock of the Adviser's parent company First Bank System, Inc. is included
in the S&P 500, such stock may be purchased by the Fund consistent with its
indexing-based policies.
Within the bond asset class, the Fund may invest in any maturity of direct
obligations of the United States Treasury. The Adviser thus has discretion in
determining the weighted average maturity of the investments within this asset
class. For information concerning certain risks associated with investing in
fixed income securities generally, see "Special Investment Methods -- Fixed
Income Securities."
Within the short-term asset class, the Fund may hold cash or invest in cash
items of the kinds described under "Special Investment Methods -- Cash Items."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) purchase securities on a when-issued or delayed-delivery
basis; (iv) engage in the lending of portfolio securities; (v) in order to
attempt to reduce risk, invest in exchange traded put and call options on
interest rate futures contracts and on interest rate indices; and (vi) in order
to manage allocations among asset classes efficiently, invest in interest rate
and stock index futures. For information about these investment methods,
restrictions on their use, and certain associated risks, see the related
headings under "Special Investment Methods."
EQUITY INCOME FUND
OBJECTIVE. Equity Income Fund has an objective of long-term growth of capital
and income.
INVESTMENT POLICIES. Under normal market conditions, Equity Income Fund invests
at least 80% of its total assets in equity securities of issuers believed by the
Adviser to be characterized by sound management, the ability to finance expected
growth and the ability to pay above average dividends.
The Fund invests in equity securities that have relatively high dividend yields
and which, in the Adviser's opinion, will result in a relatively stable Fund
dividend with a growth rate sufficient to maintain the purchasing power of the
income stream. Although the Adviser anticipates that higher yielding equity
securities will generally represent the core holdings of the Fund, the Fund may
invest in lower yielding but higher growth equity securities to the extent that
the Adviser believes such investments are appropriate to achieve portfolio
balance. All securities held by the Fund will provide current income consistent
with the Fund's investment objective.
The "equity securities" in which the Fund may invest include corporate debt
obligations which are convertible into common stock. These convertible debt
obligations may include obligations rated at the time of purchase as low as CCC
by Standard & Poor's or Caa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the Adviser.
Debt obligations rated less than BBB by Standard & Poor's or Baa by Moody's are
considered to be less than "investment grade" and are sometimes referred to as
"junk bonds." Obligations rated CCC by Standard & Poor's or Caa by Moody's are
considered to be of poor standing and are predominantly speculative.
Descriptions of Standard & Poor's and Moody's rating categories are contained in
the Statement of Additional Information. If the rating of an obligation is
reduced below the categories set forth above after purchase or is discontinued,
the Fund is not required to sell the obligation but may consider doing so.
Purchases of less than investment grade convertible debt obligations are
intended to advance the Fund's objective of long-term growth of capital through
the "upside" potential of the obligations' conversion features and to advance
the Fund's objective of income through receipt of interest payable on the
obligations. The Fund will not invest more than 25% of its total assets in
convertible debt obligations which are rated less than investment grade or which
are of comparable quality in the judgment of the Adviser. For the year ended
September 30, 1995, the following weighted average percentages of the Fund's
total assets were invested in convertible and nonconvertible debt obligations
with the indicated Standard & Poor's ratings or their equivalents: AAA, 0%; AA,
0%; A, 0%; BBB, 4%; BB, 0%; B, 7%; and CCC, 0%.
Debt obligations which are rated less than investment grade generally are
subject to greater market fluctuations and greater risk of loss of income and
principal due to default by the issuer than are higher-rated obligations. The
value of these obligations tends to reflect short-term corporate, economic,
interest rate and market developments and investor perceptions of the issuer's
credit quality to a greater extent than investment grade obligations. In
addition, since the market for these obligations is relatively new and does not
have as many participants as the market for higher-rated obligations, it may be
more difficult to dispose of or to determine the value of these obligations. In
the case of a convertible debt obligation, these risks may be present in a
greater degree where the principal amount of the obligation is greater than the
current market value of the common stock into which it is convertible.
The Fund also may invest up to 20% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
DIVERSIFIED GROWTH FUND
OBJECTIVES. Diversified Growth Fund has a primary objective of long-term growth
of capital. A secondary objective of the Fund is to provide current income.
INVESTMENT POLICIES. Under normal market conditions, Diversified Growth Fund
invests at least 80% of its total assets in equity securities of a diverse group
of companies that will provide representation across all economic sectors
included in the S&P 500. The Adviser may overweight the Fund's portfolio
holdings in sectors that it believes provide above average total return
potential and may underweight the Fund's holdings in those sectors that it
believes have a lower total return potential. Within a given sector, the Fund's
assets are invested in securities of those companies that, in the Adviser's
judgment, exhibit a combination of above average growth in revenue and earnings,
strong management and sound and improving financial condition.
The Fund also may invest up to 20% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
EMERGING GROWTH FUND
OBJECTIVE. Emerging Growth Fund has an objective of growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Emerging Growth Fund
invests at least 65% of its total assets in equity securities of small-sized
companies that exhibit, in the Adviser's opinion, outstanding potential for
superior growth. For these purposes, small-sized companies are deemed those with
market capitalizations of less than $1 billion. Companies that participate in
sectors that are identified by the Adviser as having long-term growth potential
generally are expected to make up a substantial portion of the Fund's holdings.
These companies often have established a market niche or have developed unique
products or technologies that are expected by the Adviser to produce superior
growth in revenues and earnings.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $1 billion or more
and in fixed income securities of the kinds described under "Special Investment
Methods -- Fixed Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
REGIONAL EQUITY FUND
OBJECTIVE. Regional Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Regional Equity Fund seeks to achieve its objective by
investing, in normal market conditions, at least 65% of its total assets in
equity securities of small-sized companies headquartered in Minnesota, North and
South Dakota, Montana, Wisconsin, Michigan, Iowa, Nebraska, Colorado and
Illinois.
The Adviser anticipates investing primarily in the securities of rapidly growing
small-sized companies which generally will have the following characteristics,
in the Adviser's opinion: (i) company-specific fundamentals that grow
shareholder value, (ii) experienced, shareholder-oriented management, and (iii)
undervaluation by the market. For these purposes, small-sized companies are
deemed those with market capitalizations of less than $1 billion.
In addition to the risks associated with investing in smaller-capitalization
companies, see "-- Risk Factors -- Smaller-Capitalization Companies" below,
the Fund's policy of concentrating its equity investments in a geographic region
means that it will be subject to adverse economic, political or other
developments in that region. Although the region in which the Fund principally
invests has a diverse industrial base (including, but not limited to,
agriculture, mining, retail, transportation, utilities, heavy and light
manufacturing, financial services, insurance, computer technology and medical
technology), this industrial base is not as diverse as that of the country as a
whole. The Fund therefore may be less diversified by industry and company than
other funds with a similar investment objective and no geographic limitation.
The Fund also may invest up to 35% of its total assets in the aggregate in
equity securities without regard to the location of the issuer's headquarters or
the issuer's market capitalization and in fixed income securities of the kinds
described under "Special Investment Methods -- Fixed Income Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
SPECIAL EQUITY FUND
OBJECTIVE. Special Equity Fund has an objective of capital appreciation.
INVESTMENT POLICIES. Under normal market conditions, Special Equity Fund invests
at least 65% of its total assets in equity securities. The Fund's policy is to
invest in equity securities which the Adviser believes offer the potential for
greater than average capital appreciation. The Adviser believes that this policy
can best be achieved by investing in the equity securities of companies where
fundamental changes are occurring, are likely to occur, or have occurred and
where, in the opinion of the Adviser, the changes have not been adequately
reflected in the price of the securities and thus are considered by the Adviser
to be undervalued.
Undervalued securities may include securities of companies which (i) have been
unpopular for some time but where, in the Adviser's opinion, recent developments
(such as those listed in the next sentence) suggest the possibility of improved
operating results; (ii) have recently experienced marked popularity but which,
in the opinion of the Adviser, have temporarily fallen out of favor for reasons
that are considered by the Adviser to be non-recurring or short-term; and (iii)
appear to the Adviser to be undervalued in relation to popular securities of
other companies in the same industry. Typically, but not exclusively, the
Adviser will consider investing in undervalued issues in which it sees the
possibility of substantially improved market price due to increasing demand for
an issuer's products or services, the development of new or improved products or
services, the probability of increased operating efficiencies, the elimination
of unprofitable products or operations, changes in management or management
goals, fundamental changes in the industry in which the issuer operates, new or
increased emphasis on research and development, or possible mergers or
acquisitions.
