<PAGE> 1
As filed with the Securities and Exchange Commission on_______________, 1996
Registration No. 33-18030
811-5371
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. 3 /X/
---
Post-Effective Amendment No. / /
---
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 3
---
Russell Insurance Funds, Inc.
(Exact Name of Registrant as Specified in Charter
909 A Street, Tacoma, Washington 98402
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (206) 627-7001
Karl J. Ege, Esq.
Russell Insurance Funds, Inc.
909 A Street
Tacoma, Washington 98402
(Name and Address of Agent for Service)
Approximate date of commencement of proposed sale to the public:
As soon as practical after the effective date of the Registration Statement.
DECLARATION PURSUANT TO RULE 24f-2
An indefinite amount of securities is being registered under the Securities Act
of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. A
filing fee of $500 has been paid with the initial filing of the registration
statement.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
SHALL DETERMINE.
<PAGE> 2
RUSSELL INSURANCE FUNDS, INC.
FORM N-1A
CROSS REFERENCE SHEET
-----------------
<TABLE>
<CAPTION>
Part A
Item No. Prospectus Heading
- -------- ------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Highlights and Table of Contents
3. Condensed Financial Information Not Applicable
4. General Description of Registrant Investment Objectives and
Policies; Risk Factors;
Fund Instruments and
Other Investment Information;
Investment Limitations
5. Management of the Fund Management of the Funds
6. Capital Stock and Other Securities Description of Capital Stock;
Dividends and Distributions;
Taxes; Miscellaneous
7. Purchase of Securities Being Offered How to Purchase and Redeem
Shares; Pricing of Shares
8. Redemption or Repurchase How to Purchase and Redeem
Shares
9. Pending Legal Proceedings Not Applicable
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Part B Heading in Statement
Item No. of Additional Information
- -------- -------------------------
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Description of Capital Stock
13. Investment Objectives and Policies Investment Objectives and Policies;
Additional Information on Fund
Instruments; Additional Investment
Limitations
14. Management of the Registrant Management of the Funds
15. Control Persons and Principal Management of the Funds
Holders of Securities
16. Investment Advisory and Other Services Management of the Funds;
Independent Auditors
17. Brokerage Allocation Fund Transactions
18. Capital Stock and Other Securities Description of Capital Stock
19. Purchase, Redemption, and Pricing of Additional Purchase and Redemption
Securities Being Offered Information; Net Asset Value and
Net Income-Money Market Liquidity
Fund
20. Tax Status Additional Information Concerning
Taxes
21. Underwriters Additional Purchase and Redemption
Information
22. Calculation of Performance Data Performance and Yield Information
23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
-3-
<PAGE> 4
RUSSELL INSURANCE FUNDS, INC.
909 A Street
Tacoma, Washington 98402
Telephone: 800-972-0700
In Washington: 206-627-7001
- --------------------------------------------------------------------------------
RUSSELL INSURANCE FUNDS, INC. (the "Investment Company") is a "series
mutual fund" with five different investment portfolios referred to individually
as "Funds." This Prospectus describes and offers shares of each of the five
Funds to qualified insurance company separate accounts offering variable
insurance products. Shares will be sold to the insurance company separate
accounts at net asset value.
Each Fund's assets are invested by one or more investment management
organizations researched and recommended by Frank Russell Company ("FRC"). An
affiliate of FRC, Frank Russell Investment Management Company, advises, operates
and administers the Investment Company.
Each Fund seeks to achieve a specific investment objective by using
distinct investment strategies:
MULTI-STYLE EQUITY FUND -- Seeks income and capital growth by investing
principally in equity securities.
AGGRESSIVE EQUITY FUND -- Seeks maximum total return, through income
and primarily through capital appreciation and by assuming a higher
level of volatility than is ordinarily expected from the Multi-Style
Equity Fund, by investing in equity securities.
NON-U.S. FUND -- Seeks favorable total return and additional
diversification for United States investors by investing primarily in
equity and debt securities of non-United States companies and
non-United States governments.
CORE BOND FUND -- Seeks maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is
ordinarily expected from broad fixed-income market portfolio, by
investing in fixed-income securities.
MONEY MARKET LIQUIDITY FUND -- Seeks maximum current income to the
extent consistent with the preservation of capital and liquidity, and
the maintenance of a stable $1.00 per share net asset value by
investing in short-term money market instruments.
-4-
<PAGE> 5
This Prospectus sets forth concisely significant information about the
Investment Company and its five Funds. Russell Insurance Funds, Inc. has filed a
Statement of Additional Information dated ______________, 1996, with the
Securities and Exchange Commission. A copy of the Statement of Additional
Information may be obtained without charge by writing to the Secretary of the
Investment Company at the address shown above. This Prospectus should be read
carefully and retained for future reference.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY.
AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION OF NEW YORK
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE MONEY MARKET LIQUIDITY FUND ARE NEITHER INSURED NOR
GUARANTEED BY THE US GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY
MARKET LIQUIDITY FUND WILL MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
PROSPECTUS DATED ___________________, 1996
-5-
<PAGE> 6
HIGHLIGHTS AND TABLE OF CONTENTS
RUSSELL INSURANCE FUNDS, INC. (the "Investment Company") was
incorporated under the laws of the State of Maryland on October 8, 1987. The
Investment Company is authorized to issue 500,000,000 shares of common stock in
five different investment Funds. The Investment Company is a diversified
open-end management investment company, commonly known as a "mutual fund." Frank
Russell Company, which is a consultant to the Investment Company, has been
primarily engaged since 1969 in providing asset management consulting services
to large corporate employee benefit funds. Major components of its consulting
services are: (i) quantitative and qualitative research and evaluation aimed at
identifying the most appropriate investment management firms to invest large
pools of assets in accord with specific investment objectives and styles; and
(ii) the development of strategies for investing assets using "multi-style,
multi-manager diversification." See page ___.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION is a method for investing
large pools of assets by dividing the assets into segments to be invested using
different investment styles, and selecting money managers for each segment based
upon their expertise in that style of investment. See page ___.
THE PURPOSE OF THE INVESTMENT COMPANY is to provide an investment base
for a variety of insurance products ( the "Policies") which will be issued by
one or more insurance companies (each referred to herein as an "Insurance
Company"). (See page ___ for information concerning monitoring of conflicts
which may arise from sales to a number of Insurance Companies). The Investment
Company believes that policyowners may benefit from the "multi-style,
multi-manager diversification" techniques and money manager evaluation services
of FRC on an economical and efficient basis. See page ___.
GENERAL MANAGEMENT OF THE INVESTMENT COMPANY is provided by Frank
Russell Investment Management Company (the "Management Company"), a wholly-owned
subsidiary of FRC, which also furnishes officers and staff required to manage
and administer the Investment Company on a day-to-day basis. FRC provides the
Investment Company and the Management Company with comprehensive consulting and
money manager evaluation services. See page ___.
-6-
<PAGE> 7
SUB-ADVISERS ("Money Managers") for the assets of the Funds are
evaluated and recommended to the Board of the Investment Company by the
Management Company based upon the consultation and advice of FRC. The Money
Managers have complete discretion to purchase and sell portfolio securities for
their segment of a Fund consistent with that Fund's investment objectives,
policies and restrictions, and the specific strategies developed by FRC and the
Management Company. See page ___.
EXPENSES OF THE INVESTMENT COMPANY are borne by the Investment Company.
Each Fund pays a management fee to the Management Company. Each Fund pays
directly for other services provided to shareholders, and for other operating
expenses and for certain performance and Money Manager evaluation reports
furnished by FRC to the Investment Company and the Management Company. The
Management Company pays its expenses of providing management services to the
Fund and transmits for the Fund the fees payable to the Money Managers. See page
___.
INVESTMENT OBJECTIVES, RESTRICTIONS AND POLICIES apply to each Fund.
Those designated as "fundamental" may not be changed without the approval of a
majority of a Fund's shareholders. See page ___.
DIVIDENDS AND DISTRIBUTIONS will normally be reinvested in additional
shares by the Insurance Company. Dividends from net investment income are
declared daily by the Money Market Liquidity Fund; quarterly by the Multi-Style
Equity Fund, the Aggressive Equity Fund and the Core Bond Fund; and annually by
the Non-U.S. Fund. All the Funds will declare distributions from net realized
capital gains, if any, at least annually. See page ___.
TAXES PAYABLE BY THE FUNDS are expected to be nominal, since each Fund
will seek to reduce taxes by distributing substantially all of its net
investment income and realized capital gains to Insurance Company separate
accounts ("Separate Accounts") for the benefit of policyholders. Policyholders
should review the section on "Taxes" in the Prospectus of the Policies for a
description of the federal tax effects concerning the Policies, and should
consult a tax adviser concerning state or local taxes. See page ___.
VALUATION OF FUND SHARES occurs each business day (twice a day for the
Money Market Liquidity Fund) on which shares are offered or orders to redeem
shares are tendered. The value of a share of a Fund is based upon the next
computed current market value of the assets of the
-7-
<PAGE> 8
Fund, less its liabilities, divided by the number of shares of the Fund. The
Money Market Liquidity Fund utilizes amortized cost pricing procedures to
attempt to maintain a stable $1.00 per share net asset value. See page ___.
SHARES OF EACH FUND ARE SOLD AND REDEEMED at the net asset value next
computed after receipt of the order. The Funds do not assess a redemption
charge. See pages ___ and ___.
ADDITIONAL INFORMATION is also included in this prospectus concerning
the Investment Company's Custodian; Accountants and Reports; Organization,
Capitalization and Voting; and Money Manager Profiles.
THE PURPOSE OF THE INVESTMENT COMPANY
The Investment Company has been organized to provide the investment
base for one or more variable insurance products ("Policies") to be issued by an
Insurance Company. Accordingly, the interest of a policyowner in the Investment
Company's shares is subject to the terms of the Policy described in the
accompanying Prospectus for the Policy, which should be reviewed carefully by a
person considering the purchase of a Policy. That Prospectus describes the
relationship between increases or decreases in the net asset value of Fund
shares and any distributions on such shares, and the benefits provided under the
Policy. The rights of an Insurance Company as a shareholder of a Fund should be
distinguished from the rights of a policyowner which are described in the
Policies. As long as shares of the Funds are sold only to the Insurance Company,
the term "shareholder" or "shareholders" in this Prospectus shall refer to an
Insurance Company owning shares of the Investment Company.
FRANK RUSSELL COMPANY -- CONSULTANT
TO THE INVESTMENT COMPANY
Frank Russell Company, founded in 1936, has been providing
comprehensive asset management consulting services since 1969 for institutional
pools of investment assets, principally those of large corporate employee
benefit plans. FRC and its affiliates have offices in Tacoma, New York, Toronto,
London, Zurich, Paris, Sydney, Aukland and Tokyo, and have approximately 1,000
associates.
Three functions are at the core of FRC's consulting
service:
-8-
<PAGE> 9
OBJECTIVE SETTING: defining appropriate investment objectives and
desired investment returns based upon the client's unique situation and
tolerance for risk.
ASSET ALLOCATION: allocating a client's assets among different asset
classes -- such as common stocks, fixed-income securities, international
securities, temporary cash investments and real estate -- in the manner most
likely to achieve the client's objectives.
MONEY MANAGER RESEARCH: evaluating and recommending professional
investment advisory and management organizations to make specific portfolio
investments for each asset class in accord with the specific objectives,
investment styles and strategies.
When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique with the objectives of
reducing risk and increasing returns.
MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
Frank Russell Company believes capital market history shows that no one
particular asset class provides consistent and/or above-average total return
results, either on an absolute or relative basis, over extended periods of time.
For example, there are periods of time when equity securities out-perform
fixed-income securities, and vice-versa. There are periods when securities with
particular characteristics -- investment styles -- out-perform other types of
securities. For example, there are periods of time when equity securities with
growth characteristics out-perform equities with income characteristics, and
vice-versa. While these performance cycles tend to repeat themselves, they do so
with no regularity. The blending of asset classes and investment styles on a
complementary basis can obtain more consistent returns over longer time periods
with a reduction of risk (volatility), although a particular asset class or
investment style -- or particular fund investing in one asset class or using a
particular style -- may not achieve above-average performance at any given point
in the market.
Similarly, Frank Russell Company believes financial markets generally
are efficient, and few money managers have shown the ability to time the major
highs and lows in the securities markets with any high degree of consistency.
However, some money managers have shown a consistent ability to achieve superior
results within selected asset classes and styles and have demonstrated expertise
in particular areas. Thus, by combining a mix of investment styles within each
asset class and then selecting money managers for their ability to invest
effectively in a
-9-
<PAGE> 10
particular style, the expectation is the achievement of increased returns, while
controlling the amount of additional risk inherent in seeking such returns.
GENERAL MANAGEMENT OF THE INVESTMENT COMPANY
The Investment Company's Board of Directors is responsible for
overseeing generally the operation of the Investment Company, including
reviewing and approving the Investment Company's contracts with the Management
Company, FRC and the Money Managers. The Investment Company's officers, all of
whom are employed by and are officers of the Management Company or its
affiliates, are responsible for the day-to-day management and administration of
the Investment Company's operations. The Money Managers are responsible for
individual portfolio securities selection for the assets assigned to them.
The Management Company: (i) Provides or oversees the provision of all
general management and administration, investment advisory and portfolio
management, and distribution services for the Investment Company; (ii) provides
the Investment Company with office space, equipment, and personnel necessary to
operate and administer the Investment Company's business, and to supervise the
provision of services by third parties such as the Money Managers and custodian
bank; (iii) develops the investment programs, selects Money Managers, allocates
assets among Money Managers, and monitors the Money Managers' investment
programs and results; (iv) is authorized to select, or hire Money Managers to
select individual portfolio securities held in the Investment Company's
"Liquidity Portfolios" (see, "Investment Policies -- Liquidity Portfolios"); and
(v) provides the Investment Company with transfer agent and shareholder
recordkeeping services. The Management Company bears the expenses it incurs in
providing these services (other than transfer agent and shareholder
recordkeeping), as well as the costs of preparing and distributing explanatory
materials concerning the Funds (less any amounts reimbursed by the Insurance
Company for marketing materials).
The responsibility of overseeing the Money Managers rests upon the
officers and employees of the Management Company. These officers and employees,
including their business experience for the past five years, are identified
below:
Randall P. Lert, who has been Chief Investment Officer - Investment,
Frank Russell Investment Management Company since 1989.
-10-
<PAGE> 11
Loran M. Kaufman, who has been Director - Fund Development, Frank
Russell Investment Management Company since 1990. From 1986 to 1990,
Ms. Kaufman was employed as a Senior Research Analyst with the Frank
Russell Company.
Jean E. Carter, who has been a Senior Investment Officer of Frank
Russell Investment Management Company since 1994. From 1990 to 1994,
Ms. Carter was a Client Executive in the Investment Group of Frank
Russell Company.
James M. Imhof, Investment Officer, Frank Russell Investment Management
Company, who has managed the day to day management of the Frank Russell
Investment Management Company Funds and ongoing analysis and monitoring
of Fund managers since 1989.
Peter F. Apanovitch, who has been the Manager of Short-Term Investment
Funds for Frank Russell Investment Management Company and Frank Russell
Trust Company since 1991. From 1986 to 1989, Mr. Apanovitch was
Assistant Vice President and Assistant Treasurer of CIGNA Corporation.
James A. Jornlin, who has been a Senior Investment Officer of Frank
Russell Investment Management Company since April 1995. From 1991 to
March 1995, Mr. Jornlin was employed as a Senior Research Analyst with
Frank Russell Company.
Randal C. Burge, who has been a Senior Investment Officer of Frank
Russell Investment Management Company since June 1995. Mr. Burge was a
Senior Investment Officer of the Frank Russell Trust Company from
1990 to 1995. Mr. Burge was a Client Executive for Frank Russell
Company Australia.
Madelyn Smith, who has been a Senior Investment Strategist for the
Frank Russell Investment Management Company since January 1996. From
1993 to 1995, Ms. Smith was a member of a research investment
strategist for Frank Russell Company. From 1987 to 1993, Ms. Smith was
a director of Investment Equity Manager Research of Frank Russell
Company.
Dennis J. Trittin, who has been a Senior Portfolio Manager of Frank
Russell Investment Management Company since January 1996. From 1988 to
1996, Mr. Trittin was director of US Equity Manager Research Department
with Frank Russell Company.
C. Nola Williams, who has been a Senior Investment Strategist of Frank
Russell Investment Management Company since January 1996. From 1994 to
1995, Ms. Williams became a member of the Alpha Strategy Group. From
1988 to 1994, Ms. Williams was a Senior Research Analyst with Frank
Russell Company.
-11-
<PAGE> 12
FRC provides to each Fund and to the Management Company asset
management consulting services -- including the objective setting and asset
allocation technology, and the money manager research and evaluation assistance
- -- which FRC provides to its other consulting clients. FRC receives no fee from
the Investment Company or the Management Company for these consulting services.
FRC and the Management Company, as affiliated companies, may establish certain
intercompany cost allocations for budgeting and product profitability purposes
which may reflect FRC services supplied to the Management Company.
George F. Russell, Jr., Chairman of the Board of Directors of the Fund,
is the Chairman of the Board, President and controlling shareholder of FRC. The
Management Company is a wholly-owned subsidiary of FRC.
The Investment Company has received an exemptive order from the U.S.
Securities and Exchange Commission (the "SEC") which permits the Investment
Company, with the approval of its Board of Directors, to engage and terminate
money managers without a shareholder vote and to disclose, on an aggregate
basis, the fees paid to the money managers of each Investment Company Fund.
For its services, the Management Company receives a management fee from
each Fund. From this fee, the Management Company, acting as agent for the
Investment Company, is responsible for paying the money managers for their
investment selection services. The remainder is retained by the Management
Company as compensation for the services described above and to pay expenses.
The annual rate of the management fees, payable to the Management Company
monthly on a pro rata basis, are the following percentages of the average daily
net assets of each Fund: Multi-Style Equity Fund, .78%; Aggressive Equity Fund,
.95%; Non-U.S. Fund, .95%; Core Bond Fund, .45%; and Money Market Liquidity
Fund, .25%. The fees of some of the Funds may be higher than the fees charged by
some mutual funds with similar objectives which use only a single money manager.
FRC provides its Portfolio Verification System ("PVS") to all the
Funds, except the Money Market Fund, pursuant to a written Service Agreement.
The PVS computerized data base system records detailed transaction data for each
of the Funds necessary to prepare various financial and Internal Revenue Service
accounting reports. For these services, the Investment Company Funds pay the
following annual fees:
-12-
<PAGE> 13
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Analysis of
Transaction International
Base Fee Charge Holding Charge Management Report
-------- ------ -------------- -----------------
<S> <C> <C> <C> <C>
Equity Manager Portfolios $ 1,500 $ 0.10 $ 1.80 --
Fixed Income Manager Portfolio 2,500 2.00 12.00 --
Master Holding Portfolios 500 0.10 - 3.00 1.80 - 24.00 --
Multi-Currency Portfolio 14,000 3.00 24.00 $2,500
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Annual minimum charges are: Multi-Style Equity Fund, $25,000;
Aggressive Equity Fund, $15,000; Core Bond Fund, $31,000; and $290,000 for all
international Portfolios. Any additional domestic equity or fixed-income funds
will be billed using the same fee schedule, with an annual minimum fee of
$20,000 and $25,000, respectively.
In order to reduce the impact of fees on the Non-U.S. Fund, the
Management Company has volunteered to absorb a portion of these fees in
consideration of certain intercompany transfers between the Management Company
and FRC (its parent). The Management Company reserves the right to reduce or
eliminate this voluntary absorption of fees upon notification to the Non-U.S.
Fund's shareholders.
The Management Company receives an annual management fee from each
Fund. The Management Company, acting as agent for the Investment Company is
responsible for the payment of all fees to the Money Managers. The annual
management fee of each Fund is payable monthly on a pro rata basis, at the
annual rate of 0.78% from the Multi-Style Equity Fund, 0.95% from the Aggressive
Equity Fund, 0.95% from the Non-U.S. Fund, 0.45% from the Core Bond Fund, and
0.25% from the Money Market Liquidity Fund, based in each case on the average
daily net assets of the respective fund. The fee paid by some of the Funds may
be higher than fees charged to other mutual funds with similar objectives which
use only a single money manager.
EXPENSES OF THE FUNDS
The Funds will pay all of their expenses other than those expressly
assumed by Management Company. The Funds' principal expenses are expected to
include the management, transfer agent and recordkeeping fees payable to the
Management Company; fees for custodial
-13-
<PAGE> 14
and portfolio accounting services payable to State Street Bank and Trust
Company; fees for preparing tax records payable to Frank Russell Company; fees
for independent auditing and legal services; deferred organizational expenses;
and fees for filing reports and registering shares with regulatory bodies.
THE MONEY MANAGERS
The assets of each Fund are allocated currently among the Money
Managers listed in the section "Money Manager Profiles" and the Management
Company. THE ALLOCATION OF A FUND'S ASSETS AMONG MONEY MANAGERS AND THE
MANAGEMENT COMPANY MAY BE CHANGED AT ANY TIME BY THE MANAGEMENT COMPANY. MONEY
MANAGERS ARE EMPLOYED FOR MANAGEMENT OF THE ASSETS OF A FUND PURSUANT TO
MANAGEMENT CONTRACTS APPROVED BY THE BOARD OF DIRECTORS OF THE INVESTMENT
COMPANY (INCLUDING A MAJORITY OF CERTAIN DIRECTORS WHO ARE NOT INTERESTED
PERSONS OF THE INVESTMENT COMPANY OR THE MANAGER), AND A MONEY MANAGER'S
SERVICES MAY BE TERMINATED AT ANY TIME BY THE MANAGEMENT COMPANY, THE BOARD OF
DIRECTORS, OR THE SHAREHOLDERS OF AN AFFECTED FUND. A Fund may, without the
approval of its shareholders, provide for the employment of a new Money Manager
pursuant to the provisions of a new management contract. The Investment Company
will notify shareholders of the Fund concerned within 60 days of when a Money
Manager begins or stops providing services or of implementation of a material
change in a Money Manager's contract.
From its management fees, the Management Company, as agent for the
Investment Company, pays all fees to the Money Managers for their investment
selection services. Quarterly, each Money Manager is paid the pro rata portion
of an annual fee, based on the quarterly average of all the assets allocated to
the Money Manager. The Funds have yet to begin operations, and therefore no
management fees have yet been paid to Money Managers. Fees paid to the Money
Managers are not affected by any voluntary or statutory expense limitations.
Some Money Manager may receive investment research prepared by Frank Russell
Company as additional compensation, or may receive brokerage commissions for
executing portfolio transactions for the Funds through broker-dealer affiliates.
Each Money Manager has agreed that once the Investment Company has
advanced fees to the Management Company as agent to make payment of the Money
Manager's fee, that Money Manager will look only to the Management Company as
agent to make the payment of its fee.
-14-
<PAGE> 15
Money Managers are selected for the Investment Company's Funds based
primarily upon the research and recommendations of Frank Russell Company which
evaluates qualitatively and quantitatively each Money Manager's skills and
results in managing assets for specific asset classes, investment styles and
strategies. Short-term investment performance, by itself, is not a controlling
factor in recommending or terminating a Money Manager.
The Money Market Liquidity Fund is managed by Frank Russell Investment
Management Company. The individual responsible for the management of the Fund,
including his occupation for the past five years, is Peter F. Apanovitch, who
has been Manager of the Short-Term Investment Funds for Frank Russell Investment
Management Company and Frank Russell Trust Company since 1991. From 1986 to
1989, Mr. Apanovitch was Assistant Vice President and Assistant Treasurer of
CIGNA Corporation.
Each Money Manager has complete discretion to purchase and sell
portfolio securities for its segment of a Fund within the Fund's investment
objectives, restrictions and policies, and the more specific strategies
developed by FRC and the Management Company with respect to the particular
investment style for which the Money Manager was engaged. Although the Money
Managers' activities are subject to general oversight by the Board of Directors
and officers of the Investment Company, neither the Board, the officers, the
Management Company nor FRC evaluate the investment merits of the Money Managers'
portfolio security selections.
INVESTMENT OBJECTIVES, RESTRICTIONS AND POLICIES
Each Fund has certain "fundamental" investment objectives, restrictions
and policies which may be changed only with the approval of a majority of the
shareholders of that Fund. If there is a change in a fundamental investment
objective, investors should consider whether the Fund remains an appropriate
investment in light of their then current financial position and needs. Other
policies reflect current practices of the Funds, and may be changed by the Funds
without the approval of shareholders. This section of the Prospectus describes
the Funds' principal objectives, restrictions and policies. A more detailed
discussion appears in the Statement of Additional Information ("SAI").
INVESTMENT OBJECTIVES. Each Fund's objective is "fundamental," as are
the types of securities in which it will invest. Ordinarily, each Fund will
invest more than 65% of its net
-15-
<PAGE> 16
assets in the types of securities identified in its statement of objectives.
However, the Funds may hold assets as cash reserves for temporary and defensive
purposes when their Money Managers deem that a more conservative approach is
desirable or when suitable purchase opportunities do not exist. (See,
"Investment Policies - Cash Reserves.")
MULTI-STYLE EQUITY FUND'S objective is to provide income and capital
growth by investing principally in equity securities.
The Fund may invest in common and preferred stocks, securities
convertible into common stocks, rights and warrants.
AGGRESSIVE EQUITY FUND'S objective is to maximize total return through
income and primarily through capital appreciation and by assuming a higher level
of volatility than is ordinarily expected from the Multi-Style Equity Fund, by
investing in equity securities.
Current income is a secondary consideration in selecting securities.
The Fund may invest in common and preferred stock, convertible securities,
rights and warrants. The Fund's investments may include companies whose
securities have been publicly traded for less than five years and smaller
companies, such as companies not listed in the Russell 1000(R) Index. A
substantial portion of the Fund's portfolio will generally consist of equity
securities of "emerging growth-type" companies which tend to reinvest most of
their earnings, rather than pay significant cash dividends; or companies
characterized as "special situations" where the Money Manager believes that
cyclical developments in the securities markets, the industry, or the issuer
itself present opportunities for capital growth.
NON-U.S. FUND'S objective is to provide favorable total return and
additional diversification for US investors by investing primarily in equity and
fixed-income securities of non-US companies, and securities issued by non-US
governments.
The Fund invests primarily in equity securities issued by companies
domiciled outside of the United States. The Fund may also invest in fixed-income
securities, including instruments issued by non-US governments and their
agencies, and in US companies which derive, or are expected to derive, a
substantial portion of their revenues from operations outside the United States.
-16-
<PAGE> 17
The Fund may invest in equity and debt securities denominated in other
than US dollars and gold-related equity investments, including gold mining
stocks and gold-backed debt instruments. However, as a matter of fundamental
policy the Fund will not invest more than 20% of its net assets in gold-related
investments. Under normal market conditions, at least 65% of the value of the
Fund's total assets will be invested in at least three different countries, not
including the United States.
CORE BOND FUND'S objective is to provide maximum total return,
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from broad fixed-income market
portfolios, by investing in fixed-income securities.
The Fund will invest primarily in fixed-income securities. The Fund's
investments will include: US Government Securities; obligations of foreign
governments or their subdivisions, agencies and instrumentalities; securities of
international agencies or supranational agencies; corporate debt securities;
loan participations; corporate commercial paper; indexed commercial paper;
variable, floating and zero coupon rate securities; mortgage and other
asset-backed securities; municipal obligations; variable amount demand master
notes (these notes represent a borrowing arrangement between a commercial paper
issuer and an institutional lender, such as the Fund); bank certificates of
deposit, fixed time deposits and bankers' acceptances; repurchase agreements and
reverse repurchase agreements; and foreign currency exchange related securities.
The Fund may also invest in convertible securities and derivatives,
including warrants and interest rate swaps. Interest rate swaps involve the
exchange by the Fund with another party of its respective commitments to pay or
receive interest (e.g., an exchange of floating rate payments for fixed rate
payments. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
As described above, the Fund may invest in debt securities issued by
supranational organizations such as: the World Bank, which was chartered to
finance development projects in developing member countries; the European
Community, which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union of
various European nations' steel and coal industries; and the Asian
-17-
<PAGE> 18
Development Bank, which is an international development bank established to lend
funds, promote investment and provide technical assistance to member nations in
the Asian and Pacific regions.
The Fund may invest in debt securities denominated in the ECU, which is
a "basket" consisting of specific amounts of currency of member states of the
European Community. These specific amounts of currency comprising the ECU may be
adjusted by the Counsel of Ministers of the European Community to reflect
changes in the relative values of the underlying currencies. The Money Managers
investing in such securities do not believe that such adjustments will adversely
affect holders of ECU-denominated obligations or the marketability of such
securities. European supranationals, in particular, issue ECU-denominated
obligations.
Investments in bank certificates of deposit, time deposits and bankers'
acceptances include Eurodollar Certificates of Deposit ("ECD"), which are issued
by foreign branches of US or foreign banks; Eurodollar Time Deposits ("ETD"),
which are issued by foreign branches of US or foreign banks; and Yankee
Certificates of Deposit ("Yankee CDs"), which are issued by US branches of
foreign banks. These instruments may be US dollar or foreign currency
denominated and are subject to the risks of non-US issuers described under
"Investment Policies Investment in Foreign Securities."
The variable and floating rate securities the Fund may invest in
provide for a periodic adjustment in the interest rate paid on the obligations.
The terms of such obligations must provide that interest rates are adjusted
periodically based upon some appropriate interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be regular,
and range from daily up to annually, or may be event based, such as on a change
in the prime rate. The Fund may also invest in zero coupon, US Treasury, foreign
government and US and foreign corporate debt securities, which are bills, notes
and bonds that have been stripped of their unmatured interest coupons and
receipts or certificates representing interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest to its holder
prior to maturity. Accordingly, such securities usually trade at a deep discount
from their face or par value and will be subject to greater fluctuations of
market value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest.
-18-
<PAGE> 19
The Fund's portfolio may include debt securities issued by domestic or
foreign entities, and denominated in US dollars or foreign currencies. It is
anticipated that no more than 25% of the Fund's assets will be denominated in
foreign currencies. Foreign currency exchange transactions (options on foreign
currencies, foreign currency futures contracts and forward foreign currency
exchange contracts) will only be used by the Fund for the purpose of hedging
against foreign currency exchange risk arising from the Fund's investment, or
anticipated investment, in securities denominated in foreign currencies. Foreign
investment may include emerging market debt. The risks associated with
investment in securities issued by foreign governments and companies, and the
countries considered to be emerging markets, are described under "Investment
Policies - Investment in Foreign Securities." Emerging Markets consist of
countries determined by the Money Managers of the Fund to have developing or
emerging economies and markets. These countries generally include every country
in the world except the United States, Canada, Japan, Australia and most
countries located in Western Europe. The emerging market debt in which the Fund
may invest includes bonds, notes and debentures of emerging market governments
and debt and other fixed income securities issued or guaranteed by such
governments' agencies, instrumentalities or central banks, or by banks or other
companies in emerging markets determined by the Money Managers to be suitable
investments for the Fund. Under current market conditions, it is expected that
emerging market debt will consist predominantly of Brady Bonds and other
sovereign debt. Brady Bonds are products of the "Brady Plan," under which bonds
are issued in exchange for cash and certain of a country's outstanding
commercial bank loans.
The Fund may invest up to 25% of its assets in debt securities that are
rated below "investment grade" (i.e., rated lower than BBB by Standard & Poor's
("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's") or in unrated
securities judged by the Money Managers of the Fund to be of comparable quality.
Debt rated BB, B, CCC, CC and C and debt rated Ba, B, Caa, Ca and C is regarded
by S&P and Moody's, respectively, as predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. For S&P, BB indicates the lowest degree of speculation
and C the highest. For Moody's, Ba indicates the lowest degree of speculation
and C the highest. These lower rated securities may include obligations that are
in default or that face
-19-
<PAGE> 20
the risk of default with respect to principal or interest. Such securities are
sometimes referred to as "junk bonds." For additional information on the ratings
used by S&P and Moody's and a description of lower rated debt securities, please
refer to the Investment Company's SAI.
MONEY MARKET LIQUIDITY FUND'S objective is to provide the maximum
current income that is consistent with the preservation of capital and liquidity
and the maintenance of a stable $1.00 per share net asset value by investing
exclusively in US government obligations.
The Money Market Liquidity Fund expects to maintain, but does not
guarantee, a net asset value of $1.00 per share for purposes of purchases and
redemptions by valuing their portfolio securities at "amortized cost." The Fund
will maintain a dollar-weighted average maturity of 90 days or less, invest only
in securities with a remaining maturity at the time of purchase, or time of next
interest rate reset of 397 days or less, and follow procedures reasonably
designed to assure that the prices so determined approximate the current market
value of the portfolio securities.
INVESTMENT RESTRICTIONS. The Funds have fundamental investment
restrictions which cannot be changed without shareholder approval. The principal
restrictions are the following which, unless otherwise noted, apply on a
Fund-by-Fund basis at the time an investment is being made. No Fund will:
1. Invest in any security if, as a result of such investment, less than
75% of its assets would be represented by cash; cash items; securities of the US
government, its agencies, or instrumentalities; securities of other investment
companies; and other securities limited in respect of each issuer to an amount
not greater in value than 5% of the total assets of such Fund.
2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other than the US
government, its agencies and instrumentalities).
3. Acquire more than 5% of the outstanding voting securities, or 10% of
all of the securities, of any one issuer.
-20-
<PAGE> 21
4. Borrow amounts in excess of 5% of its total assets taken at cost or
at market value, whichever is lower, and then only for temporary purposes;
invest more than 5% of its assets in securities of issuers which, together with
any predecessor, has been in operation for less than three years; or invest more
than 5% of its assets in warrants.
INVESTMENT POLICIES. The Funds use certain investment instruments and
techniques commonly used by institutional investors. The principal policies are
the following:
Cash Reserves. Each Fund, other than the Money Market Liquidity Fund,
is authorized to invest its cash reserves (and funds awaiting investment in the
specific types of securities to be acquired by a Fund) in money market
instruments and in debt securities which are at least comparable in quality to
the Fund's permitted investments.
Repurchase Agreements. Each Fund may enter into repurchase agreements
with a bank or broker-dealer that agrees to repurchase the securities at the
Fund's cost plus interest within a specified time (normally next business day).
If the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at time of the agreement) should fall below
the repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Investment Policies - Illiquid Securities," no Fund
will invest more than 15% of its total assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Money Market
Liquidity Fund will not invest more than 10% of its total assets (taken at
current market value) in repurchase agreements, and other illiquid securities
maturing in more than seven days.
Forward Commitments. Each Fund may contract to purchase securities for
a fixed price at a future date beyond customary settlement time (a "forward
commitment" or "when-issued" transaction), so long as such transactions are
consistent with the Fund's ability to manage its investment portfolio and honor
redemption requests. When effecting such transactions, cash or liquid high-grade
debt obligations of the Fund of a dollar amount sufficient to make payment for
the portfolio securities to be purchased will be segregated on the Fund's
records at the trade date and maintained until the transaction is settled.