In selecting securities judged to be undervalued and in investing in potential
"turnaround" situations, the Adviser will be acting on opinions and exercising
judgments which may be contrary to those of the majority of investors. These
opinions and judgments involve the risks of either (i) a correct judgment by the
majority, in which case losses may be incurred or profits may be limited, or
(ii) a long delay before majority recognition of the accuracy of the Adviser's
judgment, in which case capital invested by the Fund in an individual security
or group of securities may be nonproductive for an extended period.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
TECHNOLOGY FUND
OBJECTIVE. Technology Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Technology Fund invests at
least 80% of its total assets in equity securities of companies which the
Adviser believes have, or will develop, products, processes or services that
will provide or will benefit significantly from technological advances and
improvements. The description of the technology sector is interpreted broadly by
the Adviser and may include such products or services as inexpensive computing
power, such as personal computers; improved methods of communications, such as
satellite transmission; or labor saving machines or instruments, such as
computer-aided design equipment. The prime emphasis of the Fund is to identify
those companies positioned, in the Adviser's opinion, to benefit from
technological advances in areas such as semiconductors, minicomputers and
peripheral equipment, scientific instruments, computer software, communications,
and future automation trends in both office and factory settings.
The Fund also may invest up to 20% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
Technology Fund operates as a non-diversified investment company, as defined in
the 1940 Act, but intends to conduct its operations so as to qualify as a
regulated investment company for purposes of the Internal Revenue Code of 1986,
as amended. Since a relatively high percentage of the assets of the Fund may be
invested in the securities of a limited number of issuers which will be in the
same or related economic sectors, the Fund's portfolio securities may be more
susceptible to any single economic, technological or regulatory occurrence than
the portfolio securities of diversified investment companies. In addition,
competitive pressures may have a significant effect on the financial condition
of companies in the technology industry. For example, if technology continues to
advance at an accelerated rate, and the number of companies and product
offerings continue to expand, these companies could become increasingly
sensitive to short product cycles and aggressive pricing.
HEALTH SCIENCES FUND
OBJECTIVE. Health Sciences Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, Health Sciences Fund
invests at least 80% of its total assets in equity securities of companies which
the Adviser considers to be principally engaged in the development, production
or distribution of products or services connected with health care or medicine.
Examples of these products and services include pharmaceuticals, health care
services and administration, diagnostics, medical equipment and supplies,
medical technology, and medical research and development. The Adviser
anticipates investing in companies that have the potential for above average
growth in revenue and earnings as a result of new or unique products, processes
or services, increasing demand for a company's products or services, established
market leadership, or exceptional management. A company will be deemed
"principally engaged" in the health sciences industries if at the time of
investment the Adviser determines that at least 50% of its assets, revenues or
profits are derived from those industries.
The Fund also may invest up to 20% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
Subject to the limitations stated above, the Fund may invest up to 25% of its
total assets in securities of foreign issuers which are either listed on a
United States stock exchange or represented by American Depositary Receipts. For
information about these kinds of investments and certain associated risks, see
"Special Investment Methods -- Foreign Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
Health Sciences Fund operates as a non-diversified investment company, as
defined in the 1940 Act, but intends to conduct its operations so as to qualify
as a regulated investment company for purposes of the Internal Revenue Code of
1986, as amended. Since a relatively high percentage of the assets of the Fund
may be invested in the securities of a limited number of issuers which will be
in the same or related economic sectors, the Fund's portfolio securities may be
more susceptible to any single economic, technological or regulatory occurrence
than the portfolio securities of diversified investment companies. Many products
and services in the health sciences industries may become rapidly obsolete due
to technological and scientific advances. In addition, the health sciences
industries generally are subject to greater governmental regulation than many
other industries, so that changes in governmental policies may have a material
effect on the demand for products and services in these industries. Regulatory
approvals generally are required before new drugs, medical devices or medical
procedures can be introduced and before health care providers can acquire
additional facilities or equipment.
REAL ESTATE SECURITIES FUND
OBJECTIVE. Real Estate Securities Fund has an objective of providing above
average current income and long-term capital appreciation by investing primarily
in equity securities of real estate companies.
INVESTMENT POLICIES. Under normal market conditions, Real Estate Securities Fund
invests at least 65% of its total assets in income producing equity securities
of publicly traded companies principally engaged in the real estate industry.
For this purpose, a company is deemed to be "principally engaged" in the real
estate industry if (i) it derives at least 50% of its revenues or profits from
the ownership, construction, management, financing or sale of residential,
commercial or industrial real estate, or (ii) has at least 50% of the fair
market value of its assets invested in such real estate. The Fund seeks to
invest in equity securities that provide a dividend yield that exceeds the
composite dividend yield of the securities included in the S&P 500.
A majority of the Fund's total assets will be invested in securities of real
estate investment trusts ("REITs"). REITs are publicly traded corporations or
trusts that specialize in acquiring, holding, and managing residential,
commercial or industrial real estate. A REIT is not taxed at the entity level on
income distributed to its shareholders or unitholders if it distributes to
shareholders or unitholders at least 95% of its taxable income for each taxable
year and complies with regulatory requirements relating to its organization,
ownership, assets and income.
REITs generally can be classified as Equity REITs, Mortgage REITs, and Hybrid
REITs. An Equity REIT invests the majority of its assets directly in real
property and derives its income primarily from rents and from capital gains
on real estate appreciation which are realized through property sales. A
Mortgage REIT invests the majority of its assets in real estate mortgage loans
and derives its income primarily from interest payments. A Hybrid REIT combines
the characteristics of an Equity REIT and a Mortgage REIT. Although the Fund can
invest in all three kinds of REITs, its emphasis is expected to be on
investments in Equity REITs.
The Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 25% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; and (v) engage in the lending of portfolio
securities. For information about these investment methods, restrictions on
their use, and certain associated risks, see the related headings under "Special
Investment Methods."
For temporary defensive purposes during times of unusual market conditions, the
Fund may without limitation hold cash or invest in cash items of the kinds
described under "Special Investment Methods -- Cash Items." The Fund also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
Because Real Estate Securities Fund invests primarily in the real estate
industry, it is particularly subject to risks associated with that industry. The
real estate industry has been subject to substantial fluctuations and declines
on a local, regional and national basis in the past and may continue to be in
the future. Real property values and incomes from real property may decline due
to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, regulatory limitations on rents,
changes in neighborhoods and in demographics, increases in market interest
rates, or other factors. Factors such as these may adversely affect companies
which own and operate real estate directly, companies which lend to such
companies, and companies which service the real estate industry. Although the
Fund will operate as a non-diversified investment company under the 1940 Act, it
intends to conduct its operations so as to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended.
Because the Fund may invest a substantial portion of its assets in REITs, it
also is subject to risks associated with direct investments in REITs. Equity
REITs will be affected by changes in the values of and incomes from the
properties they own, while Mortgage REITs may be affected by the credit quality
of the mortgage loans they hold. In addition, REITs are dependent on specialized
management skills and on their ability to generate cash flow for operating
purposes and to make distributions to shareholders or unitholders. REITs may
have limited diversification and are subject to risks associated with obtaining
financing for real property, as well as to the risk of self-liquidation. REITs
also can be adversely affected by their failure to qualify for tax-free
pass-through treatment of their income under the Code or their failure to
maintain an exemption from registration under the 1940 Act. By investing in
REITs indirectly through the Fund, a shareholder bears not only a proportionate
share of the expenses of the Fund, but also may indirectly bear similar expenses
of some of the REITs in which it invests.
INTERNATIONAL FUND
OBJECTIVE. International Fund has an objective of long-term growth of capital.
INVESTMENT POLICIES. Under normal market conditions, International Fund invests
at least 65% of its total assets in an internationally diversified portfolio of
equity securities which trade in markets other than the United States. Generally
these securities are issued by companies (i) domiciled in countries other than
the United States, or (ii) that derive at least 50% of either their revenues or
their pre-tax income from activities outside of the United States. The
securities in which the Fund invests include common and preferred stock,
securities (bonds and preferred stock) convertible into common stock, warrants
and securities representing underlying international securities such as American
Depositary Receipts and European Depositary Receipts. The Fund also may hold
securities of other investment companies (which investments are also subject to
the advisory fee) and depositary or custodial receipts representing beneficial
interests in any of the foregoing securities.
The Fund may invest in securities of issuers in, but not limited to, Argentina,
Australia, Austria, Belgium, Canada, Chile, China, Columbia, the Czech Republic,
Denmark, Finland, France, Germany, Hong Kong, India, Indonesia, Ireland, Israel,
Italy, Japan, Korea, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand,
Norway, Peru, the Philippines, Singapore, Spain, Sweden, Switzerland, Taiwan,
Thailand, the United Kingdom, and Venezuela. Normally, the Fund will invest at
least 65% of its total assets in securities traded in at least three foreign
countries, including the countries listed above. It is possible, although not
currently anticipated, that up to 35% of the Fund's assets could be invested in
United States companies.