Reverse Repurchase Agreements. Each Fund may enter into reverse
repurchase agreements to meet redemption requests where the liquidation of
portfolio securities is deemed by a Money Manager to be inconvenient or
disadvantageous. A reverse repurchase agreement is a
-21-
<PAGE> 22
transaction whereby a Fund transfers possession of a portfolio security to a
bank or broker-dealer in return for a percentage of the portfolio security's
market value. The Fund retains record ownership of the security involved
including the right to receive interest and principal payments. At an agreed
upon future date, the Fund repurchases the security by paying an agreed upon
purchase price plus interest. Cash or liquid high-grade debt obligations of the
Fund equal in value to the repurchase price including any accrued interest will
be segregated on the Fund's records while a reverse repurchase agreement is in
effect. Subject to the limitations described in "Investment Policies - Illiquid
Securities."
Lending Portfolio Securities. Each Fund may lend portfolio securities
with a value of up to 50% of its total assets. Such loans may be terminated at
any time. The Fund will receive either cash (and agree to pay a "rebate"
interest rate), US government, or US government agency securities as collateral
in an amount equal to at least 100% of the current market value of the current
loaned securities plus accrued interest. The collateral is "marked-to-market" on
a daily basis, and the borrower will furnish additional collateral in the event
that the value of the collateral drops below 100% of the market value of the
loaned securities.
Cash collateral is invested in high-quality short-term instruments,
short-term bank collective investment and money market mutual funds (including
funds advised by State Street Bank, the Funds' Custodian, for which it may
receive an asset-based fee) and other investments meeting certain quality and
maturity requirements established by the Funds. Income generated from the
investment of the cash collateral is first used to pay the rebate interest cost
to the borrower of the securities and the remainder is then divided between the
Fund and the Fund's Custodian.
The Fund will retain most rights of beneficial ownership, including
dividends, interest or other distributions on the loaned securities. Voting
rights may pass with the lending. The Fund will call loans to vote proxies if a
material issue affecting the investment is to be voted upon. Should the borrower
of the securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Consequently, loans are made
only to borrowers which are deemed to be of good financial standing. The
Investment Company may incur costs or possible losses in excess of the interest
and fees received in connection with securities lending transactions. Some
securities purchased with cash collateral are subject to market fluctuations
-22-
<PAGE> 23
while a loan is outstanding. To the extent that the value of the cash collateral
as invested is insufficient to return the full amount of the collateral plus
rebate interest to the borrower upon termination of the loan, the Fund must
immediately pay the amount of the shortfall to the borrower.
Illiquid Securities. The Funds, other than the Money Market Liquidity
Fund, will not purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets (taken at current value) would be invested in
securities, including repurchase agreements of more than seven days' duration,
that are illiquid by virtue of the absence of a readily available market or
because of legal or contractual restrictions on resale. In the case of Money
Market Liquidity Fund this restriction is 10% of net assets. In addition, the
Funds will not invest more than 10% in securities of issuers which may not be
sold to the public without registration under the Securities Act of 1933. These
policies do not include (1) commercial paper issued under Section 4(2) of the
Securities Act of 1933 or (2) restricted securities eligible for resale to
qualified institutional purchasers pursuant to Rule 144A under the Securities
Act of 1933 that are determined to be liquid by the Money Managers in accordance
with Board approved guidelines. Such guidelines take into account trading
activity for such securities and the availability of reliable pricing
information, among other factors. If there is a lack of trading interest in a
particular Rule 144A security, the Fund's holding of that security may be
illiquid. There may be undesirable delays in selling illiquid securities at
prices representing their fair value.
Liquidity Portfolios. Management Company will exercise investment
discretion or select a money manager to exercise investment discretion for
approximately 5%-15% of the Multi-Style Equity, Aggressive Equity, and Non-U.S.
Funds' assets assigned to a "Liquidity Portfolio." The Liquidity Portfolio will
be used to create temporarily, through investments in options and futures
contracts, an equity exposure for cash balances until those balances are
invested in equities or used for Fund transactions. The purpose of having this
portfolio is to hedge against the effect that changes in general market
conditions might have on the value of securities that are held in the Funds'
portfolio or of securities that the Funds intend to purchase.
Investment in Foreign Securities. The Funds may invest in foreign
securities traded on US or foreign exchanges or in the over-the-counter market.
Investing in securities issued by foreign governments and corporations involves
considerations and possible risks not typically
-23-
<PAGE> 24
associated with investing in obligations issued by the US government and
domestic corporations. Less information may be available about foreign companies
than about domestic companies, and foreign companies generally are not subject
to the same uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic companies. The values of foreign investments are affected by changes in
currency rates or exchange control regulations, application of foreign tax laws,
including withholding taxes, changes in governmental administration or economic
or monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States. Investments in foreign countries could be affected by
other factors not present in the United States, including nationalization,
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods or restrictions affecting the
prompt return of capital to the United States.
The risks associated with investing in foreign securities are often
heightened for investments in developing or emerging markets. Moreover, the
economies of individual emerging market countries may differ favorably or
unfavorably from the US economy in such respects as the rate of growth in gross
domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Because the Fund's securities
will generally be denominated in foreign currencies, the value of such
securities to the Fund will be affected by changes in currency exchange rates
and in exchange control regulations. A change in the value of a foreign currency
against the US dollar will result in a corresponding change in the US dollar
value of the Fund's securities. In addition, some emerging market countries may
have fixed or managed currencies which are not free-floating against the US
dollar. Further, certain emerging market countries' currencies may not be
internationally traded. Certain of these currencies have experienced a steady
devaluation relative to the US dollar. Many emerging markets countries have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had,
and
-24-
<PAGE> 25
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries
Forward Foreign Currency Exchange Contracts ("forward currency
contracts"). The Non-U.S. and Core Bond Funds may enter into forward currency
contracts, which are agreements to exchange one currency for another -- for
example, to exchange a certain amount of US dollars for a certain amount of
Japanese Yen -- at a future date. The date (which may be any agreed upon fixed
number of days in the future), the amount of currency to be exchanged and the
price at which the exchange will take place, will be negotiated and fixed for
the term of the contract at the time that a Fund enters into a contract. The
Funds may engage in forward contracts that involve transacting in a currency
whose changes in value are considered to be linked (a proxy) to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated. Forward currency contracts are (a) traded in an
interbank market conducted directly between currency traders (typically,
commercial banks or other financial institutions) and their customers, (b)
generally have no deposit requirements and (c) are consummated without payment
of any commissions. The Funds may, however, enter into forward currency
contracts containing either or both deposit requirements and commissions. In
order to assure that the Fund's forward currency contracts are not used to
achieve investment leverage, the Funds will segregate cash or readily marketable
high-quality securities in an amount at all times equal to or exceeding the
Fund's commitment with respect to these contracts.
Upon maturity of a forward currency contract, the Funds may (a) pay for
and receive the underlying currency, (b) negotiate with the dealer to roll over
the contract into a new forward currency contract with a new future settlement
date or (c) negotiate with the dealer to terminate the forward contract by
entering into an offset with the currency trader whereby the Funds pay for and
receive the difference between the exchange rate fixed in the contract and the
then current exchange rate. The Fund also may be able to negotiate such an
offset prior to maturity of the original forward contract. There can be no
assurance that new forward contracts or offsets will always be available to the
Funds.
Forward currency contracts will be used only to hedge against
anticipated future changes in exchange rates which otherwise might either
adversely affect the value of the Fund's portfolio securities or adversely
affect the price of securities which the Funds intend to purchase at a later
-25-
<PAGE> 26
date. The amount the Funds may invest in forward currency contracts is limited
to the amount of the Fund's aggregate investments in foreign currencies.
The market for forward currency contracts may be limited with respect
to certain currencies. These factors will restrict a Fund's ability to hedge
against the risk of devaluation of currencies in which the Fund holds a
substantial quantity of securities and are unrelated to the qualitative rating
that may be assigned to any particular portfolio security. Where available, the
successful use of forward contracts draws upon a Money Manager's special skills
and experience with respect to such instruments and usually depends on the Money
Manager's ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, a
Fund may not achieve the anticipated benefits of forward contracts or may
realize losses and thus be in a worse position than if such strategies had not
been used. Unlike many exchange-traded futures contracts and options on futures
contracts, there are no daily price fluctuation limits with respect to forward
contracts and adverse market movements could therefore continue to an unlimited
extent over a period of time. In addition, the correlation between movements in
the prices of such instruments and movements in the price of the securities and
currencies hedged or used for cover will not be perfect. In the case of proxy
hedging, there is also a risk that the perceived linkage between various
currencies may not be present or may not be present during the particular time
the Funds are engaged in that strategy.
A Fund's ability to dispose of its positions in forward contracts will
depend on the availability of active markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of forward contracts. Forward foreign currency contracts may be closed out
only by the parties entering into an offsetting contract. Therefore, no
assurance can be given that a Fund will be able to utilize these instruments
effectively for the purposes set forth above.
Options. The Funds, other than the Money Market Liquidity Fund, may
purchase and sell (write) call and put options on securities and securities
indexes provided such options are traded on a national securities exchange or in
an over-the-counter market. The Funds, other than the Money Market Liquidity
Fund, may also purchase and sell put and call options on foreign currencies.
-26-
<PAGE> 27
A Fund may invest up to 5% of its assets, represented by the premium
paid, in call and put options. A Fund may write a call or put option to the
extent that the aggregate value of all securities or other assets used to cover
all such outstanding options does not exceed 25% of the value of its net assets.
Call and Put Options on Securities. A call option on a specific
security gives the purchaser of the option the right to buy, and obligates the
writer to sell, the underlying security at the exercise price at any time during
the option period. Conversely, a put option on a specific security gives the
purchaser of the option the right to sell, and obligates the writer to buy, the
underlying security at the exercise price at any time during the option period.
A Fund may purchase a call option on securities to protect against
substantial increases in prices of securities the Fund intends to purchase
pending its ability or desire to purchase such securities in an orderly manner.
A Fund may purchase a put option on securities to protect holdings in an
underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
to one another.
A Fund may write a call or a put option only if the option is covered
by the Fund holding a position in the underlying securities or by other means
which would permit immediate satisfaction of the Fund's obligations as the
writer of the option.
To close out a position when writing covered options, a Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
security with the same exercise price and expiration date as the option which it
previously wrote on the security. To close out a position as a purchaser of an
option, a Fund may make a "closing sale transaction," which involves liquidating
the Fund's position by selling the option previously purchased. The Fund will
realize a profit or loss from a closing purchase or sale transaction depending
upon the difference between the amount paid to purchase an option and the amount
received from the sale thereof.
The Funds intend to treat options in respect of specific securities
that are not traded on a national securities exchange and the securities
underlying covered call options as not readily marketable and therefore subject
to the limitations on the Funds' ability to hold illiquid securities.
-27-
<PAGE> 28
The Funds intend to purchase and write call and put options on specific
securities. The Funds will purchase and write options only to the extent
permitted by the policies of state securities authorities in states where the
shares of the Funds are qualified for offer and sale.
Securities Index Options. An option on a securities index is a contract
which gives the purchaser of the option, in return for the premium paid, the
right to receive from the writer of the option cash equal to the difference
between the closing price of the index and the exercise price of the option
times a multiplier established by the exchange on which the stock index is
traded. It is similar to an option on a specific security except that settlement
is in cash and gains and losses depend on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
price movements in the specific security. None of the Funds other than the
Multi-Style Equity, Aggressive Equity, and Non-U.S. Funds currently intends to
purchase and write call and put options on securities indexes.
The purchase and writing of options involves certain risks. If a put or
call option purchased by a Fund is not sold when it has remaining value, and if
the market price of the underlying security, in the case of a put, remains equal
to or greater than the exercise price or, in the case of a call, remains less
than or equal to the exercise price, the Fund will lose its entire investment
(i.e., the premium paid) on the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.
Where a Fund writes a call option, it has, in return for the premium it
receives, given up the opportunity to profit from a price increase in the
underlying security above the exercise price, but, as long as its obligation as
a writer continues, has retained the risk of loss should the price of the
underlying security decline. Where a Fund writes a put option, it is exposed
during the term of the option to a decline in the price of the underlying
security.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position.
Options on Foreign Currency. The Funds may purchase and write call and
put options on foreign currencies for the purpose of hedging against changes in
future currency exchange rates. Call options convey the right to buy the
underlying currency at a price which is expected to be
-28-
<PAGE> 29
lower than the spot price of the currency at the time the option expires. Put
options convey the right to sell the underlying currency at a price which is
anticipated to be higher than the spot price of the currency at the time the
option expires. Currency options traded on US or other exchanges may be subject
to position limits which may limit the ability of a Fund to reduce foreign
currency risk using such options. Over-the-counter options differ from traded
options in that they are two-party contracts with price and other terms
negotiated between buyer and seller and generally do not have as much market
liquidity as exchange-traded options. For a more detailed description of
options, including a discussion of the risks associated with options. See "Call
and Put Options on Specific Securities" above. None of the Funds currently
intends to write or purchase such exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Funds, other
than the Money Market Liquidity Fund, may invest in interest rate futures
contracts, stock index futures contracts and foreign currency futures contracts
and options thereon that are traded on a United States or foreign exchange or
board of trade.
An interest rate or foreign currency futures contract is an agreement
between two parties (buyer and seller) to take or make delivery of a specified
quantity of financial instruments (such as GNMA certificates or Treasury bonds)
or foreign currency at a specified price at a future date. A futures contract on
an index (such as the S&P 500) is an agreement between two parties (buyer and
seller) to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written. In
the case of futures contracts traded on US exchanges, the exchange itself or an
affiliated clearing corporation assumes the opposite side of each transaction
(i.e., as buyer or seller). A futures contract may be satisfied or closed out by
delivery or purchase, as the case may be, of the financial instrument or by
payment of the change in the cash value of the index. Frequently, using futures
to effect a particular strategy instead of using the underlying or related
security or index will result in lower transaction costs being incurred.
Each Fund may also purchase and write call options and put options on
futures contracts. An option on a futures contract gives the holder the right,
in return for the premium paid, to assume a long position (in the case of a
call) or a short position (in the case of a put) in a futures contract at a
specified exercise price prior to the expiration of the option. Upon exercise of
a call
-29-
<PAGE> 30
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true. An option on a futures contract may be closed out (before
exercise or expiration) by an offsetting purchase or sale of an option on a
futures contract of the same series.
There are several risks associated with the use of futures and options
on futures contracts for hedging purposes. There can be no guarantee that there
will be a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. An incorrect correlation could result in a
loss on both the hedged securities in a Fund and the hedging vehicle so that the
portfolio return might have been greater had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there is
no assurance that an active secondary market will develop or continue to exist.
Lack of a liquid market for any reason may prevent a Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed.
The Fund will only enter into futures contracts or options on futures
contracts which are standardized and traded on a US or foreign exchange or board
of trade, or similar entity, or quoted on an automated quotation system. A Fund
will enter into a futures contract only if the contract is "covered" or if the
Fund at all times maintains with its Custodian cash or cash equivalents equal to
or greater than the fluctuating value of the contract (less any margin or
deposit). A Fund will write a call or put option on a futures contract only if
the option is "covered." For a discussion of how to cover a written call or put
option, see "Options" above.
A Fund may enter into contracts and options on futures contracts for
"bona fide hedging" purposes, as defined under the rules of the Commodity
Futures Trading Commission. A Fund may also enter into futures contracts and
options on futures contracts for non-hedging purposes provided the aggregate
initial margin and premiums required to establish these positions will not
exceed 5% of the Fund's net assets.
-30-
<PAGE> 31
High Risk Bonds. The Funds, other than the Core Bond Fund, do not
invest assets in securities rated less than BBB by S&P or Baa by Moody's, or in
unrated securities judged by the Money Manager to be of a lesser credit quality
than those designations. Securities rated BBB by S&P or Baa by Moody's and above
are considered by those rating agencies to be "investment grade" securities,
although Moody's and S&P consider securities rated Baa to have some speculative
characteristics. The Funds, other than the Core Bond Fund, will dispose in a
prudent and orderly fashion securities whose ratings drop below these minimum
ratings. For additional information, please refer to the Funds' SAI.
The Core Bond Fund will invest in "investment grade" securities and may
invest up to 25% of its total assets in debt securities rated less than BBB by
S&P or Baa by Moody's, or in unrated securities judged by the Money Managers of
the Fund to be of comparable quality. Lower rated debt securities generally
offer a higher yield than that available from higher grade issues. However,
lower rated debt securities involve higher risks, in that they are especially
subject to adverse changes in general economic conditions and in the industries
in which the issuers are engaged, to changes in the financial condition of the
issuers and to price fluctuation in response to changes in interest rates.
During periods of economic downturn or rising interest rates, highly leveraged
issuers may experience financial stress which could adversely affect their
ability to make payments of principal and interest and increase the possibility
of default. In addition, the market for lower rated debt securities has expanded
rapidly in recent years, and its growth paralleled a long economic expansion.
The market for lower rated debt securities is generally thinner and less active
than that for higher quality securities, which would limit the Fund's ability to
sell such securities at fair value in response to changes in the economy or the
financial markets. While such debt may have some quality and protective
characteristics, these are outweighted by large uncertainties or major risk
exposure to adverse conditions. The Money Managers of the Fund will seek to
reduce the risks associated with investing in such securities by limiting the
Fund's holdings in such securities and by the depth of their own credit
analysis. For additional information, please refer to the SAI.
U.S. Government Obligations. The types of US government obligations the
Funds may at times invest in include: (1) A variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance: (a)
US Treasury bills have a maturity of one year
-31-
<PAGE> 32
or less; (b) US Treasury notes have original maturities of one to ten years; and
(c) US Treasury bonds have original maturities of greater than ten years; (2)
obligations issued or guaranteed by US government agencies and instrumentalities
are supported by any of the following: (a) the full faith and credit of the US
Treasury (such as Government National Mortgage Association participation
certificates); (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the US Treasury; (c) discretionary authority of the
US government agency or instrumentality; or (d) the credit of the
instrumentality (examples of agencies and instrumentalities are Federal Land
Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks, and Federal National
Mortgage Association). No assurance can be given that the US government will
provide financial support to such US government agencies or instrumentalities
described in (2)(b), (2)(c) and (2)(d) in the future, other than as set forth
above, since it is not obligated to do so by law. The Funds may purchase US
government obligations on a forward commitment basis.
PORTFOLIO TRANSACTION POLICIES
Decisions to buy and sell securities are made by the Money Managers for
the assets assigned to them, and by Management Company or the Money Manager for
the Liquidity Portfolios. Money Managers make decisions to buy or sell
securities independently from other managers. Thus, one manager could be selling
a security when another manager for the same Fund is purchasing the same
security. In addition, when a Money Manager's services are terminated and
another retained, the new Money Manager may significantly restructure the
portfolio. These practices may increase the Funds' portfolio turnover rates,
realization of gains or losses, brokerage commissions and other transaction
based costs. The annual portfolio turnover rates for each of the Funds (other
than the Money Market Liquidity Fund) are expected not to exceed 90% for the
Multi-Style Equity Fund, 90% for the Aggressive Equity Fund, 75% for the
Non-U.S. Fund, and 200% for the Core Bond Fund. A high portfolio turnover rate
generally will result in higher brokerage transaction costs and may result in
higher levels of realized capital gains or losses with respect to a Fund's
portfolio securities (see "Taxes"). The Investment Company's Board of Directors
monitors portfolio activities to minimize possible adverse consequences.
-32-
<PAGE> 33
The Funds may effect portfolio transactions with or through Frank
Russell Securities, Inc., an affiliate of Management Company, when the Money
Manager determines that the Fund will receive competitive execution, price and
commissions. Frank Russell Securities refunds up to 70% of the commission paid
to the Funds effecting such transactions, after reimbursement for research
services provided to Management Company, to reduce such Funds' brokerage
expenses and correspondingly enhance the Funds' investment returns. This
arrangement is used by Multi-Style Equity, Aggressive Equity, and Non-U.S.
Funds. All Funds may also effect portfolio transactions through and pay
brokerage commissions to Money Managers (or their affiliates).
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS. The Board of Directors presently intends to declare
dividends from net investment income and (Money Market Liquidity Fund only) net
short-term capital gains, if any, for payment on the following schedule:
<TABLE>
<CAPTION>
Declared Payable Fund
- -------- ------- ----
<S> <C> <C>
Daily 1st day of following month Money Market Liquidity Fund
Quarterly Mid: April, July, October and Core Bond, Multi-Style Equity and Aggressive Equity Funds
December
Annually Mid-December Non-U.S. Fund
</TABLE>
The Money Market Liquidity Fund determines net investment income
immediately prior to the determination of the net asset value per share at the
close of the New York Stock Exchange (currently 4:00 p.m. Eastern time) on each
business day. Net investment income will be credited daily to the accounts of
shareholders of record prior to the net asset value calculation and paid
monthly.
CAPITAL GAINS DISTRIBUTIONS. The Board intends to declare distributions
from net capital gains through October 31, (excess of net long-term capital gain
over net short-term capital losses) annually, generally in mid-December. In
addition, in order to satisfy certain distribution requirements a Fund may
declare special year-end dividend and capital gains distributions during
October, November or December to shareholders of record in such month. Such
distributions, if received by shareholders by January 31, are deemed to have
been paid by a Fund and received by
-33-
<PAGE> 34
shareholders on December 31 of the prior year. Net capital gains realized during
November and December will be distributed during the month of February of the
following year.
Investors should be aware that by purchasing shares shortly before the
record date of a dividend or capital gains distribution, they will pay the full
price for the Shares and then receive some portion of the price back as a
taxable dividend or capital gains distribution.
AUTOMATIC REINVESTMENT. All dividends and distributions will be
automatically reinvested, at the net asset value per share at the close of
business on the record date, in additional shares of the Fund paying the
dividend or making the distribution unless a shareholder elects to have
dividends or distributions paid in cash or invested in another Fund. Any
election may be changed by delivering written notice no later than ten days
prior to the payment date to Frank Russell Investment Management Company, the
Investment Company's transfer and dividend paying agent, at Operations
Department, P.O. Box 1591, Tacoma, WA 98401.
TAXES
Each Fund intends to qualify and to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended ("Code"). As such, a Fund is not subject to Federal income tax on that
part of its investment company taxable income (consisting generally of net
investment income, net gains from certain foreign currency transactions, and net
short-term capital gain, if any) and any net capital gain (the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
its shareholders. It is the intention of each Fund to distribute all such income
and gains.
Fund shares are offered only to separate accounts of insurance
companies (which are insurance company separate accounts that fund the variable
contracts). For a discussion of the taxation of life insurance companies and the
separate accounts, as well as the tax treatment of the variable contracts and
the holders thereof, see the discussion regarding "Federal Tax Considerations"
included in the prospectus for the variable contracts.
Each Fund intends to comply with the diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on each
Fund by Subchapter M of the Code and the 1940 Act. These requirements place
certain limitations on the assets of each separate account that may be invested
in securities of a single issuer, and, because Section 817(h) and the
regulations thereunder treat a Fund's assets as assets of the related separate
account, these limitations also
-34-
<PAGE> 35
apply to the Fund's assets that may be invested in securities of a single
issuer. Generally, the regulations provide that, as of the end of each calendar
quarter, or within 30 days thereafter, no more than 55% of a Fund's total assets
may be represented by any one investment, no more than 70% by any two
investments, nor more than 80% by any three investments, and no more than 90% by
any four investments. For purposes of Section 817(h), all securities of the same
issuer, all interests in the same real property project, and all interests in
the same commodity are treated as a single investment. A government security
includes any security issued or guaranteed or insured by the United States or an
instrumentality of the United States. Failure of a Fund to satisfy the Section
817(h) requirements could result in adverse tax consequences to the insurance
company and holders of Policies, other than as described in the prospectus for
the Policies.
The foregoing is only a summary of some of the important Federal income
tax considerations generally affecting the Funds and their shareholders; see the
SAI for a more detailed discussion. Prospective investors are urged to
consult their tax advisers.
PERFORMANCE AND YIELD INFORMATION
TOTAL RETURN
From time to time, in advertisements, sales literature, or reports to
shareholders, the performance of the Multi-Style Equity, Aggressive Equity,
Non-U.S. and Core Bond Funds may be quoted and compared to that of other mutual
funds with similar investment objectives and to other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., a widely recognized independent service which monitors the
performances of mutual funds. The performance of the Multi-Style Equity,
Aggressive Equity and Non-U.S. Funds may be also compared to the Standard &
Poor's 500 Stock Index ("S&P 500"), an index of unmanaged groups of common
stocks, the Consumer Price Index, the Dow Jones Industrial Average, a recognized
unmanaged index of common stocks of 30 industrial companies listed on the New
York Stock Exchange or the Russell 1000(R) Index, an index of the 1,000 largest
US companies by capitalization.
-35-
<PAGE> 36
Performance data as reported in national financial publications
including, but not limited to, Money Magazine, Forbes, The Wall Street Journal
and The New York Times, or in publications of a local regional nature, may also
be used in comparing the performance of these Funds.
From time to time, each of these Funds may advertise its performance
using "average annual total return" over various periods of time. Such total
return figure reflects the average percentage change in the value of an
investment in a Fund from the beginning date of the measuring period to the end
of the measuring period. Average total return figures will be given for the most
recent one-year periods, and may be given for other periods as well (such as
from the commencement of a Fund's operations, or on a year-by-year basis). Each
of these Funds may also use aggregate total return figures for various periods,
representing the cumulative change in the value of an investment in a Fund for
the specific period. Both methods of calculating total return assume that
dividends and capital gain distributions made by a Fund during the period are
reinvested in Fund shares. Fund total return information will not be quoted
separately from the corresponding total return information of a separate account
that invests in the relevant Fund.
YIELD
From time to time, in advertisements, sales literature, or reports to
shareholders, the yields of the Core Bond and Money Market Liquidity Funds may
be quoted and compared to those of other mutual funds with similar investment
objectives and to other relevant indexes or to rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the yield of the Money Market
Liquidity Fund may be compared to the applicable averages compiled by Donoghue's
Money Fund Report, a widely recognized independent publication that monitors the
performance of money market funds. Yield of the Money Market Liquidity Fund may
also be compared to the average yields reported by the Bank Rate Monitor for
money market deposit accounts offered by the 50 leading banks and thrift
institutions in the top five standard metropolitan statistical areas.
Yield data as reported in national financial publications including,
but not limited to, Money Magazine, Forbes, Barron's, The Wall Street Journal
and The New York Times, or in publications of a local or regional nature, may
also be used in comparing the Funds' yields.
-36-
<PAGE> 37
The Money Market Liquidity Fund may advertise a seven-day yield which
refers to the income generated over a particular seven-day period identified in
the advertisement by an investment in the Fund. This income is annualized, i.e.,
the income during a particular week is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. The Money Market
Liquidity Fund may also advertise its "effective yield" which is calculated
similarly but, when annualized, income is assumed to be reinvested, thereby
making the effective yields slightly higher because of the compounding effect of
the assumed reinvestment.
The Core Bond Fund may advertise its effective yield which is
calculated by dividing its average daily net investment income per share during
a 30-day (or one month) base period identified in the advertisement by its net
asset value per share on the last day of the period, and annualizing the result
on a semi-annual basis.
Performance and yields will fluctuate and any quotation of performance
or yield should not be considered as representative of a Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in a Fund with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Fund yield information will not be quoted
separately from the correspondence yield information of a separate account that
invests in the relevant Fund.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The net asset value per share is calculated
for each Fund on each business day on which shares are offered or orders to
redeem are tendered. For all Funds except the Money Market Liquidity Fund, a
business day is one on which the New York Stock Exchange is open for trading. A
business day for the Money Market Liquidity Fund includes any day on which the
New York Stock Exchange is open for trading and the Boston Federal Reserve Bank
is open. Net asset value per share is computed for a Fund by dividing the
current value of the Fund's assets, less its liabilities, by the number of
shares of the Fund outstanding, and rounding to the nearest cent. All Funds
determine net asset value as of the close of the New York Stock Exchange
(currently 4:00 p.m. Eastern time). The Money Market Liquidity Fund also
determines its net asset value as of 1:00 p.m. Eastern time.
-37-
<PAGE> 38
VALUATION OF PORTFOLIO SECURITIES. With the exceptions noted below, the
Funds value portfolio securities at "fair market value." This generally means
that equity securities and fixed-income securities listed and traded principally
on any national securities exchange are valued on the basis of the last sale
price or, lacking any sale, at the closing bid price, on the primary exchange on
which the security is traded. United States over-the-counter equity and
fixed-income securities and options are valued on the basis of the closing bid
price, futures contracts are valued on the basis of last sell price.
Because many fixed-income securities do not trade each day, last sale
or bid prices are frequently not available. Fixed-income securities therefore
may be valued using prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. International
equity securities traded on a national securities exchange are valued on the
basis of the last sale price. Non-U.S. traded over the counter are valued on the
basis of the mean of bid prices. In the absence of a last sale or mean bid
price, respectively, such securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
The Money Market Liquidity Fund's portfolio investments are valued on
the basis of amortized cost, a method by which each portfolio instrument is
initially valued at cost, and thereafter a constant accretion/amortization to
maturity of any discount or premium is assumed. The Fund utilizes the amortized
cost valuation method in accordance with Rule 2a-7 of the 1940 Act, as amended.
Money market instruments maturing within 60 days of the valuation date held by
Funds other than the Money Market Liquidity Fund are also valued at "amortized
cost" unless the Board determines that amortized cost does not represent fair
value. While this method provides certainty in valuation, it may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the Funds would receive if they sold the instrument.
The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith pursuant to procedures
established by the Board of Directors.
-38-
<PAGE> 39
PURCHASE OF FUND SHARES
Separate accounts of the Insurers place orders based on, among other
things, the amount of premium payments to be invested pursuant to Policies.
Individuals may not place orders directly with the Investment Company. See the
prospectus of the Separate Account and Policies of the Insurance Company for
more information on the purchase of Fund shares and with respect to the
availability for investment in specific Funds. The Funds do not issue share
certificates.
Purchase orders from Separate Accounts based on premiums and
transaction requests received by the Insurance Company on a given business day
in accordance with procedures established by the Insurance Company will be
effected at the net asset value of the applicable Fund determined on such
business day if the orders are received by the Investment Company in proper form
and in accordance with applicable requirements on the next business day and
Federal funds (monies of member banks within the Federal Reserve System which
are held on deposit at a Federal Reserve Bank) in the net amount of such orders
are received by the Investment Company on such next business day in accordance
with applicable requirements. It is each Insurance Company responsibility to
properly transmit purchase orders and Federal funds in accordance with
applicable requirements. Policy owners should refer to the prospectus for their
Policy and Separate Account in this regard.
REDEMPTION PROCEDURES
Fund shares may be redeemed at any time by the Separate Accounts of the
Insurance Companies. Individuals may not place redemption orders directly with
the Fund. Redemption requests for Separate Accounts based on premiums and
transaction requests received by the Insurance Company on a given business day
in accordance with procedures established by the Insurance Company will be
effected at the net asset value of the applicable Fund determined on such
business day if the requests are received by the Investment Company in proper
form and in accordance with applicable requirements on the next business day. It
is each Insurance Company's responsibility to properly transmit redemption
requests in accordance with applicable requirements. Policy owners should
consult their Insurance Company in this regard. The value of the shares redeemed
may be more or less than their original cost, depending on the Fund's
then-current net asset value. No charges are imposed by a Fund when shares are
redeemed.
-39-
<PAGE> 40
The Investment Company ordinarily will make payment for all shares
redeemed within seven days after receipt by the Investment Company or its
transfer agent of a redemption request in proper form, except as provided by
rules of the Securities and Exchange Commission.
Should any conflict between variable annuity Policy owners and variable
life insurance Policy owners arise which would require that a substantial amount
of net assets be withdrawn from a Fund, orderly Fund management could be
disrupted to the potential detriment of affected contract owners.
ADDITIONAL INFORMATION
CUSTODIAN, ACCOUNTANTS AND REPORTS. State Street Bank and Trust
Company, Boston, Massachusetts, holds all portfolio securities and cash assets
of each Fund and provides portfolio recordkeeping services. State Street is
authorized to deposit securities in securities depositories or to use the
services of sub-custodians. State Street has no responsibility for the
supervision and management of the Investment Company. Coopers & Lybrand, L.L.P.,
Boston, Massachusetts, are the Investment Company's independent accountants.
Shareholders will receive unaudited semiannual financial statements; the annual
statement is audited by Coopers & Lybrand, L.L.P.
ORGANIZATION, CAPITALIZATION AND VOTING. The Investment Company was
organized as a Maryland corporation on October 8, 1987. Frank Russell Company
has the right to grant the nonexclusive use of the name "Frank Russell" or any
derivation thereof to any other investment company or other business enterprise,
and to withdraw from the Investment Company the use of the name "Frank Russell"
or its derivations.
The Investment Company offers shares of five separate Funds which are
described in this prospectus. Each Fund, in effect, represents a separate mutual
fund with its own investment objectives and policies. Proceeds from the sale of
shares of each Fund will be invested in accordance with that Fund's investment
objectives and policies and a shareholder will be entitled to a pro rata share
of all dividends and distributions arising from the assets of the Fund in which
the shareholder has invested. Upon redeeming shares, the shareholder will
receive the current net asset value per share of the Fund represented by the
redeemed shares.
The shares of each Fund, when issued and paid for in accordance with
this prospectus, will be fully paid and non-assessable shares, with equal,
non-cumulative voting rights and no preferences as to conversion, exchange,
dividends, redemption or any other feature.
-40-
<PAGE> 41
Annual meetings of shareholders are held when required by the Maryland
General Corporation Law or when so called by the Board of Directors, Chairman of
the Board of Directors or the Secretary of the Fund. Special Meetings may also
be held. On any matter which affects only a particular Fund, only shareholders
of that Fund vote unless otherwise required by the Investment Company Act of
1940 or the Articles of Incorporation. The Directors of the Investment Company
hold office until their successors are elected and assume office. A Director may
resign or retire, and a Director may be removed at any time by, in substance, a
vote of the Investment Company's shares. A vacancy in the Board of Directors
shall be filled by the vote of a majority of the remaining Directors so long as,
in substance, two-thirds of the Directors have been elected by shareholders.
In connection with an exemptive order which the Investment Company
requested from the SEC, it has committed to a "pass-through" voting procedure
which will generally require an Insurance Company to cast votes at Investment
Company meetings as directed by Policyholders, and to cast votes for which it
has not received voting instructions from Policyholders in the same proportion
as those for which instructions have been received. Policyholders should review
their prospectus for their Policies to determine their rights and
responsibilities, and to ascertain when the Insurance Company may disregard
voting instructions.