In investing the Fund's assets, the Sub-Adviser expects to place primary
emphasis on country selection, followed by selection of industries or sectors
within or across countries and by selection of individual stocks corresponding
to the industries or sectors selected. Investments are expected to be made
primarily in developed markets and larger capitalization companies. However, the
Fund also may invest in emerging markets where smaller capitalization companies
are the norm.
In addition, the Fund may (i) enter into repurchase agreements; (ii) in order to
attempt to reduce risk, purchase put and call options on equity securities and
on stock indices; (iii) write covered call options covering up to 50% of the
equity securities owned by the Fund; (iv) purchase securities on a when-issued
or delayed-delivery basis; (v) engage in the lending of portfolio securities;
(vi) engage in foreign currency transactions; (vii) in order to attempt to
reduce risk, purchase put and call options on foreign currencies; (viii) write
covered call options on foreign currencies owned by the Fund; and (ix) enter
into contracts for the future purchase or delivery of securities, foreign
currencies, and indices, purchase or sell options on any such futures contracts
and engage in related closing transactions. For information about these
investment methods, restrictions on their use, and certain associated risks, see
the related headings under "Special Investment Methods."
Under normal market conditions, it is expected that the Fund will be fully
invested in equity securities and related hedging instruments (except for
short-term investments of cash for liquidity purposes and pending investment).
However, for temporary defensive purposes during times of unusual market
conditions, the Fund may without limitation hold cash or invest in cash items of
the kinds described under "Special Investment Methods -- Cash Items."
International Fund is subject to special risks associated with investing in
foreign securities and to declines in net asset value resulting from changes in
exchange rates between the United States dollar and foreign currencies. These
risks are discussed under "Special Investment Methods -- Foreign Securities" and
"-- Foreign Currency Transactions" elsewhere here. Because of the special risks
associated with foreign investing and the Sub-Adviser's ability to invest
substantial portions of the Fund's assets in a small number of countries, the
Fund may be subject to greater volatility than most mutual funds which invest
principally in domestic securities.
RISKS TO CONSIDER
An investment in any of the Funds involves certain risks in addition to those
noted above with respect to particular Funds. These include the following:
EQUITY SECURITIES GENERALLY. Market prices of equity securities generally, and
of particular companies' equity securities, frequently are subject to greater
volatility than prices of fixed income securities. Market prices of equity
securities as a group have dropped dramatically in a short period of time on
several occasions in the past, and they may do so again in the future. Each of
the Funds is subject to the risk of generally adverse equity markets.
SMALLER-CAPITALIZATION COMPANIES. Emerging Growth Fund and Regional Equity Fund
emphasize investments in companies with relatively small market capitalizations,
and the remaining Funds (excluding Equity Index Fund and Asset Allocation Fund)
are permitted to invest in equity securities of such companies. The equity
securities of smaller-capitalization companies frequently have experienced
greater price volatility in the past than those of larger-capitalization
companies, and they may be expected to do so in the future. To the extent that
the Funds invest in smaller-capitalization companies, they are subject to this
risk of greater volatility.
ACTIVE MANAGEMENT. All of the Funds other than Equity Index Fund are actively
managed to a greater or lesser degree by the Adviser or, in the case of
International Fund, the Sub-Adviser. The performance of these Funds therefore
will reflect in part the ability of the Adviser or Sub-Adviser to select
securities which are suited to achieving the Funds' investment objectives. Due
to their active management, these Funds could underperform other mutual funds
with similar investment objectives or the market generally.
OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by the Funds.
MANAGEMENT
The Board of Directors of FAIF has the primary responsibility for overseeing the
overall management and electing the officers of FAIF. Subject to the overall
direction and supervision of the Board of Directors, the Adviser acts as
investment adviser for and manages the investment portfolios of FAIF.
INVESTMENT ADVISER
First Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55480, acts as the Funds' investment adviser through its First Asset Management
group. The Adviser has acted as an investment adviser to FAIF since its
inception in 1987 and has acted as investment adviser to First American Funds,
Inc. since 1982. As of September 30, 1995, the Adviser was managing accounts
with an aggregate value of approximately $29 billion, including mutual fund
assets in excess of $7 billion. First Bank System, Inc., 601 Second Avenue
South, Minneapolis, Minnesota 55480, is the holding company for the Adviser.
Each of the Funds other than International Fund has agreed to pay the Adviser
monthly fees calculated on an annual basis equal to 0.70% of its average daily
net assets. International Fund pays the Adviser a monthly fee calculated on the
same basis equal to 1.25% of its average daily net assets, out of which the
Adviser pays the Sub-Adviser's fee. The Adviser may, at its option, waive any or
all of its fees, or reimburse expenses, with respect to any Fund from time to
time. Any such waiver or reimbursement is voluntary and may be discontinued at
any time. The Adviser also may absorb or reimburse expenses of the Funds from
time to time, in its discretion, while retaining the ability to be reimbursed by
the Funds for such amounts prior to the end of the fiscal year. This practice
would have the effect of lowering a Fund's overall expense ratio and of
increasing yield to investors, or the converse, at the time such amounts are
absorbed or reimbursed, as the case may be.
While the advisory fee payable to the Adviser with respect to International Fund
is higher than the advisory fee paid by most mutual funds, the Adviser believes
it is comparable to that paid by many funds having similar investment objectives
and policies.
The Glass-Steagall Act generally prohibits banks from engaging in the business
of underwriting, selling or distributing securities and from being affiliated
with companies principally engaged in those activities. In addition,
administrative and judicial interpretations of the Glass-Steagall Act prohibit
bank holding companies and their bank and nonbank subsidiaries from organizing,
sponsoring or controlling registered open-end investment companies that are
continuously engaged in distributing their shares. Bank holding companies and
their bank and nonbank subsidiaries may serve, however, as investment advisers
to registered investment companies, subject to a number of terms and conditions.
Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the appropriate
regulatory agencies, the Funds have received an opinion from their counsel that
the Adviser is not prohibited from performing the investment advisory services
described above. In the event of changes in federal or state statutes or
regulations or judicial and administrative interpretations or decisions
pertaining to permissible activities of bank holding companies and their bank
and nonbank subsidiaries, the Adviser might be prohibited from continuing these
arrangements. In that event, it is expected that the Board of Directors would
make other arrangements and that shareholders would not suffer adverse financial
consequences.
SUB-ADVISER TO INTERNATIONAL FUND
Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is Sub-Adviser to International Fund under an
agreement with the Adviser (the "Sub-Advisory Agreement"). The Sub-Adviser is
responsible for the investment and reinvestment of International Fund's assets
and the placement of brokerage transactions in connection therewith. For its
services under the Sub-Advisory Agreement, the Sub-Adviser is paid a monthly fee
by the Adviser calculated on an annual basis equal to 0.75% of the first $100
million of International Fund's average daily net assets, 0.70% of the second
$100 million of International Fund's average daily net assets, 0.65% of the
third $100 million of International Fund's average daily net assets, and 0.60%
of International Fund's average daily net assets in excess of $300 million.
The Sub-Adviser, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the Sub-Adviser is owned by Mr. Marvin,
Mr. Palmer and 21 other holders. The Sub-Adviser is engaged in the management of
global, non-United States and emerging markets equity portfolios for
institutional accounts. At September 30, 1995, the Sub-Adviser managed a total
of $3.1 billion in investments for 55 institutional investors.
PORTFOLIO MANAGERS
Stock Fund, Equity Index Fund and Balanced Fund are managed by a committee
comprised of Mr. Doak, Mr. Murphy, Mr. Rovner, Mr. Dubiak, Mr. Whitcomb and Mr.
Shields, whose backgrounds are set forth below. Asset Allocation Fund, Equity
Income Fund and Diversified Growth Fund are managed by a committee comprised of
Mr. Bren, Mr. Doak, Mr. Dubiak, Ms. Hoyme, Ms. Johnson, Mr. Murphy, Mr.
Whitcomb, and Mr. Johnson, whose backgrounds also are set forth below. The
remaining Funds are managed or co-managed as indicated below.
JAMES DOAK is a member of the committees which manage six of the Funds, as set
forth above. Jim joined the Adviser in 1982 after serving for two years as vice
president of INA Capital Advisors and ten years as Vice President of
Loomis-Sayles & Co. He has managed assets for individual and institutional
clients, specializing in equity investments, and served as the analyst and
portfolio manager for Stock Fund since its inception in December 1987. Jim
received his bachelor's degree from Brown University and his master's degree in
business administration from the Wharton School of Business. He is a Chartered
Financial Analyst.
JOHN M. MURPHY, JR. is a member of the committees which manage six of the
Funds, as set forth above. John is Chief Investment Officer of the Adviser's
First Asset Management group, having joined the Adviser in 1984. He has more
than 30 years in the investment management field and served with Investment
Advisers, Inc. and Blyth, Eastman, Dillon & Co. before joining the Adviser.
He received his bachelor's degree from Regis College.
JAMES S. ROVNER is a member of the committee which manages three of the Funds,
as set forth above, and he is portfolio manager for Special Equity Fund. Jim
joined the Adviser in 1986 and has managed assets for institutional and
individual clients for over 15 years, specializing in equity and balanced
investment strategies. Jim received his bachelor's degree and his master's
degree in business administration from the University of Wisconsin. He is a
Chartered Financial Analyst.
GERALD C. BREN is a member of the committee which manages three of the Funds, as
set forth above, and he is portfolio co-manager for Emerging Growth Fund and
Health Sciences Fund. Gerald joined the Adviser in 1972 as an investment
analyst. He received his master's degree in business administration from the
University of Chicago in 1972 and his Chartered Financial Analyst certification
in 1977.
ALBIN S. DUBIAK is a member of the committees which manage six of the Funds, as
set forth above, and he is portfolio co-manager for Emerging Growth Fund,
Regional Equity Fund, and Health Sciences Fund. Al began his investment career
as a security trader with The First National Bank of Chicago in 1963 before
joining the Adviser as an investment analyst in 1969. Al received his bachelor's
degree from Indiana University in 1962 and his master's degree in business
administration from the University of Arizona in 1969.
MARY M. HOYME is a member of the committee which manages three of the Funds, as
set forth above, and she is portfolio co-manager for Real Estate Securities
Fund. Mary joined the Adviser in 1989 as a research analyst, prior to which she
was employed for seven years as an equity and economic analyst with IDS
Financial Services. She received her bachelor's degree from the University of
Wisconsin -- Eau Claire and her master's degree in business administration from
the College of St. Thomas. She is a Chartered Financial Analyst.
CORI B. JOHNSON is a member of the committee which manages three of the Funds,
as set forth above, and she is portfolio co-manager for Real Estate Securities
Fund. Cori has been managing assets using quantitative analysis techniques since
1992. She joined the Adviser in 1991 as a securities analyst. Cori received her
bachelor's degree from Concordia College and her master's degree in business
administration from the University of Minnesota. She is a Chartered Financial
Analyst.
ROLAND P. WHITCOMB is a member of the committees which manage six of the Funds,
as set forth above, and he is portfolio co-manager for Regional Equity Fund and
Technology Fund. Roland joined the Adviser in 1986 after serving as an account
executive with Smith Barney & Co. since 1979. He received his bachelor's degree
from the University of Chicago and is a Chartered Financial Analyst.
JEFF A. JOHNSON is a member of the committee which manages three of the Funds,
as set forth above, and he is portfolio co-manager for Regional Equity Fund and
Technology Fund. Jeff has been employed by the Adviser in investment management
since 1991 and in commercial lending from 1985 to 1991. He received his master
of arts degree from the University of Iowa.
KEVIN SHIELDS is a member of the committee which manages three of the Funds, as
set forth above. Kevin, who joined the Adviser in 1993, received his bachelor's
degree from Marquette University and his master's degree from the University of
Wisconsin -- Madison.
A committee comprised of the following five individuals shares the management of
International Fund on behalf of the Sub-Adviser:
DAVID F. MARVIN is Chairman of the Sub-Adviser and founded the firm together
with Mr. Palmer in 1986. Before founding the Sub-Adviser, Mr. Marvin was Vice
President in charge of DuPont Corporation's $10 billion internally-managed
pension fund. Prior to that Mr. Marvin was Associate Portfolio Manager, and then
Head Portfolio Manager, for Investors Diversified Services' IDS Stock Fund. Mr.
Marvin started in the investment business in 1965 as a securities analyst for
Chicago Title & Trust. He received his bachelor's degree from the University of
Illinois and his master's degree in business administration from Northwestern
University. He is a Chartered Financial Analyst and a member of the Financial
Analysts Federation.
STANLEY PALMER is President of the Sub-Adviser and co-founder of the firm. Mr.
Palmer was Equity Portfolio Manager for DuPont Corporation from 1978 through
1986, an analyst and portfolio manager at Investors Diversified Services from
1971 through 1978, and an analyst at Harris Trust & Savings Bank from 1964
through 1971. He received his bachelor's degree from Gustavus Adolphus College
and his master's degree in business administration from the University of Iowa.
He is a Chartered Financial Analyst and a member of the Financial Analysts
Federation.
TERRY B. MASON is a Vice President and Portfolio Manager of the Sub-Adviser.
Before joining the Sub-Adviser, Mr. Mason was employed for 14 years by DuPont
Corporation, the last five as international equity analyst and international
trader. He received his bachelor's degree from Glassboro State College and his
master's degree in business administration from Widener University.
JAY F. MIDDLETON is a Vice President and Portfolio Manager for the Sub-Adviser
and joined the firm in 1989. He received his bachelor's degree from Wesleyan
University.
TODD D. MARVIN is a Vice President and Portfolio Manager for the Sub-Adviser
and joined the firm in 1991. Before joining the Sub-Adviser, Mr. Marvin was
employed by Oppenheimer & Company as an analyst in investment banking. Mr.
Marvin received his bachelor's degree from Wesleyan University.
CUSTODIAN
The custodian of the Funds' assets is First Trust National Association (the
"Custodian"), First Trust Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of First Bank System, Inc., which also
controls the Adviser.
As compensation for its services to Stock Fund, Equity Index Fund, Balanced
Fund, Asset Allocation Fund, Regional Equity Fund, and Special Equity Fund, the
Custodian is paid the following fees: (i) an annual administration fee of $750
per Fund; (ii) an issue held fee, computed as of the end of each month, at the
annual rate of $30 per securities issue held by each Fund; (iii) transaction
fees, consisting of (a) a securities buy/sell/maturity fee of $15 per each such
transaction, and (b) a payment received fee of $12 for each principal pay down
payment received on collateralized mortgage pass-through instruments; (iv) a
wire transfer fee of $10 per transaction; (v) a cash management fee, for
"sweeping" cash into overnight investments, at an annual rate of 0.25% of the
amounts so invested; and (vi) a remittance fee, for payment of each Fund's
expenses, of $3.50 per each check drawn for such remittances. The Custodian is
paid monthly fees equal to 0.03% of the average daily net assets of Equity
Income Fund, Diversified Growth Fund, Emerging Growth Fund, Technology Fund,
Health Sciences Fund, and Real Estate Securities Fund and 0.25% of the average
daily net assets of International Fund. Sub-custodian fees with respect to
International Fund are paid by the Custodian out of this amount. In addition,
the Custodian is reimbursed for its out-of-pocket expenses incurred while
providing its services to the Funds.
Rules adopted under the 1940 Act permit International Fund to maintain its
securities and cash in the custody of certain eligible foreign banks and
depositories. International Fund's portfolio of non-United States securities are
held by sub-custodians which are approved by the directors of FAIF in accordance
with these rules. This determination is made pursuant to these rules following a
consideration of a number of factors including, but not limited to, the
reliability and financial stability of the institution; the ability of the
institution to perform custodian services for International Fund; the reputation
of the institution in its national market; the political and economic stability
of the country in which the institution is located; and the risks of potential
nationalization or expropriation of International Fund's assets.
ADMINISTRATOR
The administrator for the Funds is SEI Financial Management Corporation (the
"Administrator"), 680 East Swedesford Road, Wayne, Pennsylvania 19087. The
Administrator, a wholly-owned subsidiary of SEI Corporation, provides the Funds
with certain administrative services necessary to operate the Funds. These
services include shareholder servicing and certain accounting and other
services. The Administrator provides these services for a fee calculated at an
annual rate of 0.12% of each Fund's average daily net assets, subject to a
minimum administrative fee during each fiscal year of $50,000 per Fund;
provided, that to the extent that the aggregate net assets of all First American
funds exceed $8 billion, the percentage stated above is reduced to 0.105%. From
time to time, the Administrator may voluntarily waive its fees or reimburse
expenses with respect to any of the Funds. Any such waivers or reimbursements
may be made at the Administrator's discretion and may be terminated at any time.
TRANSFER AGENT
DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent is
210 West 10th Street, Kansas City, Missouri 64105. The Transfer Agent is not
affiliated with the Distributor, the Administrator or the Adviser.
DISTRIBUTOR
SEI Financial Services Company is the principal distributor for shares of the
Funds and of the other FAIF Funds. The Distributor is a Pennsylvania corporation
and is the principal distributor for a number of investment companies. The
Distributor is a wholly-owned subsidiary of SEI Corporation and is located at
680 East Swedesford Road, Wayne, Pennsylvania 19087. The Distributor is not
affiliated with the Adviser, First Bank System, Inc., the Custodian or their
respective affiliates.