Under the terms of an exemptive order received by the Investment
Company from the SEC, shares of the Fund may be sold to separate accounts of
more than one Insurance Company to fund variable life and variable annuity
Policies. The Investment Company Board of Directors will monitor events in order
to identify any material irreconcilable conflicts which may possibly arise and
to determine what action, if any, should be taken in response thereto. An
irreconcilable conflict that is not resolved might result in the withdrawal of a
substantial amount of assets, causing a negative impact on net asset value.
MONEY MANAGER PROFILES
The Money Managers, other than FRIMCo for the Money Market Liquidity
Fund have no other affiliations with the Funds or with Frank Russell Company.
Each Money Manager has been in business for at least three years, and is
principally engaged in managing institutional investment accounts. These Money
Managers may also serve as managers or advisers to other Investment Company
Funds, or to other clients of Frank Russell Company, including its wholly owned
subsidiary, Frank Russell Trust Company.
-41-
<PAGE> 42
MULTI-STYLE EQUITY FUND
Money Manager A, [identity, address and ownership information to be
provided]
Money Manager B, [identity, address and ownership information to be
provided]
Money Manager C, [identity, address and ownership information to be
provided]
AGGRESSIVE EQUITY FUND
Money Manager D, [identity, address and ownership information to be
provided]
Money Manager E, [identity, address and ownership information to be
provided]
Money Manager F, [identity, address and ownership information to be
provided]
NON-U.S. FUND
Money Manager G, [identity, address and ownership information to be
provided]
Money Manager H, [identity, address and ownership information to be
provided]
Money Manager I, [identity, address and ownership information to be
provided]
CORE BOND FUND
Money Manager J, [identity, address and ownership information to be
provided]
Money Manager K, [identity, address and ownership information to be
provided]
Money Manager L, [identity, address and ownership information to be
provided]
MONEY MARKET LIQUIDITY FUND
Frank Russell Investment Management Company, 909 A Street, Tacoma, WA
98402, a registered investment advisor wholly owned by Frank Russell Company.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATIONS THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUNDS OR
THE MONEY MANAGERS SINCE THE DATE HEREOF; HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
-42-
<PAGE> 43
RUSSELL INSURANCE FUNDS, INC.
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
<TABLE>
<S> <C>
MONEY MANAGERS
MULTI-STYLE EQUITY FUND MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Money Manager A Frank Russell Investment Management Co.
Money Manager B 909 A Street
Money Manager C Tacoma, Washington 98402
AGGRESSIVE EQUITY FUND CONSULTANT
Money Manager D Frank Russell Company
Money Manager E 909 A Street
Money Manager F Tacoma, Washington 98402
DISTRIBUTOR
NON-U.S FUND. Russell Fund Distributors, Inc.
Money Manager G 909 A Street
Money Manager H Tacoma, Washington 98402
Money Manager I
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
CORE BOND FUND One Post Office Square
Money Manager J Boston, Massachusetts 02109
Money Manager K
Money Manager L LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
MONEY MARKET LIQUIDITY FUND 2600 - One Commerce Square
Frank Russell Investment Management Co. Philadelphia, Pennsylvania 19103-7098
OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington (206) 627-7001
</TABLE>
-43-
<PAGE> 44
RUSSELL INSURANCE FUNDS, INC.
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
STATEMENT OF ADDITIONAL INFORMATION
___________, 1996
Russell Insurance Funds, Inc. (the "Investment Company") is a single legal
entity organized as a corporation under the laws of the State of Maryland. The
Investment Company operates five investment portfolios, each referred to as a
"Fund:"
Multi-Style Equity Fund
Aggressive Equity Fund
Non-U.S. Fund
Core Bond Fund
Money Market Liquidity Fund
The Funds serve as the investment base for a variety of insurance products (the
"Policies") to be issued by one or more insurance companies (the "Insurance
Company").
This Statement of Additional Information supplements or describes in greater
detail information concerning Investment Company and the Funds contained in the
Prospectuses of the Funds dated _______________, 1996. This Statement is not a
Prospectus; the Statement should be read in conjunction with the Funds'
Prospectuses. Prospectuses may be obtained without charge by telephoning or
writing the Investment Company at the number or address shown above. You should
retain this Statement of Additional Information for future reference.
-44-
<PAGE> 45
TABLE OF CONTENTS
Page
STRUCTURE AND GOVERNANCE
Organization and Business History
Shareholder Meetings
Controlling Shareholders
Directors and Officers
OPERATION OF INVESTMENT COMPANY
Service Providers
Consultant
Manager
Money Managers
Distributor
Custodian
Transfer and Dividend Disbursing Fund
Expenses
Valuation of Fund Shares
Portfolio Transaction Policies
Portfolio Turnover Rate
Brokerage Allocations
Brokerage Commissions
Yield and Total Return Quotations
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN
INVESTMENTS
Investment Restrictions
Investment Policies
Certain Investments
TAXES
RATINGS OF DEBT INSTRUMENTS
FINANCIAL STATEMENTS
-45-
<PAGE> 46
STRUCTURE AND GOVERNANCE
Organization and Business History. The Investment Company is a Maryland
Corporation which commenced business operations as an investment company on
______________, 1996.
The Investment Company is authorized to issue one class of common stock, but has
presently divided the stock into five series, each of which evidences pro rata
ownership interest in a different investment portfolio -- each referred to as a
"Fund." Under Maryland law the Board of Directors can create additional Funds
without seeking shareholder approval.
Shareholder Meetings. Subject to the Investment Company Act of 1940, as amended,
and the Maryland General Corporation Law, meetings of the stockholders of the
Investment Company, or of a Fund, may be called at any time by the Chairman, or
by the Secretary at the direction of a majority of the members of the Board of
Directors. Annual meetings of shareholders shall not be required to be held in
any year except that annual meetings must be held in a particular year if any of
the following is required to be voted on by the Investment Company Act of 1940:
(1) election of Directors; (2) approval of an Investment Advisory Agreement; (3)
ratification of the selection of independent public accountants; and (4)
approval of a Distribution Agreement.
Controlling Shareholders - Directors and Officers. The Directors have authority
and responsibility to manage the business of the Investment Company, and hold
office until their successors are elected and assume office, unless they resign
or are removed by, in substance, a vote of two-thirds of the Investment
Company's shares outstanding. The Board of Directors is responsible for
overseeing generally the operations of the Investment Company. The officers, all
of whom are employed by and are officers of Frank Russell Investment Management
Company (the "Management Company") or its affiliates, are responsible for the
day-to-day management and administration of the Investment Company's operations.
Investment Company did not pay any amounts for the year ended December 31, 1994
to the Directors as a group who are not officers or employees of Management
Company or its affiliates. Directors are paid an annual fee plus travel and
other expenses incurred in attending Board meetings. The Funds' officers and
employees, including those who are Directors, are paid by Frank Russell
Investment Management Company or its affiliates.
The following table lists the Directors and officers and their positions with
the Investment Company, their present and principal occupations during the past
five years, and the mailing addresses of Directors who are not affiliated with
the Investment Company. The mailing address for all Directors and officers
affiliated with the Investment Company is Russell Insurance Funds, Inc., 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that the Director or officer is an "interested person"
of the Investment Company as defined in the Investment Company Act of l940. As
used in the table, "Frank Russell Company" includes its corporate predecessor,
Frank Russell Co., Inc.
*George F. Russell, Jr. -- 63 years old -- Director. Trustee and Chairman of
the Board, Frank Russell Investment Company. Director and Chairman of the
Board, Frank Russell Company; Director, Chief Executive Officer and
-46-
<PAGE> 47
Chairman of the Board, Russell Building Management Company, Inc., Director and
Chairman of the Board, Frank Russell Securities, Inc. and Frank Russell Trust
Company, Director, Frank Russell Investment Management Company; Director,
Chairman of the Board and President of Russell 20-20 Association. March 1988 to
April 1992, Director of Russell-Zisler, Inc.; January 1957 to March 1993, Chief
Executive Officer of Frank Russell Company; March 1982 to November 1995,
Chairman of the Board of Frank Russell Investment Management Company.
*Lynn L. Anderson -- 56 years old -- Director and President. Trustee, President
and Chief Executive Officer, Frank Russell Investment Company. Director, Chief
Executive Officer and Chairman of the Board, Russell Fund Distributors, Inc.;
Trustee and President, The Seven Seas Series Fund (investment company);
Director, Chief Executive Officer and Chairman of the Board, Frank Russell
Investment Management Company; Director, Chief Executive Officer and President,
Frank Russell Trust Company; Director and Chairman, Frank Russell Investment
Company Public Limited Company; Director and Chairman of the Board, Frank
Russell Company (Delaware); March 1989 to June 1993, Director, Frank Russell
Company, Director of Frank Russell Investments (Ireland) Limited. Until
September 1994, Director and President, The Laurel Funds, Inc. (investment
company).
Paul E. Anderson -- 64 years old -- Director. 23 Forest Glen Lane, Tacoma,
Washington 98409. Trustee, Frank Russell Investment Company. President,
Vancouver Door Company, Inc.
Paul Anton, Ph.D. -- 76 years old -- Director. 22218 55th Street, N.W., Gig
Harbor, Washington 98335. Trustee, Frank Russell Investment Company. President,
Paul Anton and Associates (Marketing Consultant on emerging international
markets for small corporations). From 1986 to 1991, Visiting Associate
Professor, International Marketing School of Business Administration and
International Trade Institute, Portland State University, Portland, Oregon;
1991-1994, Adjunct Professor, International Marketing, University of Washington,
Tacoma, Washington.
William E. Baxter -- 60 years old -- Director. 800 North C Street, Tacoma,
Washington 98403. Trustee, Frank Russell Investment Company. Retired.
Lee C. Gingrich -- 65 years old -- Director. 1730 North Jackson, Tacoma,
Washington 98406. Trustee, Frank Russell Investment Company. President,
Gingrich Enterprises, Inc. (Business and Property Management).
Eleanor W. Palmer -- 69 years old -- Director. 2025 Narrows View Circle,
P.O. Box 1057, Gig Harbor, Washington 98335. Retired. Trustee, Frank Russell
Investment Company. Until August 1981, Director, Vice President and Treasurer of
Frank Russell Company; since October 1980, Director of Frank Russell Trust
Company.
*George W. Weber -- 44 years old -- Fund Treasurer and Chief Accounting Officer.
Fund Treasurer and Chief Account Officer, Frank Russell Investment Company;
Director of Finance and Operations, Frank Russell Trust Company; Director of
Fund Administration and Operation, Frank Russell Investment Management Company;
March 1993 to January 1996, Vice President, Operations, Funds Management, J.P.
Morgan; December 1985 to March 1993, Senior Vice President, Operations, Frank
Russell Investment Company, The Laurel Funds, Inc. and The Seven Seas Series
Fund (investment companies); Director of Operations, Frank Russell Investment
Management Company and Frank Russell Trust Company; Director, Russell Fund
Distributors, Inc.
-47-
<PAGE> 48
*Randall P. Lert -- 42 years old -- Director of Investments of Frank Russell
Investment Company. Senior Investment Officer and Director of Investment
Services, Frank Russell Trust Company; Director and Chief Investment Officer,
Frank Russell Investment Management Company; Director, Russell Fund
Distributors, Inc. April 1990 to November 1995, Director of Investments of Frank
Russell Investment Management Company.
*Karl J. Ege -- 54 years old -- Director and Secretary. Trustee, Secretary and
General Counsel of Frank Russell Investment Company; Director, Secretary and
General Counsel of Frank Russell Company; Secretary and General Counsel of
Frank Russell Investment Management Company, Frank Russell Trust Company and
Russell Fund Distributors, Inc.; Director and Secretary of Russell Building
Management Company; Director of Frank Russell Company Party Limited and Frank
Russell Japan; Director and Assistant Secretary of frank Russell Company
Limited and Russell Systems Ltd. Director, Frank Russell Investment Company
LLC, Frank Russell Investments (Cayman) Ltd., frank Russell Investment Company
Public Limited Company and Frank Russell Investments (Ireland) Limited;
Director and Secretary, Frank Russell Company (Delaware) and Frank Russell
International Services, Co., Inc.; Director, Secretary and General Counsel,
Russell Fiduciary Services Company and Frank Russell Capital Inc.; Director of
Frank Russell Company, S.A., Frank Russell Company (N.A.) Limited and Russell
Investment Nominee Co. PTY Ltd., Director and Secretary, Russell 20-20
Association. From July 1992 to June 1994, Director, President and Secretary of
Frank Russell Shelf Corporation. From 1972 to 1991, Partner, Bogle and Gates
(law firm).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation from Retirement Benefits Benefits Upon From the
Trustee the Accrued as Part of Retirement Investment Company
Investment Company the Paid to Trustees
Investment Company
Expenses
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------
Paul E. Anderson $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------------
Paul Anton, PhD. $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------------
William E. Baxter $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------------
Lee C. Gingrich $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------------
Eleanor W. Palmer $20,000 $0 $0 $20,000
- -----------------------------------------------------------------------------------------------------------------
George F. Russell $0 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-48-
<PAGE> 49
OPERATION OF INVESTMENT COMPANY
Service Providers. Most of Investment Company's necessary day-to-day operations
are performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Consultant Frank Russell Company
Manager, Transfer and Frank Russell Investment Management Company
Dividend Disbursing
Agent
Money Managers Multiple professional discretionary
investment management organizations
Custodian and Portfolio State Street Bank and Trust Company
Accountant
Consultant. Frank Russell Company, the corporate parent of Management Company,
was responsible for organizing Investment Company and provides ongoing
consulting services, described in the Prospectus, to Investment Company and
Management Company. Frank Russell Company provides (i) Portfolio Verification
Services ("PVS"), which are based upon a 100% transactional verification of all
securities purchases and sales, cash transactions and other investment portfolio
operations of each Money Manager's portfolio except Money Managers for the Money
Market Liquidity Fund, and (ii) Analysis of International Management Reports
("AIM") by country on each Non-US Fund's Money Manager's portfolio. The reports
are paid for by the Funds and provide certain of the financial and tax
accounting information required by Investment Company.
The Management Company does not pay Frank Russell Company an annual fee for
consulting services.
The Investment Company was not in operation in 1996, 1995, 1994 or 1993, and
therefore, no Fund paid any fees to Frank Russell Company for PVS and AIM
Reports.
Frank Russell Company provides comprehensive consulting and Money Manager
evaluation services to institutional clients, including Management Company and
Frank Russell Trust Company, and to high net worth individuals and families
($100 million) through its Russell Private Investment Division. Frank Russell
Company also provides: (i) consulting services for international investment to
these and other clients through its International Division and its wholly owned
subsidiaries, Frank Russell Company London (Frank Russell Company Limited),
Frank Russell Canada (Frank Russell Canada Limited/Limitee), Frank Russell
Australia (Frank Russell Company Pty., Limited), and Frank Russell Japan, Frank
Russell AG (Zurich), Frank Russell Company S.A. (Paris) Frank Russell Company
(N.Z.) Limited (New Zealand) and Frank Russell Company (Delaware)
(ii) investment account and portfolio evaluation services to corporate pension
plan sponsors and institutional Money Managers through its Russell Data Services
Division. Frank Russell Securities, Inc., a wholly owned subsidiary of Frank
Russell Company, carries on an institutional brokerage business as a member of
the New York Stock Exchange. Frank Russell Capital Inc., a wholly owned
subsidiary of Frank Russell Company carries on an investment banking business
as a registered
-49-
<PAGE> 50
broker-dealer. Frank Russell Trust Company, a wholly-owned subsidiary of Frank
Russell Company, provides comprehensive trust and investment management services
to corporate pension and profit-sharing plans. Frank Russell Investment (Cayman)
Ltd., a wholly owned subsidiary of Frank Russell Company, provides investment
advice and other services. Frank Russell Investment (Ireland) Ltd., a wholly
owned subsidiary of Frank Russell Company, provides investment advice and other
services. Frank Russell International Services Co., Inc., a wholly owned
subsidiary of Frank Russell Company, provides services to U.S. personnel
secunded to overseas enterprises. Russell Fiduciary Services Company, a wholly
owned subsidiary of Frank Russell Company, provides fiduciary services to
pension and welfare benefit plans and other institutional investors. The mailing
address of Frank Russell Company is 909 A Street, Tacoma, WA 98402.
Manager. Frank Russell Investment Management Company provides or oversees the
provision of all general management and administration, investment advisory and
portfolio management, and distribution services for the Funds. Management
Company provides the Funds with office space, equipment and the personnel
necessary to operate and administer the Funds' business and to supervise the
provision of services by third parties such as the Money Managers and custodian.
Management Company also develops the investment programs for each of the Funds,
selects Money Managers for the Funds (subject to approval by the Board of
Directors), allocates assets among Money Managers, monitors the Money Managers'
investment programs and results, and may exercise investment discretion over
assets invested in the Funds' Liquidity Portfolios. (See, "Investment Policies
- -- Liquidity Portfolios.") Management Company also acts as the Investment
Company's transfer agent, dividend disbursing agent, and as the Money Manager
for the Money Market Liquidity Fund. Management Company, as agent for the
Investment Company, pays the Money Managers' fees for the Funds, as a fiduciary
for the Funds.
Each of the Funds pays an annual management fee to Management Company, billed
monthly on a pro rata basis and calculated as a specified percentage of the
average daily net assets of each of the Funds. Management Company, on behalf of
the Investment Company, uses a portion of the Management Fee to pay the Money
Managers' fees for the Funds. In doing so, Management Company acts as a
fiduciary for the Funds.
Because the Investment Company has not commenced operations as of the date of
this Statement of Additional Information, no Fund has yet paid any management
fee to the Management Company.
Management Company is a wholly owned subsidiary of Frank Russell Company.
Management Company's mailing address is 909 A Street, Tacoma, WA 98402.
Money Managers. Except with respect to the Money Market Liquidity Fund, Money
Managers have no affiliations or relationships with Investment Company or
Management Company other than as discretionary managers for all or a portion of
a Fund's portfolio, except some Money Managers (and their affiliates) may effect
brokerage transactions for the Funds (see, "Brokerage Allocations" and
"Brokerage Commissions"). Money Managers may serve as advisers or discretionary
managers for Frank Russell Trust Company, Frank Russell Investment Company,
-50-
<PAGE> 51
other consulting clients of Frank Russell Company, and/or for accounts which
have no business relationship with the Frank Russell Company organization.
From its management fees, the Management Company, as agent for the Investment
Company, pays all fees to the Money Managers for their investment selection
services. Quarterly, each Money Manager is paid the pro rata portion of an
annual fee, based on the average for the quarter of all the assets allocated to
the Money Manager. The Funds have yet to begin operation, and therefore no
management fees have yet been paid to Money Managers. Fees paid to the Money
Managers are not affected by any voluntary or statutory expense limitations.
Some Money Managers may receive investment research prepared by Frank Russell
Company as additional compensation; or may receive brokerage commissions for
executing portfolio transactions for the Fund through broker-dealer affiliates.
Distributor. Russell Fund Distributors, Inc. serves as the distributor of
Investment Company shares. The distributor receives no compensation from
Investment Company for its services. The distributor is a wholly owned
subsidiary of Management Company and its mailing address is: 909 A Street,
Tacoma, WA 98402.
Custodian. State Street Bank and Trust Company serves as the custodian for the
Investment Company. State Street also provides the basic portfolio recordkeeping
required by each of the Funds for regulatory and financial reporting purposes.
State Street is paid an annual fee of [$________] per portfolio per Fund, plus
specified transaction costs per portfolio per Fund for these portfolio
recordkeeping services.
Transfer and Dividend Disbursing Agent. Management Company serves as Transfer
Agent for the Investment Company. For this service, Management Company is paid a
fee of [$15.00] per shareholder transaction. Management Company is also
reimbursed by the Investment Company for certain out-of-pocket expenses
including postage, taxes, wires, stationery, and telephone.
Independent Accountants. Coopers & Lybrand, L.L.P. serves as the independent
accountants of the Investment Company. Coopers & Lybrand, L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards, a review of
federal tax returns, and, pursuant to Rule 17f-2 of the Investment Company Act
of 1940, three security counts. The mailing address of Coopers & Lybrand,
L.L.P. is One Post Office Square, Boston, MA 02109.
Fund Expenses. The Funds will pay all their expenses other than those expressly
assumed by Management Company. The principal expense of the Funds is the annual
management fee payable to Management Company. The Funds' other expenses include:
fees for independent accountants, legal, transfer agent, registrar, custodian,
dividend disbursement, and portfolio and shareholder recordkeeping services fees
for Portfolio Verification Services and Analysis of International Management
Reports, and maintenance of tax records payable to Frank Russell Company (except
for Money Market Liquidity Fund); state taxes; brokerage fees and commissions;
insurance premiums; association membership dues; fees for filing of reports and
registering shares with regulatory bodies; deferred organizational expenses; and
such extraordinary expenses as may arise such as federal taxes and expenses
incurred in connection
-51-
<PAGE> 52
with litigation proceedings and claims and the legal obligations of the
Investment Company to indemnify its Directors, officers, employees,
shareholders, distributors and agents with respect thereto.
Whenever an expense can be attributed to a particular Fund, the expense is
charged to that Fund. Other common expenses are allocated among the Funds based
primarily upon their relative net assets.
Management Company may from time to time, voluntarily agree to reimburse Fund
expenses in excess of certain limits on an annualized basis. These limits may be
changed or rescinded at any time to certain of the Funds. In addition to such
"voluntary limits," if the expenses of any Fund exceed the expense limitations
established by the State of California, Management Company will pay the excess
amount. California's expense limitation is 2.5% of the Investment Company's
first $30 million of average net assets, 2.0% of the next $70 million of average
net assets, and 1.5% of the remaining average net assets for any year.
Valuation of Fund Shares. The net asset value per share is calculated for each
Fund on which shares are offered or orders to redeem are tendered. A business
day is one on which the New York Stock Exchange is open for trading, and for the
Money Market Liquidity Fund any day on which both the New York Stock Exchange
and the Boston Federal Reserve Bank are open for trading. Currently, the New
York Stock Exchange is open for trading every weekday except New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. The Boston Federal Reserve Bank is open for
business Good Friday and every day the New York Stock Exchange is open, except
Martin Luther King Day, Columbus Day, and Veterans Day.
The Non-US Fund's portfolio securities actively trade on foreign exchanges which
may trade on Saturdays and on days that the Fund does not offer or redeem
shares. The trading of portfolio securities on foreign exchanges on such days
may significantly increase or decrease the net asset value of Fund shares when
the shareholder is not able to purchase or redeem Fund shares. Further, because
foreign securities markets may close prior to the time the Fund determines net
asset value, events affecting the value of the portfolio securities occurring
between the time prices are determined and the time the Fund calculates net
asset value may not be reflected in the calculation of net asset value unless
the Management Company determines that a particular event would materially
affect the net asset value.
Portfolio Transaction Policies. Generally, securities are purchased for
Multi-Style Equity, Aggressive Equity, Non-US and Core Bond Funds for investment
income and/or capital appreciation and not for short-term trading profits.
However, these Funds may dispose of securities without regard to the time they
have been held when such action, for defensive or other purposes, appears
advisable to its Money Managers.
The portfolio turnover rates for certain Funds are likely to be somewhat higher
than the rates for comparable mutual funds with a single Money Manager.
Decisions to buy and sell securities for each Fund are made by a money manager
independently from other money managers. Thus, one Money Manager could be
selling a security when another Money Manager for the same Fund
-52-
<PAGE> 53
is purchasing the same security thereby increasing the Funds' portfolio turnover
ratios and brokerage commissions. The Funds' changes of Money Managers may also
result in a significant number of portfolio sales and purchases as the new Money
Manager restructures the former Money Manager's portfolio.
The Funds do not give significant weight to attempting to realize long-term,
rather than short-term, capital gains when making portfolio management
decisions.
Portfolio Turnover Rate. The portfolio turnover rate for each Fund is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
particular year, by the monthly average value of the portfolio securities owned
by the Fund during the year. For purposes of determining the rate, all
short-term securities, including options, futures, forward contracts, and
repurchase agreements, are excluded.
Because the Funds only recently began operations, they do not have a history of
portfolio turnover rates. However, portfolio turnover rates are expected not to
exceed those set forth in the prospectus under "Portfolio Transaction Policies."
Brokerage Allocations. Transactions on US stock exchanges involve the payment of
negotiated brokerage commissions; on non-US exchanges, commissions are generally
fixed. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, including most debt securities and money market
instruments, but the price includes an undisclosed "commission" in the form of a
mark-up or mark-down. The cost of securities purchased from underwriters
includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection of a
broker or dealer to execute portfolio transactions is usually made by the Money
Manager. The Investment Company's Agreements with Management Company and the
Money Managers provide, in substance and subject to specific directions from
officers of the Funds or Management Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Securities will ordinarily be
purchased from the primary markets, and the Money Manager shall consider all
factors it deems relevant in assessing the best overall terms available for any
transaction, including the breadth of the market in the security, the price of
the security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis).
In addition, those Agreements authorize the Management Company and Money
Manager, respectively, in selecting brokers or dealers to execute a particular
transaction and in evaluating the best overall terms available, to consider the
"brokerage and research services" (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) provided to the Funds, Management
Company and/or to the Money Manager (or their affiliates). The Management
Company and Money Managers are authorized to cause the Funds to pay a commission
to a broker or dealer who provides such brokerage and research services for
executing a portfolio transaction which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction. The
Investment Company, Management Company or the
-53-
<PAGE> 54
Money Manager, as appropriate, must determine in good faith that such commission
was reasonable in relation to the value of the brokerage and research services
provided -- viewed in terms of that particular transaction or in terms of all
the accounts over which Management Company or the Money Manager exercises
investment discretion. Any commission, fee or other remuneration paid to an
affiliated broker-dealer is paid in compliance with Investment Company's
procedures adopted in accordance with Rule 17e-1 of the Investment Company Act
of 1940, as amended.
Management Company does not expect the Investment Company to ordinarily effect a
significant portion of the Investment Company's total brokerage business with
broker-dealers affiliated with its Money Managers. However, a Money Manager may
effect portfolio transactions for the segment of the Funds' portfolio assigned
to the Money Manager with a broker-dealer affiliated with the manager, as well
as with brokers affiliated with other Money Managers.
The Investment Company effects portfolio transactions with or through Frank
Russell Securities, Inc., only when it has been determined by the applicable
Money Managers that the Investment Company will receive competitive execution,
price and commission. Frank Russell Securities refunds up to 70% of the
commissions paid to the Funds effecting such transactions, after reimbursement
for research services provided to the Management Company. This arrangement is
used by Multi-Style Equity, Aggressive Equity and Non-U.S. Funds.
Brokerage Commissions. The Board of Directors reviews, at least annually, the
commissions paid by the Funds to evaluate whether the commissions paid over
representative periods of time were reasonable in relation to commissions being
charged by other brokers and the benefits to the Funds. Frank Russell Company
maintains an extensive data base showing commissions paid by institutional
investors, which is the primary basis for making this evaluation. Certain
services received by the Management Company or Money Managers attributable to a
particular transaction may benefit one or more other accounts for which
investment discretion is exercised by the Money Manager, or a Fund other than
that for which the particular portfolio transaction was effected. The fees of
the Money Managers are not reduced by reason of their receipt of such brokerage
and research services.
Because the Funds had not yet commenced operations as of the date of this
Statement of Additional Information, they do not yet have a history of paying
brokerage commissions.
Yield and Total Return Quotations. The Funds compute their average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one, five and ten year periods (or
-54-
<PAGE> 55
life of the funds as appropriate), that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
N = number of years; and
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the one, five or ten year
period at the end of the one, five, or
ten year period (or fractional portion
thereof).
The calculation assumes that all dividends and distributions of each Fund are
reinvested at the price stated in the prospectus on the dividend dates during
the period, and includes all recurring fees that are charged to all shareholder
accounts. The average annual total returns for the Funds are reported in the
Prospectus.
Yields are computed by using standardized methods of calculation required by the
Securities and Exchange Commission. Yields for Funds are calculated by dividing
the net investment income per share earned during a 30-day (or one month) period
by the maximum offering price per share on the last day of the period, according
to the following formula:
YIELD = 2[(a-b+1)(6)-1]
----
cd
Where: a = dividends and interest earned during the
period
b = expenses accrued for the period (net of
reimbursements)
c = average daily number of shares
outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on
the last day of the period
The yields for the Funds investing primarily in fixed income instruments are
reported in the Funds Prospectus.
The Money Market Liquidity Fund computes its current annualized and compound
effective annualized yields using standardized methods required by the
Securities and Exchange Commission. The annualized yield for the Money Market
Liquidity Fund is computed by (a) determining the net change in the value of a
hypothetical account having a balance of one share at the beginning of a seven
calendar day period; (b) dividing the net change by the value of the account at
the beginning of the period to obtain the base period return; and (c)
annualizing the results (i.e., multiplying the base period return by 365/7). The
net change in the value of the account reflects the value of additional shares
purchased with dividends declared on both the original share and such additional
shares, but does not include realized gains and losses or unrealized
appreciation and depreciation. Compound effective yields are computed by adding
1
-55-
<PAGE> 56
to the base period return (calculated as described above), raising that sum to a
power equal to 365/7 and subtracting 1.
Yield may fluctuate daily and does not provide a basis for determining future
yields. Because the Money Market Liquidity Fund's yield fluctuates, its yield
cannot be compared with yields on savings accounts or other investment
alternatives that provide an agreed-to or guaranteed fixed yield for a stated
period of time. However, yield information may be useful to an investor
considering temporary investments in money market instruments.
Current and effective yields for the Money Market Liquidity Fund are reported in
the Fund's Prospectus.
Each Fund may, from time to time, advertise non-standard performances, including
average annual total return.
Each Fund may compare its performance with various industry standards of
performance, including Lipper Analytical Services, Inc. or other industry
publications, business periodicals, rating services and market indices.
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS
Each Fund has certain fundamental investment objectives, restrictions and
policies which may be changed only with the approval of a majority of the
shareholders of that Fund. Other policies may be changed by the Funds without
shareholder approval. The Funds' investment objectives are set forth in the
Prospectus.
Investment Restrictions. Each Fund is subject to the following fundamental
investment restrictions. Unless otherwise noted, these restrictions apply on a
Fund-by-Fund basis at the time an investment is being made. No Fund will:
1. Invest in any security if, as a result of such investment, less than 75%
of its assets would be represented by cash; cash items; securities of
the US government, its agencies, or instrumentalities; securities of
other investment companies; and other securities limited in respect of
each issuer to an amount not greater in value than 5% of the total
assets of such Fund. Investments by Funds in shares of the Money Market
Liquidity Fund are not subject to this restriction, or to Investment
Restrictions 2, 3, 10 and 14. (See, "Investment Policies -- Cash
Reserves.")
2. Invest 25% or more of the value of the Fund's total assets in the
securities of companies primarily engaged in any one industry (other
than the US government, its agencies and instrumentalities), but such
concentration may occur incidentally as a result of changes in the
market value of portfolio securities. The Money Market Liquidity Fund
may invest more than 25% of its assets in money market instruments
issued by domestic branches of US banks having net assets in excess of
$100,000,000.
-56-
<PAGE> 57
3. Acquire more than 5% of the outstanding voting securities, or 10% of all
of the securities, of any one issuer.
4. Invest in companies for the purpose of exercising control or management.
5. Purchase or sell real estate; provided that a Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
6. Purchase or sell commodities or commodities contracts, or interests in
oil, gas or other mineral exploration or development programs, except
stock index and financial futures contracts.
7. Borrow amounts more than 5% of the Fund's total assets taken at cost or
at market value, whichever is lower, and only from banks as a temporary
measure for extraordinary or emergency purposes, except that a Fund may
engage in reverse repurchase agreements to meet redemption requests
without immediately selling any portfolio instruments. The Fund will not
mortgage, pledge or in any other manner transfer as security for any
indebtedness, any of its assets. Collateral arrangements with respect to
margin for futures contracts are not deemed a pledge of assets.
8. Purchase securities on margin or effect short sales (except that a Fund
may obtain such short-term credits as may be necessary for the clearance
of purchases or sales of securities, may trade in futures and related
options, and may make margin payments in connection with transactions in
futures contracts and related options).
9. Engage in the business of underwriting securities issued by others or
purchase securities, except as permitted by the Money Market Liquidity
Fund's investment objectives.
10. Invest in securities of an issuer which, together with any predecessor,
has been in operation for less than three years if, as a result, more
than 5% of the Fund's total assets would then be invested in such
securities.
11. The Investment Company will not participate on a joint or a joint and
several basis in any trading account in securities except to the extent
permitted by the Investment Company Act of 1940, as amended, and any
applicable rules and regulations and except as permitted by any
applicable exemptive orders from the 1940 Act. The "bunching" of orders
for the sale or purchase of marketable portfolio securities with two or
more Funds, or with a Fund and such other accounts under the management
of Management Company or any Money Manager for the Funds to save
brokerage costs or to average prices among them shall not be considered
a joint securities trading account. The purchase of shares of the Money
Market Liquidity Fund by any other Fund shall also not be deemed to be a
joint securities trading account.
12. Make loans of money or securities to any person or firm; provided,
however, that the making of a loan shall not be construed to include (i)
the acquisition for investment of
-57-
<PAGE> 58
bonds, debentures, notes or other evidences of indebtedness of any
corporation or government which are publicly distributed or of a type
customarily purchased by institutional investors; (ii) the entry into
"repurchase agreements"; or (iii) the lending of portfolio securities in
the manner generally described and in the Funds' prospectus section
"Investment Policies -- Lending Portfolio Securities."
13. Purchase or sell options except to the extent permitted by the policies
set forth in the sections "Certain Investments -- Options on Securities
and Indices", "Certain Investments -- Foreign Currency Options",
"Certain Investments -- Futures Contracts and Options on Future
Contracts" and "Certain Investments -- Forward Foreign Currency
Contracts" below.
14. The Investment Company will not purchase the securities of other
investment companies except to the extent permitted by the Investment
Company Act of 1940, as amended, and any applicable rules and
regulations and except as permitted by any applicable exemptive orders
from the 1940 Act.
15. Purchase from or sell portfolio securities to its officers, Directors or
other "interested persons" (as defined in the Investment Company Act of
1940) of the Fund, including the Fund's Money Managers and their
affiliates, except as permitted by the Investment Company Act of 1940,
SEC rules or exemptive orders.
Additional fundamental policies are: (a) No Fund will invest more than 5% of the
current market value of its assets in warrants nor more than 2% of such value in
warrants which are not listed on the New York or American Stock Exchanges;
warrants attached to other securities are not subject to this limitation. (b) No
Fund will purchase or retain the securities of an issuer if, to the Fund's
knowledge, one or more of the Directors or officers of the Fund, or one or more
of the officers or directors of the Money Manager responsible for the investment
or its directors or officers, individually own beneficially more than l/2 of l%
of the securities of such issuer and together own beneficially more than 5% of
such securities. Compliance with this policy by the Fund's Directors and
officers is monitored by Fund officers.