The Distributor, the Administrator and the Adviser may in their discretion use
their own assets to pay for certain costs of distributing Fund shares. They also
may discontinue any payment of such costs at any time.
PURCHASES AND REDEMPTIONS OF SHARES
SHARE PURCHASES AND REDEMPTIONS
Shares of the Funds are sold and redeemed on days on which the New York Stock
Exchange is open for business ("Business Days").
Payment for shares can be made only by wire transfer. Wire transfers of federal
funds for share purchases should be sent to First Bank National Association,
Minneapolis, Minnesota, ABA Number 091000022; For Credit to: DST Systems:
Account Number 6023458026; For Further Credit To: (Investor Name and Fund Name).
Shares cannot be purchased by Federal Reserve wire on days on which the New York
Stock Exchange is closed and on Federal holidays upon which wire transfers are
restricted. Purchase orders will be effective and eligible to receive dividends
declared the same day if the Transfer Agent receives an order before 3:00 p.m.
Central time and the Custodian receives Federal funds before the close of
business that day. Otherwise, the purchase order will be effective the next
Business Day. The net asset value per share is calculated as of 3:00 p.m.
Central time each Business Day. The Funds reserve the right to reject a purchase
order.
The Funds are required to redeem for cash all full and fractional shares of the
Funds. Redemption orders may be made any time before 3:00 p.m. Central time in
order to receive that day's redemption price. For redemption orders received
before 3:00 p.m. Central time, payment will ordinarily be made the same day by
transfer of Federal funds, but payment may be made up to 7 days later.
WHAT SHARES COST
Class C Shares of the Funds are sold and redeemed at net asset value. The net
asset value per share is determined as of the earlier of the close of the New
York Stock Exchange or 3:00 p.m. Central time on each day the New York Stock
Exchange is open for business, provided that net asset value need not be
determined on days when no Fund shares are tendered for redemption and no order
for that Fund's shares is received and on days on which changes in the value of
portfolio securities will not materially affect the current net asset value of
the Fund's shares. The price per share for purchases or redemptions is such
value next computed after the Transfer Agent receives the purchase order or
redemption request. In the case of redemptions and repurchases of shares owned
by corporations, trusts or estates, the Transfer Agent may require additional
documents to evidence appropriate authority in order to effect the redemption,
and the applicable price will be that next determined following the receipt of
the required documentation.
DETERMINING NET ASSET VALUE. The net asset value per share for each of the Funds
is determined by dividing the value of the securities owned by the Fund plus any
cash and other assets (including interest accrued and dividends declared but not
collected), less all liabilities, by the number of Fund shares outstanding. For
the purpose of determining the aggregate net assets of the Funds, cash and
receivables will be valued at their face amounts. Interest will be recorded as
accrued and dividends will be recorded on the ex-dividend date. Investments in
equity securities which are traded on a national securities exchange (or
reported on the NASDAQ national market system) are stated at the last quoted
sales price if readily available for such equity securities on each business
day; other equity securities traded in the over-the-counter market and listed
equity securities for which no sale was reported on that date are stated at the
last quoted bid price. Debt obligations exceeding 60 days to maturity which are
actively traded are valued by an independent pricing service at the most
recently quoted bid price. Debt obligations with 60 days or less remaining until
maturity may be valued at their amortized cost. Foreign securities are valued
based upon quotation from the primary market in which they are traded. When
market quotations are not readily available, securities are valued at fair value
as determined in good faith by procedures established and approved by the Board
of Directors.
Portfolio securities underlying actively traded options are valued at their
market price as determined above. The current market value of any exchange
traded option held or written by a Fund is its last sales price on the exchange
prior to the time when assets are valued, unless the bid price is higher or the
asked price is lower, in which event the bid or asked price is used. In the
absence of any sales that day, options will be valued at the current closing bid
price.
Although the methodology and procedures for determining net asset value are
identical for all classes of shares, the net asset value per share of different
classes of shares of the same Fund may differ because of the distribution
expenses charged to Class A and Class B Shares.
FOREIGN SECURITIES. Any assets or liabilities of the Funds initially expressed
in terms of foreign currencies are translated into United States dollars using
current exchange rates. Trading in securities on foreign markets may be
completed before the close of business on each business day of the Funds. Thus,
the calculation of the Funds' net asset value may not take place
contemporaneously with the determination of the prices of foreign securities
held in the Funds' portfolios. If events materially affecting the value of
foreign securities occur between the time when their price is determined and the
time when the Funds' net asset value is calculated, such securities will be
valued at fair value as determined in good faith by or under the direction of
the Board of Directors. In addition, trading in securities on foreign markets
may not take place on all days on which the New York Stock Exchange is open for
business or may take place on days on which the Exchange is not open for
business. Therefore, the net asset value of a Fund which holds foreign
securities might be significantly affected on days when an investor has no
access to the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A Fund will allow such
exchanges only upon the prior approval by the Fund and a determination by the
Fund and the Adviser that the securities to be exchanged are acceptable.
Securities accepted by a Fund will be valued in the same manner that a Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued.
CERTIFICATES AND CONFIRMATIONS
The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.
Confirmations of each purchase and redemption are sent to each shareholder. In
addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly with respect to Stock Fund, Equity Index
Fund, Balanced Fund, Asset Allocation Fund, Equity Income Fund, Diversified
Growth Fund, and Special Equity Fund, to all shareholders of record on the
record date. Dividends are declared paid quarterly with respect to Emerging
Growth Fund, Regional Equity Fund, Technology Fund, Health Sciences Fund, and
Real Estate Securities Fund and annually with respect to International Fund.
Distributions of any net realized long-term capital gains will be made at least
once every 12 months. A portion of the quarterly distributions paid by Real
Estate Securities Fund may be a return of capital. Dividends and distributions
are automatically reinvested in additional shares of the Fund paying the
dividend on payment dates at the ex-dividend date net asset value without a
sales charge, unless shareholders request cash payments on the new account form
or by writing to the Fund.
All shareholders on the record date are entitled to the dividend. If shares are
purchased before a record date for a dividend or a distribution of capital
gains, a shareholder will pay the full price for the shares and will receive
some portion of the purchase price back as a taxable dividend or distribution
(to the extent, if any, that the dividend or distribution is otherwise taxable
to holders of Fund shares). If shares are redeemed or exchanged before the
record date for a dividend or distribution or are purchased after the record
date, those shares are not entitled to the dividend or distribution.
The amount of dividends payable on Class C Shares generally will be more than
the dividends payable on Class A or Class B Shares because of the distribution
expenses charged to Class A and Class B Shares.
EXCHANGE PRIVILEGE
Shareholders may exchange Class C Shares of a Fund for currently available Class
C Shares of the other FAIF Funds or of other funds in the First American family
at net asset value. Exchanges of shares among the FAIF Funds must meet any
applicable minimum investment of the fund for which shares are being exchanged.
The ability to exchange shares of the Funds does not constitute an offering or
recommendation of shares of one fund by another fund. This privilege is
available to shareholders resident in any state in which the fund shares being
acquired may be sold. An investor who is considering acquiring shares in another
First American fund pursuant to the exchange privilege should obtain and
carefully read a prospectus of the fund to be acquired. Exchanges may be
accomplished by a written request, or by telephone if a preauthorized exchange
authorization is on file with the Transfer Agent, shareholder servicing agent,
or financial institution. Neither the Transfer Agent nor any Fund will be
responsible for the authenticity of exchange instructions received by telephone
if it reasonably believes those instructions to be genuine. The Funds and the
Transfer Agent will each employ reasonable procedures to confirm that telephone
instructions are genuine, and they may be liable for losses resulting from
unauthorized or fraudulent telephone instructions if they do not employ these
procedures. These procedures may include taping of telephone conversations.
Shares of a class in which an investor is no longer eligible to participate may
be exchanged for shares of a class in which that investor is eligible to
participate. An example of this kind of exchange would be a situation in which
Class C Shares of a Fund held by a financial institution in a trust or agency
capacity for one or more individual beneficiaries are exchanged for Class A
Shares of that Fund and distributed to the individual beneficiaries.
FEDERAL INCOME TAXES
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"), during its
current taxable year in order to be relieved of payment of federal income taxes
on amounts of taxable income it distributes to shareholders.
Dividends paid from each Fund's net investment income and net short-term capital
gains will be taxable to shareholders as ordinary income, whether or not the
shareholder elects to have such dividends automatically reinvested in additional
shares. Dividends paid by the Funds attributable to investments in the
securities of foreign issuers or REITs will not be eligible for the 70%
deduction for dividends received by corporations. Dividends paid from the net
capital gains of each Fund and designated as capital gain dividends will be
taxable to shareholders as long-term capital gains, regardless of the length of
time for which they have held their shares in the Fund.
Gain or loss realized upon the sale of shares in the Fund will be treated as
capital gain or loss, provided that the shares represented a capital asset in
the hands of the shareholder. Such gain or loss will be long-term gain or loss
if the shares were held for more than one year.
International Fund may be required to pay withholding and other taxes imposed by
foreign countries, generally at rates from 10% to 40%, which would reduce the
Fund's investment income. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. If at the end of International
Fund's taxable year more than 50% of its total assets consist of securities of
foreign corporations, it will be eligible to file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund will be required to
include their respective pro rata portions of such foreign taxes in gross
income, treat such amounts as foreign taxes paid by them, and deduct such
amounts in computing their taxable income or, alternatively, use them as foreign
tax credits against their federal income taxes. If such an election is filed for
a year, International Fund shareholders will be notified of the amounts which
they may deduct as foreign taxes paid or use as foreign tax credits.
Alternatively, if the amount of foreign taxes paid by International Fund is not
large enough to warrant its making the election described above, the Fund may
claim the amount of foreign taxes paid as a deduction against its own gross
income. In that case, shareholders would not be required to include any amount
of foreign taxes paid by the Fund in their income and would not be permitted
either to deduct any portion of foreign taxes from their own income or to claim
any amount of foreign tax credit for taxes paid by the Fund.
This is a general summary of the federal tax laws applicable to the Funds and
their shareholders as of the date of this Prospectus. See the Statement of
Additional Information for further details. Before investing in the Funds, an
investor should consult his or her tax adviser about the consequences of state
and local tax laws.
FUND SHARES
Each share of a Fund is fully paid, nonassessable, and transferable. Shares may
be issued as either full or fractional shares. Fractional shares have pro rata
the same rights and privileges as full shares. Shares of the Funds have no
preemptive or conversion rights.
Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FAIF Funds vote together as one series. The shares
do not have cumulative voting rights. Consequently, the holders of more than 50%
of the shares voting for the election of directors are able to elect all of the
directors if they choose to do so. On issues affecting only a particular Fund or
Class, the shares of that Fund or Class will vote as a separate series. Examples
of such issues would be proposals to alter a fundamental investment restriction
pertaining to a Fund or to approve, disapprove or alter a distribution plan
pertaining to a Class.
Under the laws of the State of Maryland and FAIF's Articles of Incorporation,
FAIF is not required to hold shareholder meetings unless they (i) are required
by the 1940 Act, or (ii) are requested in writing by the holders of 25% or more
of the outstanding shares of FAIF.
CALCULATION OF PERFORMANCE DATA
From time to time, any of the Funds may advertise information regarding its
performance. Each Fund may publish its "yield," its "cumulative total return,"
its "average annual total return" and its "distribution rate." Distribution
rates may only be used in connection with sales literature and shareholder
communications preceded or accompanied by a Prospectus. Each of these
performance figures is based upon historical results and is not intended to
indicate future performance, and, except for "distribution rate," is
standardized in accordance with Securities and Exchange Commission ("SEC")
regulations.
"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day period
(which period will be stated in the advertisement) by the maximum offering price
per share on the last day of the period. Yield is an annualized figure, in that
it assumes that the same level of net investment income is generated over a one
year period. The yield formula annualizes net investment income by providing for
semi-annual compounding.
"Total return" is based on the overall dollar or percentage change in value of a
hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all charges and expenses, including, as
applicable, the maximum sales charge imposed on Class A Shares or the contingent
deferred sales charge imposed on Class B Shares redeemed at the end of the
specified period covered by the total return figure. "Cumulative total return"
reflects a Fund's performance over a stated period of time. "Average annual
total return" reflects the hypothetical annually compounded rate that would have
produced the same cumulative total return if performance had been constant over
the entire period. Because average annual returns tend to smooth out variations
in a Fund's performance, they are not the same as actual year-by-year results.
As a supplement to total return computations, a Fund may also publish "total
investment return" computations which do not assume deduction of the maximum
sales charge imposed on Class A Shares or the contingent deferred sales charge
imposed on Class B Shares.
"Distribution rate" is determined by dividing the income dividends per share for
a stated period by the maximum offering price per share on the last day of the
period. All distribution rates published for the Funds are measures of the level
of income dividends distributed during a specified period. Thus, these rates
differ from yield (which measures income actually earned by a Fund) and total
return (which measures actual income, plus realized and unrealized gains or
losses of a Fund's investments). Consequently, distribution rates alone should
not be considered complete measures of performance.
The performance of the Class C Shares of a Fund will normally be higher than for
the Class A and Class B Shares because Class C Shares are not subject to the
sales charges and distribution expenses applicable to Class A and Class B
Shares.
In reports or other communications to shareholders and in advertising material,
the performance of each Fund may be compared to recognized unmanaged indices or
averages of the performance of similar securities. Also, the performance of each
Fund may be compared to that of other funds of similar size and objectives as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
independent mutual fund rating services, and each Fund may include in such
reports, communications and advertising material evaluations published by
nationally recognized independent ranking services and publications. For further
information regarding the Funds' performance, see "Fund Performance" in the
Statement of Additional Information.
SPECIAL INVESTMENT METHODS
This section provides additional information concerning the securities in which
the Funds may invest and related topics. Further information concerning these
matters is contained in the Statement of Additional Information.
CASH ITEMS
The "cash items" in which the Funds may invest, as described under "Investment
Objectives and Policies," include short-term obligations such as rated
commercial paper and variable amount master demand notes; United States
dollar-denominated time and savings and time deposits (including certificates of
deposit); bankers acceptances; obligations of the United States Government or
its agencies or instrumentalities; repurchase agreements collateralized by
eligible investments of a Fund; securities of other mutual funds which invest
primarily in debt obligations with remaining maturities of 13 months or less
(which investments also are subject to the advisory fee); and other similar
high-quality short-term United States dollar-denominated obligations.
REPURCHASE AGREEMENTS
Each of the Funds may enter into repurchase agreements. A repurchase agreement
involves the purchase by a Fund of securities with the agreement that after a
stated period of time, the original seller will buy back the same securities
("collateral") at a predetermined price or yield. Repurchase agreements involve
certain risks not associated with direct investments in securities. If the
original seller defaults on its obligation to repurchase as a result of its
bankruptcy or otherwise, the purchasing Fund will seek to sell the collateral,
which could involve costs or delays. Although collateral (which may consist of
any fixed income security which is an eligible investment for the Fund entering
into the repurchase agreement) will at all times be maintained in an amount
equal to the repurchase price under the agreement (including accrued interest),
a Fund would suffer a loss if the proceeds from the sale of the collateral were
less than the agreed-upon repurchase price. The Adviser or, in the case of
International Fund, the Sub-Adviser will monitor the creditworthiness of the
firms with which the Funds enter into repurchase agreements.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
Each of the Funds (excluding Equity Index Fund) may purchase securities on a
when-issued or delayed-delivery basis. When such a transaction is negotiated,
the purchase price is fixed at the time the purchase commitment is entered, but
delivery of and payment for the securities take place at a later date. A Fund
will not accrue income with respect to securities purchased on a when-issued or
delayed-delivery basis prior to their stated delivery date. Pending delivery of
the securities, each Fund will maintain in a segregated account cash or liquid
high-grade securities in an amount sufficient to meet its purchase commitments.
The purchase of securities on a when-issued or delayed-delivery basis exposes a
Fund to risk because the securities may decrease in value prior to delivery. In
addition, a Fund's purchase of securities on a when-issued or delayed-delivery
basis while remaining substantially fully invested could increase the amount of
the Fund's total assets that are subject to market risk, resulting in increased
sensitivity of net asset value to changes in market prices. However, the Funds
will engage in when-issued and delayed-delivery transactions only for the
purpose of acquiring portfolio securities consistent with their investment
objectives, and not for the purpose of investment leverage. A seller's failure
to deliver securities to a Fund could prevent the Fund from realizing a price or
yield considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds (excluding Equity
Index Fund) may lend portfolio securities representing up to one-third of the
value of its total assets to broker-dealers, banks or other institutional
borrowers of securities. As with other extensions of credit, there may be risks
of delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the Funds will
only enter into loan arrangements with broker-dealers, banks, or other
institutions which the Adviser or, in the case of International Fund, the
Sub-Adviser has determined are creditworthy under guidelines established by the
Board of Directors. In these loan arrangements, the Funds will receive
collateral in the form of cash, United States Government securities or other
high-grade debt obligations equal to at least 100% of the value of the
securities loaned. Collateral is marked to market daily. The Funds will pay a
portion of the income earned on the lending transaction to the placing broker
and may pay administrative and custodial fees in connection with these loans.