Each Fund has adopted the following additional "non-fundamental" investment
restrictions, which may be changed without shareholder approval, in compliance
with applicable law and regulatory policy. No Fund will:
1) Invest in real estate limited partnerships that are not
readily marketable.;
2) Invest in oil, gas and mineral leases.
Investment Policies.
Liquidity Portfolios. A Fund at times has to sell portfolio
securities in order to meet redemption requests. The selling of securities may
effect a Fund's performance since the Money Manager sells the securities for
other than investment reasons. A Fund can avoid selling its portfolio securities
by holding adequate levels of cash to meet anticipated redemption requests.
-58-
<PAGE> 59
The holding of significant amounts of cash is contrary to the
investment objectives of each of the Funds. The more cash the Funds hold, the
more difficult it is for their returns to meet or surpass their respective
benchmarks.
A Liquidity Portfolio addresses this potential detriment by
having Management Company or a Money Manager selected for this purpose create an
equity exposure for cash reserves through the use of options and futures
contracts. This will enable the Funds to hold cash while receiving a return on
the cash which is similar to holding equity securities.
Liquidity Portfolios are currently used for each of the Funds.
Money Market Instruments. The Money Market Liquidity Fund
expects to maintain, but does not guarantee, a net asset value of $1.00 per
share for purposes of purchases and redemptions by valuing its Fund shares at
"amortized cost." The Money Market Liquidity Fund will maintain a
dollar-weighted average maturity of 90 days or less. The Fund will invest in
securities with maturities of 397 days or less at the time from the trade date
or such other date upon which the fund's interest in security is subject to
market action. The Fund will follow procedures reasonably designed to assure
that the prices so determined approximate the current market value of the Fund's
securities. The procedures also address such matters as diversification and
credit quality of the securities the Fund purchases, and were designed to ensure
compliance by the Fund with the requirements of Rule 2a-7 of the Investment
Company Act of 1940, as amended. For additional information concerning this
Fund, refer to the Prospectus.
Russell 1000(R) Index. The Russell 1000(R) Index consists of
the 1,000 largest US Companies by capitalization. The Index does not include
cross corporate holdings in a company's capitalization. For example, when IBM
owned approximately 20% of Intel, only 80% of the total shares outstanding of
Intel were used to determine Intel's capitalization. Also not included in the
Index are closed-end investment companies, companies that do not file a Form
10-K report with the Securities and Exchange Commission, foreign securities, and
American Depository Receipts (ADRs).
The Index's composition is changed annually to reflect changes
in market capitalization and share balances outstanding. These changes are
expected to represent less than 1% of the total market capitalization of the
Index. Changes for mergers and acquisitions are made when trading ceases in the
acquirer's shares. The 1,001st largest US company by capitalization is then
added to the Index to replace the acquired stock.
Certain Investments.
Repurchase Agreements. Each Fund may enter into repurchase
agreements with the seller -- a bank or securities dealer -- who agrees to
repurchase the securities at the Fund's cost plus interest within a specified
time (normally one day). The securities purchased by the Fund have a total value
in excess of the value of the repurchase agreement and are held by the Fund's
custodian bank until repurchased. Repurchase agreements assist a Fund in being
invested fully while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature.
-59-
<PAGE> 60
The Fund will limit repurchase transactions to those member banks of the
Federal Reserve System and primary dealers in US government securities whose
credit worthiness is continually monitored and found satisfactory by the Funds'
Money Managers.
Reverse Repurchase Agreements. Each Fund may enter into
reverse repurchase agreements to meet redemption requests where the liquidation
of portfolio securities is deemed by the Fund's Money Manager to be inconvenient
or disadvantageous. A reverse repurchase agreement is a transaction whereby a
Fund transfers possession of a portfolio security to a bank or broker-dealer in
return for a percentage of the portfolio securities' market value. The Fund
retains record ownership of the security involved including the right to receive
interest and principal payments. At an agreed upon future date, the Fund
repurchases the security by paying an agreed upon purchase price plus interest.
Cash or liquid high-grade debt obligations of the Fund equal in value to the
repurchase price including any accrued interest will be segregated on the Fund's
records while a reverse repurchase agreement is in effect.
High Risk Bonds. The Funds do not invest assets in securities
rated less than BBB by Standard & Poor's Ratings Group ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's"), or in unrated securities judged by the
Money Manager to be of a lesser credit quality than those designations.
Securities rated BBB by S&P or Baa by Moody's are the lowest ratings which are
considered "investment grade." The Funds will dispose of securities which they
have purchased which drop below these minimum ratings.
Securities rated BBB by S&P or Baa by Moody's may involve
greater risks than securities in higher rating categories. Securities receiving
S&P's BBB rating are regarded as having adequate capacity to pay interest and
repay principal. Such securities typically exhibit adequate investor protections
but adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rating categories.
Securities possessing Moody's Baa rating are considered medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security is judged adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics and in fact may have speculative characteristics as
well.
Illiquid Securities. The expenses of registration of
restricted securities that are illiquid (excluding securities that may be resold
by the Fund pursuant to Rule 144A, as explained in the Prospectus) may be
negotiated at the time such securities are purchased by a Fund. When
registration is required, a considerable period may elapse between a decision to
sell the securities and the time the sale would be permitted. Thus, the Fund may
not be able to obtain as favorable a price as that prevailing at the time of the
decision to sell. The Fund also may acquire, through private placements,
securities having contractual resale restrictions, which might lower the amount
realizable upon the sale of such securities.
Delayed Delivery Transactions. A Fund may make contracts to
purchase securities for a fixed price at a future date beyond customary
settlement time ("forward
-60-
<PAGE> 61
commitments" or "when-issued" transactions) consistent with the Fund's ability
to manage its investment portfolio and meet redemption requests. The Fund may
dispose of a commitment or when issued transaction prior to settlement if it is
appropriate to do so and realize short-term profits or losses upon such sale.
When effecting such transactions, cash or liquid high-grade debt obligations of
the Fund in a dollar amount sufficient to make payment for the portfolio
securities to be purchased will be segregated on the Fund's records at the trade
date and maintained until the transaction is settled. Forward commitments and
when-issued transactions involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date or the other party to the
transaction fails to complete the transaction.
Additionally, under certain circumstances, the Non-U.S. Fund may occasionally
engage in "free trade" transactions in which delivery of securities sold by the
Fund is made prior to the Fund's receipt of cash payment therefor or the Fund's
payment of cash for portfolio securities occurs prior to the Fund's receipt of
those securities. "Free trade" transactions involve the risk of loss to a Fund
if the other party to the "free trade" transaction fails to complete the
transaction after the Fund has tendered cash payment or securities, as the case
may be.
Options and Futures The Funds, other than the Money Market
Liquidity Fund, may purchase and sell (write) both call and put options on
securities, securities indexes, and foreign currencies, and enter into interest
rate, foreign currency and index futures contracts and purchase and sell options
on such futures contracts for hedging purposes. If other types of options,
futures contracts, or options on futures contracts are traded in the future, the
Funds may also use those instruments, provided that the Funds' Board determines
that their use is consistent with the Funds' investment objectives, and provided
that their use is consistent with restrictions applicable to options and futures
contracts currently eligible for use by the Funds (i.e., that written call or
put options will be "covered" or "secured" and that futures and options on
futures contracts will be used only for hedging purposes).
Options on Securities and Indexes. Each Fund, except as noted
above, may purchase and write both call and put options on securities and
securities indexes in standardized contracts traded on foreign or national
securities exchanges, boards of trade, or similar entities, or quoted on NASDAQ
or on a regulated foreign over-the-counter market, and agreements, sometimes
called cash puts, which may accompany the purchase of a new issue of bonds from
a dealer.
An option on a security (or index) is a contract that gives
the holder of the option, in return for a premium, the right to buy from (in the
case of a call) or sell to (in the case of a put) the writer of the option the
security underlying the option (or the cash value of the index) at a specified
exercise price at any time during the term of the option. The writer of an
option on a security has the obligation upon exercise of the option to deliver
the underlying security upon payment of the exercise price or to pay the
exercise price upon delivery of the underlying security. Upon exercise, the
writer of an option on an index is obligated to pay the difference between the
cash value or the index and the exercise price multiplied by the specified
multiplier for the index option. (An index is designed to reflect specified
facets of a particular financial or securities market, a specified group of
financial instruments or securities, or certain economic indicators.)
-61-
<PAGE> 62
A Fund will write call options and put options only if they
are "covered." In the case of a call option on a security, the option is
"covered" if the Fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are placed in a segregated account by its custodian)
upon conversion or exchange of other securities held by the Fund. For a call
option on an index, the option is covered if the Fund maintains with its
custodian cash or cash equivalents equal to the contract value. A call option is
also covered if the Fund holds a call on the same security or index as the call
written where the exercise price of the call held is (1) equal to or less than
the exercise price of the call written, or (2) greater than the exercise price
of the call written, provided the difference is maintained by the Fund in cash
or cash equivalents in a segregated account with its custodian. A put option on
a security or an index is "covered" if the Fund maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
custodian. A put option is also covered if the Fund holds a put on the same
security or index as the put written where the exercise price of the put held is
(1) equal to or greater than the exercise price of the put written, or (2) less
than the exercise price of the put written, provided the difference is
maintained by the Fund in cash or cash equivalents in a segregated account with
its custodian.
If an option written by a Fund expires, the Fund realizes a
short term capital gain equal to the premium received at the time the option was
written. If an option purchased by a Fund expires unexercised, the Fund realizes
a capital loss (long or short term depending on whether the Fund's holding
period for the option is greater than one year) equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may
be closed out by an offsetting purchase or sale of an option of the same series
(type, exchange, underlying security or index, exercise price, and expiration).
There can be no assurance, however, that a closing purchase or sale transaction
can be effected when the Fund desires.
A Fund will realize a short term capital gain from a closing
transaction on an option it has written if the cost of the closing option is
less than the premium received from writing the option, or, if it is more, the
Fund will realize a capital loss. If the premium received from a closing sale
transaction is more than the premium paid to purchase the option, the Fund will
realize a capital gain or, if it is less, the Fund will realize a capital loss.
With respect to closing transactions on purchased options, the capital gain or
loss realized will be short or long term depending on the holding period of the
option closed out. The principal factors affecting the market value of a put or
a call option include supply and demand, interest rates, the current market
price of the underlying security or index in relation to the exercise price of
the option, the volatility of the underlying security or index, and the time
remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund
is an asset of the Fund. The premium received for an option written by a Fund is
recorded as a deferred credit. The value of an option purchased or written is
marked-to-market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.
-62-
<PAGE> 63
Risks Associated with Options on Securities and Indexes. There
are several risks associated with transactions in options on securities and on
indexes. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. If a Fund were unable to close out
an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option may expire worthless. If a
Fund were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, a Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund,
the Fund would not be able to close out the option. If restrictions on exercise
were imposed, the Fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by the Fund is
covered by an option on the same index purchased by the Fund, movements in the
index may result in a loss to the Fund; however, such losses may be mitigated by
changes in the value of the Fund's securities during the period the option was
outstanding.
Foreign Currency Options. A Fund may buy or sell put and call
options on foreign currencies either on exchanges or in the over-the-counter
market. A put option on a foreign currency gives the purchaser of the option the
right to sell a foreign currency at the exercise price until the option expires.
Currency options traded on US or other exchanges may be subject to position
limits which may limit the ability of a Fund to reduce foreign currency risk
using such options. Over-the-counter options differ from traded options in that
they are two-party contracts with price and other terms negotiated between buyer
and seller, and generally do not have as much market liquidity as
exchange-traded options.
Futures Contracts and Options on Futures Contracts. A Fund may
use interest rate, foreign currency or index futures contracts, as specified for
that Fund in its Prospectus. An interest rate, foreign currency or index futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time. A futures contract on an index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering
several indexes as well as a number of financial instruments and foreign
currencies. For example: the S&P 500; the Russell 2000(R); Nikkei 225; CAC-40;
FT-SE 100; the NYSE composite; US Treasury bonds; US
-63-
<PAGE> 64
Treasury notes; GNMA Certificates; three-month US Treasury bills; Eurodollar
certificates of deposit; the Australian Dollar; the Canadian Dollar; the British
Pound; the German Mark; the Japanese Yen; the French Franc; the Swiss Franc; the
Mexican Peso; and certain multinational currencies, such as the European
Currency Unit ("ECU"). It is expected that other futures contracts will be
developed and traded in the future.
A Fund may purchase and write call and put options on futures
contracts. Options on futures contracts possess many of the same characteristics
as options on securities and indexes (discussed above). A futures option gives
the holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true.
As long as required by regulatory authorities, each Fund will
limit its use of futures contracts and options on futures contracts to hedging
transactions. For example, a Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Fund's securities or the price of the securities which the Fund
intends to purchase. Additionally, a Fund may use futures contracts to create
equity exposure for its cash reserves for liquidity purposes.
A Fund will only enter into futures contracts and options on
futures contracts which are standardized and traded on a US or foreign exchange,
board of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a
Fund, the Fund is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or US Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, each Fund
will mark-to-market its open futures positions.
A Fund is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by the Fund.
-64-
<PAGE> 65
Although some futures contracts call for making or taking
delivery of the underlying securities, generally these obligations are closed
out prior to delivery by offsetting purchases or sales of matching futures
contracts (same exchange, underlying security or index, and delivery month). If
an offsetting purchase price is less than the original sale price, the Fund
realizes a capital gain, or if it is more, the Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Fund realizes a capital gain, or if it is less, the Fund realizes a
capital loss. The transaction costs must also be included in these calculations.
Limitations on Use of Futures and Options on Futures
Contracts. A Fund will not enter into a futures contract or futures option
contract if, immediately thereafter, the aggregate initial margin deposits
relating to such positions plus premiums paid by it for open futures option
positions, less the amount by which any such options are "in-the-money," would
exceed 5% of the Fund's total assets. A call option is "in-the-money" if the
value of the futures contract that is the subject of the option exceeds the
exercise price. A put option is "in-the-money" if the exercise price exceeds the
value of the futures contract that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) cash, US Government
securities, or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Fund's custodian).
When selling a call option on a futures contract, a Fund will
maintain with its custodian (and mark-to-market on a daily basis) cash, US
Government securities, or other highly liquid debt securities that, when added
to the amounts deposited with a futures commission merchant as margin, equal the
total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.
When selling a put option on a futures contract, a Fund will
maintain with its custodian (and mark-to-market on a daily basis) cash, US
Government securities, or other highly
-65-
<PAGE> 66
liquid debt securities that equal the purchase price of the futures contract,
less any margin on deposit. Alternatively, the Fund may cover the position
either by entering into a short position in the same futures contract, or by
owning a separate put option permitting it to sell the same futures contract so
long as the strike price of the purchased put option is the same or higher than
the strike price of the put option sold by the Fund.
In order to comply with applicable regulations of the
Commodity Futures Trading Commission ("CFTC") pursuant to which the Funds avoid
being deemed a "commodity pool," the Funds are limited in their futures
activities to positions which constitute "bona fide hedging" positions within
the meaning and intent of applicable CFTC rules, and with respect to positions
which do not qualify under that hedging test, to positions for which the
aggregate initial margins and premiums will not exceed 5% of the net assets of
the Fund as determined under the CFTC Rules.
The requirements for qualification as a regulated investment
company also may limit the extent to which a Fund may enter into futures,
options on futures contracts or forward contracts. See "Taxation."
Risks Associated with Futures and Options on Futures
Contracts. There are several risks associated with the use of futures contracts
and options on futures contracts as hedging techniques. A purchase or sale of a
futures contract may result in losses in excess of the amount invested in the
futures contract. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the Fund securities being
hedged. In addition, there are significant differences between the securities
and futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures and options on futures contracts on
securities, including technical influences in futures trading and options on
futures contracts, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single trading day. The
daily limit establishes the maximum amount that the price of a futures contract
may vary either up or down from the previous day's settlement price at the end
of the current trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made on that day at
a price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
-66-
<PAGE> 67
There can be no assurance that a liquid market will exist at a
time when a Fund seeks to close out a futures or a futures option position, and
that Fund would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
Additional Risks of Options on Securities, Futures Contracts,
Options on Futures Contracts, and Forward Currency Exchange Contract and Options
Thereon. Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees, and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (1) other complex foreign political, legal and economic
factors, (2) lesser availability than in the United Stated of data on which to
make trading decisions, (3) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (5) lesser
trading volume.
Hedging Strategies. Stock index futures contracts may be used
by the Funds as an "equitization" vehicle for cash reserves held by the Funds.
For example: equity index futures contracts are purchased to correspond with the
cash reserves in each of the Funds. As a result, a Fund will realize gains or
losses based on the performance of the equity market corresponding to the
relevant indices for which futures contracts have been purchased. Thus, each
Fund's cash reserves always will be fully exposed to equity market performance.
Financial futures contracts may be used by the Non-U.S. and
Core Bond Funds as a hedge during or in anticipation of interest rate changes.
The Funds may purchase a put option on a stock index futures
contract instead of selling a futures contract in anticipation of market
decline. Purchasing a call option on a stock index futures contract is used
instead of buying a futures contract in anticipation of a market advance, or to
temporarily create an equity exposure for cash balances until those balances are
invested in equities. Options on financial futures are used in a similar manner
in order to hedge portfolio securities against anticipated changes in interest
rates.
When purchasing a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) cash, US government
securities, or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
Foreign Currency Futures Contracts. The Funds are also
permitted to enter into foreign currency futures contracts in accordance with
their investment objectives and as limited by the procedures outlined above.
-67-
<PAGE> 68
A foreign currency futures contract is a bilateral agreement
pursuant to which one party agrees to make, and the other party agrees to accept
delivery of a specified type of debt security or currency at a specified price.