OPTIONS TRANSACTIONS
PURCHASES OF PUT AND CALL OPTIONS. The Funds may purchase put and call options.
These transactions will be undertaken only for the purpose of reducing risk to
the Funds; that is, for "hedging" purposes. Depending on the Fund, these
transactions may include the purchase of put and call options on equity
securities, on stock indices, on interest rate indices, or (only in the case of
International Fund) on foreign currencies. Options on futures contracts are
discussed below under "Futures and Options on Futures."
A put option on a security gives the purchaser of the option the right (but not
the obligation) to sell, and the writer of the option the obligation to buy, the
underlying security at a stated price (the "exercise price") at any time before
the option expires. A call option on a security gives the purchaser the right
(but not the obligation) to buy, and the writer the obligation to sell, the
underlying security at the exercise price at any time before the option expires.
The purchase price for a put or call option is the "premium" paid by the
purchaser for the right to sell or buy.
Options on indices are similar to options on securities except that, rather than
the right to take or make delivery of a specific security at a stated price, an
option on an index gives the holder the right to receive, upon exercise of the
option, a defined amount of cash if the closing value of the index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
None of the Funds other than International Fund will invest more than 5% of the
value of its total assets in purchased options, provided that options which are
"in the money" at the time of purchase may be excluded from this 5% limitation.
A call option is "in the money" if the exercise price is lower than the current
market price of the underlying security or index, and a put option is "in the
money" if the exercise price is higher than the current market price. A Fund's
loss exposure in purchasing an option is limited to the sum of the premium paid
and the commission or other transaction expenses associated with acquiring the
option.
The use of purchased put and call options involves certain risks. These include
the risk of an imperfect correlation between market prices of securities held by
a Fund and the prices of options, and the risk of limited liquidity in the event
that a Fund seeks to close out an options position before expiration by entering
into an offsetting transaction.
WRITING OF COVERED CALL OPTIONS. The Funds may write (sell) covered call options
to the extent specified with respect to particular Funds under "Investment
Objectives and Policies." These transactions would be undertaken principally to
produce additional income. Depending on the Fund, these transactions may include
the writing of covered call options on equity securities or (only in the case of
International Fund) on foreign currencies which a Fund owns or has the right to
acquire or on interest rate indices.
When a Fund sells a covered call option, it is paid a premium by the purchaser.
If the market price of the security covered by the option does not increase
above the exercise price before the option expires, the option generally will
expire without being exercised, and the Fund will retain both the premium paid
for the option and the security. If the market price of the security covered by
the option does increase above the exercise price before the option expires,
however, the option is likely to be exercised by the purchaser. In that case the
Fund will be required to sell the security at the exercise price, and it will
not realize the benefit of increases in the market price of the security above
the exercise price of the option.
FUTURES AND OPTIONS ON FUTURES
Equity Index Fund, Balanced Fund, Asset Allocation Fund and International Fund
may engage in futures transactions and purchase options on futures to the extent
specified with under "Investment Objectives and Policies." Depending on the
Fund, these transactions may include the purchase of stock index futures and
options on stock index futures, and the purchase of interest rate futures and
options on interest rate futures. In addition, International Fund may enter into
contracts for the future delivery of securities or foreign currencies and
futures contracts based on a specific security, class of securities, or foreign
currency.
A futures contract on a security obligates one party to purchase, and the other
to sell, a specified security at a specified price on a date certain in the
future. A futures contract on an index obligates the seller to deliver, and
entitles the purchaser to receive, an amount of cash equal to a specific dollar
amount times the difference between the value of the index at the expiration
date of the contract and the index value specified in the contract. The
acquisition of put and call options on futures contracts will, respectively,
give a Fund the right (but not the obligation), for a specified exercise price,
to sell or to purchase the underlying futures contract at any time during the
option period.
A Fund may use futures contracts and options on futures in an effort to hedge
against market risks and, in the case of International Fund, as part of its
management of foreign currency transactions. In addition, Equity Index Fund may
use stock index futures and options on futures to maintain sufficient liquidity
to meet redemption requests, to increase the level of Fund assets devoted to
replicating the composition of the S&P 500, and to reduce transaction costs.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of a Fund's total assets, and the value of
securities that are the subject of such futures and options (both for receipt
and delivery) may not exceed 1/3 of the market value of a Fund's total assets.
Futures transactions will be limited to the extent necessary to maintain each
Fund's qualification as a regulated investment company under the Internal
Revenue Code of 1986, as amended.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if the Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities or foreign currencies,
limiting the Fund's ability to hedge effectively against interest rate, exchange
rate and/or market risk and giving rise to additional risks. There is no
assurance of liquidity in the secondary market for purposes of closing out
futures positions.
FIXED INCOME SECURITIES
The fixed income securities in which Stock Fund, Equity Income Fund, Diversified
Growth Fund, Emerging Growth Fund, Regional Equity Fund, Special Equity Fund,
Technology Fund, Health Sciences Fund and Real Estate Securities Fund may invest
include securities issued or guaranteed by the United States Government or its
agencies or instrumentalities, nonconvertible preferred stocks, nonconvertible
corporate debt securities, and short-term obligations of the kinds described
above under "-- Cash Items." Investments in nonconvertible preferred stocks and
nonconvertible corporate debt securities will be limited to securities which are
rated at the time of purchase not less than BBB by Standard & Poor's or Baa by
Moody's (or equivalent short-term ratings), or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the Adviser.
Obligations rated BBB, Baa or their equivalent, although investment grade, have
speculative characteristics and carry a somewhat higher risk of default than
obligations rated in the higher investment grade categories.
Equity Income Fund also may invest a portion of its assets in less than
investment grade convertible debt obligations. For a description of such
obligations and the risks associated therewith, see "Investment Objectives and
Policies -- Equity Income Fund."
The fixed income securities specified above, as well as the fixed income
securities in which Balanced Fund and Asset Allocation Fund may invest as
described under "Investment Objectives and Policies," are subject to (i)
interest rate risk (the risk that increases in market interest rates will cause
declines in the value of debt securities held by a Fund); (ii) credit risk (the
risk that the issuers of debt securities held by a Fund default in making
required payments); and (iii) call or prepayment risk (the risk that a borrower
may exercise the right to prepay a debt obligation before its stated maturity,
requiring a Fund to reinvest the prepayment at a lower interest rate).
FOREIGN SECURITIES
GENERAL. Under normal market conditions International Fund invests at least 65%
of its total assets in equity securities which trade in markets other than the
United States. In addition, the other Funds (excluding Equity Index Fund, Asset
Allocation Fund, Regional Equity Fund and Real Estate Securities Fund) may
invest lesser proportions of their assets in securities of foreign issuers which
are either listed on a United States securities exchange or represented by
American Depositary Receipts.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities also may be subject to greater
fluctuations in price than securities issued by United States corporations. The
principal markets on which these securities trade may have less volume and
liquidity, and may be more volatile, than securities markets in the United
States.
In addition, there may be less publicly available information about a foreign
company than about a United States domiciled company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to United States domestic
companies. There is also generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of United States banks, foreign
banks and foreign issuers may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting, and recordkeeping standards
than those applicable to domestic branches of United States banks and United
States domestic issuers.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. For many foreign
securities, United States dollar-denominated American Depositary Receipts, which
are traded in the United States on exchanges or over-the-counter, are issued by
domestic banks. American Depositary Receipts represent the right to receive
securities of foreign issuers deposited in a domestic bank or a correspondent
bank. American Depositary Receipts do not eliminate all the risk inherent in
investing in the securities of foreign issuers. However, by investing in
American Depositary Receipts rather than directly in foreign issuers' stock, a
Fund can avoid currency risks during the settlement period for either purchases
or sales. In general, there is a large, liquid market in the United States for
many American Depositary Receipts. The information available for American
Depositary Receipts is subject to the accounting, auditing and financial
reporting standards of the domestic market or exchange on which they are traded,
which standards are more uniform and more exacting than those to which many
foreign issuers may be subject. International Fund also may invest in European
Depositary Receipts, which are receipts evidencing an arrangement with a
European bank similar to that for American Depositary Receipts and which are
designed for use in the European securities markets. European Depositary
Receipts are not necessarily denominated in the currency of the underlying
security.
Certain American Depositary Receipts and European Depositary Receipts, typically
those denominated as unsponsored, require the holders thereof to bear most of
the costs of the facilities while issuers of sponsored facilities normally pay
more of the costs thereof. The depository of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights to
facility holders in respect to the deposited securities, whereas the depository
of a sponsored facility typically distributes shareholder communications and
passes through voting rights.
FOREIGN CURRENCY TRANSACTIONS
International Fund invests in securities which are purchased and sold in foreign
currencies. The value of its assets as measured in United States dollars
therefore may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations. International Fund
also will incur costs in converting United States dollars to local currencies,
and vice versa.
International Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date certain at a
specified price. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
International Fund may enter into forward currency contracts in order to hedge
against adverse movements in exchange rates between currencies. It may engage in
"transaction hedging" to protect against a change in the foreign currency
exchange rate between the date the Fund contracts to purchase or sell a security
and the settlement date, or to "lock in" the United States dollar equivalent of
a dividend or interest payment made in a foreign currency. It also may engage in
"portfolio hedging" to protect against a decline in the value of its portfolio
securities as measured in United States dollars which could result from changes
in exchange rates between the United States dollar and the foreign currencies in
which the portfolio securities are purchased and sold. International Fund also
may hedge its foreign currency exchange rate risk by engaging in currency
financial futures and options transactions.
Although a foreign currency hedge may be effective in protecting the Fund from
losses resulting from unfavorable changes in exchanges rates between the United
States dollar and foreign currencies, it also would limit the gains which might
be realized by the Fund from favorable changes in exchange rates. The
Sub-Adviser's decision whether to enter into currency hedging transactions will
depend in part on its view regarding the direction and amount in which exchange
rates are likely to move. The forecasting of movements in exchange rates is
extremely difficult, so that it is highly uncertain whether a hedging strategy,
if undertaken, would be successful. To the extent that the Sub-Adviser's view
regarding future exchange rates proves to have been incorrect, International
Fund may realize losses on its foreign currency transactions.
International Fund does not intend to enter into forward currency contracts or
maintain a net exposure in such contracts where it would be obligated to deliver
an amount of foreign currency in excess of the value of its portfolio securities
or other assets denominated in that currency.
MORTGAGE-BACKED SECURITIES
With respect to the fixed income portion of its portfolio, Balanced Fund may
invest in mortgage-backed securities which are Agency Pass-Through Certificates
or collateralized mortgage obligations ("CMOs"), as described below.
Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency Pass-Through Certificate is an obligation of or guaranteed by Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
The obligation of GNMA with respect to such certificates is backed by the full
faith and credit of the United States, while the obligations of FNMA and FHLMC
with respect to such certificates rely solely on the assets and credit of those
entities. The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.
CMOs are debt obligations typically issued by a private special-purpose entity
and collateralized by residential or commercial mortgage loans or Agency
Pass-Through Certificates. Balanced Fund will invest only in CMOs which are
rated in one of the four highest rating categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the Adviser. Because CMOs are debt obligations of private entities,
payments on CMOs generally are not obligations of or guaranteed by any
governmental entity, and their ratings and creditworthiness typically depend,
among other factors, on the legal insulation of the issuer and transaction from
the consequences of a sponsoring entity's bankruptcy. CMOs generally are issued
in multiple classes, with holders of each class entitled to receive specified
portions of the principal payments and prepayments and/or of the interest
payments on the underlying mortgage loans. These entitlements can be specified
in a wide variety of ways, so that the payment characteristics of various
classes may differ greatly from one another. Examples of the more common classes
are provided in the Statement of Additional Information. The CMOs in which the
Fund may invest include classes which are subordinated in right of payment to
other classes, as long as they have the required rating referred to above.
It generally is more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict the
effect of such changes on the return of a conventional fixed-rate debt
instrument, and the magnitude of such effects may be greater in some cases. The
return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. Balanced Fund will
not invest more than 10% of its total fixed income assets in interest-only,
principal-only or inverse floating rate mortgage backed securities.
ASSET-BACKED SECURITIES
With respect to the fixed income portion of its portfolio, Balanced Fund may
invest in asset-backed securities. Asset-backed securities generally constitute
interests in, or obligations secured by, a pool of receivables other than
mortgage loans, such as automobile loans and leases, credit card receivables,
home equity loans and trade receivables. Asset-backed securities generally are
issued by a private special-purpose entity. Their ratings and creditworthiness
typically depend on the legal insulation of the issuer and transaction from the
consequences of a sponsoring entity's bankruptcy, as well as on the credit
quality of the underlying receivables and the amount and credit quality of any
third-party credit enhancement supporting the underlying receivables or the
asset-backed securities. Asset-backed securities and their underlying
receivables generally are not issued or guaranteed by any governmental entity.
BANK INSTRUMENTS
The bank instruments in which Balanced Fund may invest include time and savings
deposits, deposit notes and bankers acceptances (including certificates of
deposit) in commercial or savings banks. They also include Eurodollar
Certificates of Deposit issued by foreign branches of United States or foreign
banks; Eurodollar Time Deposits, which are United States dollar-denominated
deposits in foreign branches of United States or foreign banks; and Yankee
Certificates of Deposit, which are United States dollar-denominated certificates
of deposit issued by United States branches of foreign banks and held in the
United States. For a description of certain risks of investing in foreign
issuers' securities, see "-- Foreign Securities" above. In each instance,
Balanced Fund may only invest in bank instruments issued by an institution which
has capital, surplus and undivided profits of more than $100 million or the
deposits of which are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund.
PORTFOLIO TRANSACTIONS
Portfolio transactions in the over-the-counter market will be effected with
market makers or issuers, unless better overall price and execution are
available through a brokerage transaction. It is anticipated that most portfolio
transactions involving debt securities will be executed on a principal basis.
Also, with respect to the placement of portfolio transactions with securities
firms, subject to the overall policy to seek to place portfolio transactions as
efficiently as possible and at the best price, research services and placement
of orders by securities firms for a Fund's shares may be taken into account as a
factor in placing portfolio transactions for the Fund.
PORTFOLIO TURNOVER
Although the Funds do not intend generally to trade for short-term profits, they
may dispose of a security without regard to the time it has been held when such
action appears advisable to the Adviser or, in the case of International Fund,
the Sub-Adviser. The portfolio turnover rate for a Fund may vary from year to
year and may be affected by cash requirements for redemptions of shares. High
portfolio turnover rates generally would result in higher transaction costs and
could result in additional tax consequences to a Fund's shareholders.
INVESTMENT RESTRICTIONS
The fundamental and nonfundamental investment restrictions of the Funds are set
forth in full in the Statement of Additional Information. The fundamental
restrictions include the following:
* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets, except for Asset Allocation Fund,
which may borrow in amounts not to exceed 33-1/3% of its total assets.
None of the Funds will borrow money for leverage purposes. For the
purpose of this investment restriction, the use of options and futures
transactions and the purchase of securities on a when-issued or
delayed-delivery basis shall not be deemed the borrowing of money. If a
Fund engages in borrowing, its share price may be subject to greater
fluctuation, and the interest expense associated with the borrowing may
reduce the Fund's net income.
* None of the Funds will mortgage, pledge or hypothecate its assets,
except in an amount not exceeding 15% of the value of its total assets
to secure temporary or emergency borrowing.
* None of the Funds will make short sales of securities.
* None of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary for the clearance of
transactions and except, in the case of Emerging Growth Fund,
Technology Fund, and International Fund, as may be necessary to make
margin payments in connection with foreign currency futures and other
derivative transactions.
A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.
As a nonfundamental policy, none of the Funds will invest more than 15% of its
net assets in all forms of illiquid investments, as determined pursuant to
applicable Securities and Exchange Commission rules and interpretations. Section
4(2) commercial paper may be determined to be "liquid" under guidelines adopted
by the Board of Directors. Rule 144A securities may in the future be determined
to be "liquid" under guidelines adopted by the Board of Directors if the current
position of certain state securities regulators regarding such securities is
modified. Investing in Rule 144A securities could have the effect of increasing
the level of illiquidity in a Fund to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing these securities.
Pursuant to an undertaking to certain state securities regulators, Real Estate
Securities Fund will purchase securities that meet the investment objectives and
policies of the Fund, are acquired for investment and not for resale, that are
liquid and not restricted as to transfer, and that have a value that is readily
ascertainable as evidenced by a listing on the New York Stock Exchange, the
American Stock Exchange, or NASDAQ.
FIRST AMERICAN INVESTMENT FUNDS, INC.
680 East Swedesford Road
Wayne, Pennsylvania 19087
INVESTMENT ADVISER
FIRST BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402
CUSTODIAN
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101
DISTRIBUTOR
SEI FINANCIAL SERVICES COMPANY
680 East Swedesford Road
Wayne, Pennsylvania 19087
ADMINISTRATOR
SEI FINANCIAL MANAGEMENT
CORPORATION
680 East Swedesford Road
Wayne, Pennsylvania 19087
TRANSFER AGENT
DST SYSTEMS, INC.
210 West 10th Street
Kansas City, Missouri 64105
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
COUNSEL
DORSEY & WHITNEY P.L.L.P.
220 South Sixth Street
Minneapolis, Minnesota 55402
FAIF-1503 (1/96)I