Although such futures contacts by their terms call for actual delivery or
acceptance of debt securities or currency, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
The Fund may sell a foreign currency futures contract to hedge
against possible variations in the exchange rate of the foreign currency in
relation to the US dollar. When a manager anticipates a significant change in a
foreign exchange rate while intending to invest in a foreign security, the Fund
may purchase a foreign currency futures contract to hedge against a rise in
foreign exchange rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the Fund against any rise
in the foreign exchange rate which may add additional costs to acquiring the
foreign security position. The Fund may also purchase call or put options on
foreign currency futures contracts to obtain a fixed foreign exchange rate. The
Fund may purchase a call option or write a put option on a foreign exchange
futures contract to hedge against a decline in the foreign exchange rates or the
value of its foreign securities. The Fund may write a call option on a foreign
currency futures contract as a partial hedge against the effects of declining
foreign exchange rates on the value of foreign securities.
Risk Factors. There are certain investment risks in using
futures contracts and/or options as a hedging technique. One risk is the
imperfect correlation between price movement of the futures contracts or options
and the price movement of the portfolio securities, stock index or currency
subject of the hedge. Another risk is that a liquid secondary market may not
exist for a futures contract causing a Fund to be unable to close out the
futures contract thereby affecting a Fund's hedging strategy.
In addition, foreign currency options and foreign currency
futures involve additional risks. Such transaction may not be regulated as
effectively as similar transactions in the United States; may not involve a
clearing mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities.
The value of such positions could also be adversely affected by (i) other
complex foreign, political, legal and economic factors, (ii) lesser availability
than in the United States of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the United States, (iv) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States, and (v) lesser trading volume.
Forward Foreign Currency Exchange Transactions. "The Funds may
engage in forward foreign currency exchange transactions to hedge against
uncertainty in the level of future exchange rates. The Funds will conduct their
forward foreign currency exchange transactions either on a spot (i.e. cash)
basis at the rate prevailing in the currency exchange market, or through
entering into forward currency exchange contracts ("forward contract") to
purchase or sell currency at a future date. A forward contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. The Funds may engage in a
-68-
<PAGE> 69
forward contract that involves transacting in a currency whose changes in value
are considered to be linked (a proxy) to a currency or currencies in which some
or all of the Fund's portfolio securities are or are expected to be denominated.
The Fund's dealings in forward contracts will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of foreign currency with respect to specific receivables or
payables of the Funds generally accruing in connection with the purchase or sale
of its portfolio securities. Position hedging is the sale of foreign currency
with respect to portfolio security positions denominated or quoted in the
currency. The Funds may not position hedge with respect to a particular currency
to an extent greater than the aggregate market value (at the time of making such
sale) of the securities held in its portfolio denominated or quoted in or
currency convertible into that particular currency (or another currency or
aggregate of currencies which act as a proxy for that currency). The Funds may,
however, enter into a position hedging transaction with respect to a currency
other than that held in the Fund's portfolio, if such a transaction is deemed a
hedge. If a Fund enters into this type of hedging transaction, cash or liquid
high-grade debt securities will be placed in a segregated account in an amount
equal to the value of the Fund's total assets committed to the consummation of
the forward contract. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the Fund's commitment
with respect to the contract. Hedging transactions may be made from any foreign
currency into US dollars or into other appropriate currencies.
At or before the maturity of a forward foreign currency
contract, the Fund may either sell a portfolio security and make delivery of the
currency, or retain the security and offset its contractual obligation to
deliver the currency by purchasing a second contract pursuant to which the Fund
will obtain, on the same maturity date, the same amount of the currency which it
is obligated to deliver. If the Fund retains the portfolio security and engages
in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that movement
has occurred in forward currency contract prices. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a currency and the date that it enters into an offsetting contract for
the purchase of the currency, the Fund will realize a gain to the extent that
the price of the currency that it has agreed to sell exceeds the price of the
currency that it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency that it has agreed to sell.
The cost to the Fund of engaging in currency transactions
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because transactions in
currency exchange are usually conducted on a principal basis, no fees or
commissions are involved. The use of forward foreign currency contracts does not
eliminate fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. In addition,
although forward foreign currency contracts limit the risk of loss due to a
decline in the value of the hedged currency, at the same time, they limit any
potential gain that might result should the value of the currency increase.
If a devaluation is generally anticipated, the Fund may be
able to contract to sell the currency at a price above the devaluation level
that it anticipates. The Fund will not enter
-69-
<PAGE> 70
into a currency transaction if, as a result, it will fail to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), for a given year.
Forward foreign currency contracts are not regulated by the
SEC. They are traded through financial institutions acting as market-makers. In
the forward foreign currency market, there are no daily price fluctuation
limits, and adverse market movements could therefore continue to an unlimited
extent over a period of time. Moreover, a trader of forward contracts could lose
amounts substantially in excess of its initial investments, due to the
collateral requirements associated with such positions.
Forward foreign currency transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or securities.
The value of such positions also could be adversely affected by (a) other
complex foreign political and economic factors, (b) lesser availability than in
the United States of data on which to make trading decisions, (c) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
non-business hours in the United States and the United Kingdom, (d) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, (e) lesser trading volume and (f) that a
perceived linkage between various currencies may not persist throughout the
duration of the contracts.
Indexed Commercial Paper. Indexed commercial paper is
US-dollar denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on commercial indexed
paper is established at maturity as a function of spot exchange rates between
the US dollar and a designated currency as of or about that time. The yield to
the investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on US-dollar
denominated commercial paper, with both the minimum and maximum rates of return
on the investment corresponding to the minimum and maximum values of the spot
exchange rate two business days prior to maturity. While such commercial paper
entails risk of loss of principal, the potential risk for realizing gains as a
result of changes in foreign currency exchange rates enables the Fund to hedge
(or cross-hedge) against a decline in the US-dollar value of investments
denominated in foreign currencies while providing an attractive money market
rate of return. The staff of the SEC is currently considering whether the
purchase of this type of commercial paper would result in the issuance of a
"senior security." If required by the appropriate authorities to assure that
investments in indexed commercial paper are not used to achieve investment
leverage, a Fund will segregate cash or readily marketable high-quality
securities in an amount at all times equal or exceeding the Fund's commitment
with respect to these contracts.
US Government Obligations. The types of US government
obligations the Funds may purchase: (1) a variety of US Treasury obligations
which differ only in their interest rates, maturities and times of issuance: (a)
US Treasury bills at time of issuance have maturities of one year or less, (b)
US Treasury notes at time of issuance have maturities of one to ten years and
(c) US Treasury bonds at time of issuance generally have maturities of greater
than ten years; (2) obligations issued or guaranteed by US government agencies
and instrumentalities are supported by any of the following: (a) the full faith
and credit of the US Treasury (such as Government
-70-
<PAGE> 71
National Mortgage Association participation certificates), (b) the right of the
issuer to borrow an amount limited to a specific line of credit from the US
Treasury, (c) discretionary authority of the US government agency or
instrumentality, or (d) the credit of the instrumentality (examples of agencies
and instrumentalities are: Federal Land Banks, Farmers Home Administration,
Central Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home
Loan Banks, Federal National Mortgage Association). No assurance can be given
that the US government will provide financial support to such US government
agencies or instrumentalities described in (2)(b), (2)(c) and (2)(d) in the
future, other than as set forth above, since it is not obligated to do so by
law. The Funds may purchase US government obligations on a forward commitment
basis.
Variable and Floating Rate Securities. A floating rate
security is one whose terms provide for the automatic adjustment of interest
rate whenever a specified interest rate changes. A variable rate security is one
whose terms provide for the automatic establishment of a new interest rate on
set dates. The interest rate on floating rate securities is ordinarily tied to
and is a percentage of the prime rate of a specified bank or some similar
objective standard, such as 90-day US Treasury Bill rate, and may change as
often as twice daily. Generally, changes in interest rates on floating rate
securities will reduce changes in the security's market value from the original
purchase price resulting in the potential for capital appreciation or capital
depreciation being less than for fixed income obligations with a fixed interest
rate.
Variable Amount Master Demand Notes. The Money Market
Liquidity Fund, consistent with its fundamental investment objectives, may
invest in variable amount master demand notes. Variable amount master demand
notes are unsecured obligations redeemable upon notice that permit investment of
fluctuating amounts at varying rates of interest pursuant to direct arrangements
with the issuer of the instrument. A variable amount master demand note differs
from ordinary commercial paper in that (1) it is issued pursuant to a written
agreement between the issuer and the holders, (2) its amount may, from time to
time, be increased (subject to an agreed maximum) or decreased by the holder of
the issue, (3) it is payable on demand, (4) its rate of interest payable varies
with an agreed upon formula and (5) it is not typically rated by a rating
agency.
Zero Coupon Securities. Zero coupon securities are notes,
bonds and debentures that (i) do not pay current interest and are issued at a
substantial discount from par value, (ii) have been stripped of their unmatured
interest coupons and receipts or (iii) pay no interest until a stated date one
or more years into the future. These securities also include certificates
representing interests in such stripped coupons and receipts. Zero coupon
securities trade at a discount from their par value and are subject to greater
fluctuations of market value in response to changing interest rates.
Mortgage-Related and other Asset-Backed Securities. The forms
of mortgage-related and other asset-backed securities the Funds may invest in
include the securities described below:
Mortgage pass-through securities. Mortgage pass-through
securities are securities representing interests in "pools" of
mortgages in which payments of both interest and principal on
the securities are generally made monthly. The securities are
-71-
<PAGE> 72
"pass-through" securities because they provide investors with
monthly payments of principal and interest which in effect are
a "pass through" of the monthly payments made by the
individual borrowers on the underlying mortgages, net of any
fees paid to the issuer or guarantor. The principal
governmental issuer of such securities is the Government
National Mortgage Association ("GNMA"), which is a
wholly-owned US government corporation within the Department
of Housing and Urban Development. Government-related issuers
include the Federal Home Loan Mortgage Corporation ("FHLMC"),
a corporate instrumentality of the United States created
pursuant to an act of Congress which is owned entirely by the
Federal Home Loan Banks, and the Federal National Mortgage
Association ("FNMA"), a government sponsored corporation owned
entirely by private stockholders. Commercial banks, savings
and loans institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage
loans. Such issuers may be the originators of the underlying
mortgage loans as well as the guarantors of the
mortgage-related securities.
Collateralized Mortgage Obligations. Collateralized Mortgage
Obligations ("CMOs") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage
pass-through securities. Similar to a bond, interest and
pre-paid principal on a CMO are paid, in most cases, monthly.
CMOs may be collateralized by whole mortgage loans but are
more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA.
CMOs are structured into multiple classes (or "tranches"),
with each class bearing a different stated maturity.
Asset-Backed Securities. Asset-backed securities represent
undivided fractional interests in pools of instruments, such
as consumer loans, and are similar in structure to
mortgage-related pass-through securities. Payments of
principal and interest are passed through to holders of the
securities and are typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited
guarantee by another entity or by priority to certain of the
borrower's other securities. The degree of enhancement varies,
generally applying only until exhausted and covering only a
fraction of the security's par value. If the credit
enhancement held by a Fund has been exhausted, and if any
required payments of principal and interest are not made with
respect to the underlying loans, a Fund may experience loss or
delay in receiving payment and a decrease in the value of the
security.
Risk Factors. Prepayment of principal on mortgage or
asset-backed securities may expose a Fund to a lower rate of
return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, in the
event of prepayment the value of the premium would be lost.
Like other fixed income securities, the value of
mortgage-related securities is affected by fluctuations in
interest rates.
-72-
<PAGE> 73
Municipal Obligations. "Municipal obligations" are debt
obligations issued by states, territories and possessions of the United States
and the District of Columbia and their political subdivisions, agencies and
instrumentalities, or multi-state agencies or authorities the interest from
which is exempt from federal income tax in the opinion of bond counsel to the
issuer. Municipal obligations include debt obligations issued to obtain funds
for various public purposes and certain industrial development bonds issued by
or on behalf of public authorities. Municipal obligations are classified as
general obligation bonds, revenue bonds and notes.
Municipal Bonds. Municipal bonds generally have maturities of
more than one year when issued and have two principal
classifications -- General Obligation Bonds and Revenue Bonds.
General Obligation Bonds - are secured by the
issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest.
Revenue Bonds - are payable only from the revenues
derived from a particular facility or group of
facilities or from the proceeds of special excise
or other specific revenue service.
Industrial Development Bonds - are a type of
revenue bond and do not generally constitute
the pledge of credit of the issuer of such
bonds. The payment of the principal and
interest on such bonds is dependent on the
facility's user to meet its financial
obligations and the pledge, if any, of real
and personal property financed as security
for such payment. Industrial development
bonds are issued by or on behalf of public
authorities to raise money to finance public
and private facilities for business,
manufacturing, housing, ports, pollution
control, airports, mass transit and other
similar type projects.
Municipal Notes. Municipal notes generally have maturities of
one year or less when issued and are used to satisfy
short-term capital needs. Municipal notes include:
Tax Anticipation Notes - are issued to finance
working capital needs of municipalities and are
generally issued in anticipation of future tax
revenues.
Bond Anticipation Notes - are issued in expectation
of a municipality issuing a longer term bond in the
future. Usually the long-term bonds provide the
money for the repayment of the notes.
Revenue Anticipation Notes - are issued in
expectation of receipt of other types of revenues
such as certain federal revenues.
Construction Loan Notes - are sold to provide
construction financing and may be insured by the
Federal Housing Administration. After
-73-
<PAGE> 74
completion of the project the Federal National
Mortgage Association or the Government National
Mortgage Association frequently provides
permanent financing.
Pre-Refunded Municipal Bonds - are bonds no longer
secured by the credit of the issuing entity, having
been escrowed with US Treasury Securities as a
result of a refinancing by the issuer. The bonds
are escrowed for retirement either at original
maturity or at an earlier call date.
Tax Free Commercial Paper - is a promissory
obligation issued or guaranteed by a municipal
issuer and frequently accompanied by a letter of
credit of a commercial bank. It is used by agencies
of state and local governments to finance seasonal
working capital needs, or as short-term financing
in anticipation of long term financing.
Tax Free Floating and Variable Rate Demand Notes -
are municipal obligations backed by an obligation
of a commercial bank to the issuer thereof which
allows the issuer to issue securities with a demand
feature, which, when exercised, usually becomes
effective within thirty days. The rate of return on
the notes is readjusted periodically according to
some objective standard such as changes in a
commercial bank's prime rate.
Tax Free Participation Certificates - are tax-free
floating or variable rate demand notes which are
issued by a bank, insurance company or other
financial institution or affiliated organization
that sells a participation in the note. The Funds'
Money Managers will continually monitor the
pricing, quality and liquidity of the floating and
variable rate demand instruments held by the Funds,
including the participation certificates.
A participation certificate gives the Fund an
undivided interest in the municipal obligation in
the proportion that the Fund's participation
interest bears to the total principal amount of the
municipal obligation and provides the demand
feature described below. Each participation is
backed by: an irrevocable letter of credit or
guaranty of a bank which may be the bank issuing
the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing
bank, or a bank serving as agent of the issuing
bank with respect to the possible repurchase of the
certificate of participation; or insurance policy
of an insurance company that the Money Manager has
determined meets the prescribed quality standards
for the Fund. The Fund has the right to sell the
participation certificate back to the institution
and draw on the letter of credit or insurance on
demand after thirty days' notice for all or any
part of the full principal amount of the Fund's
participation interest in the security plus accrued
interest. The Funds' Money Managers intend to
exercise the
-74-
<PAGE> 75
demand feature only (1) upon a default under the
terms of the bond documents, (2) as needed to
provide liquidity to the Fund in order to make
redemptions of Fund shares, or (3) to maintain
the required quality of its investment
portfolio.
The institutions issuing the participation
certificates will retain a service and letter of
credit fee and a fee for providing the demand
feature, in an amount equal to the excess of the
interest paid on the instruments over the
negotiated yield at which the participations were
purchased by the Fund. The total fees generally
range from 5% to 15% of the applicable prime rate
or other interest rate index. The Fund will attempt
to have the issuer of the participation certificate
bear the cost of the insurance. The Fund retains
the option to purchase insurance if necessary, in
which case the cost of insurance will be a
capitalized expense of the Fund.
The Funds will enter into put and stand-by commitment with
institutions such as banks and broker-dealers that the Funds'
Money Manager continually believes satisfy the Funds' credit
quality requirements. The ability of the Funds to exercise the
put or stand-by commitment may depend on the seller's ability
to purchase the securities at the time the put or stand-by
commitment is exercised or on certain restrictions in the buy
back arrangement. Such restrictions may prohibit the Funds
from exercising the put or stand-by commitment except to
maintain portfolio flexibility and liquidity. In the event the
seller would be unable to honor a put or stand-by commitment
for financial reasons, the Funds may, in the opinion of Funds'
management, be a general creditor of the seller. There may be
certain restrictions in the buy back arrangement which may not
obligate the seller to repurchase the securities. (See,
"Certain Investments -- Municipal Notes -- Tax-Free
Participation Certificates.")
Foreign Government Securities. Foreign government securities
which the Fund may invest in generally consist of obligations issued or backed
by the national, state or provincial government or similar political
subdivisions or central banks in foreign countries. Foreign government
securities also include debt obligations of supranational entities, which
include international organizations designated or backed by governmental
entities to promote economic reconstruction or development, international
banking institutions and related government agencies. These securities also
include debt securities of "quasi-government agencies" and debt securities
denominated in multinational currency units of an issuer.
TAXES
In order to qualify for treatment as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended ("Code"),
each Fund must distribute annually to its shareholders at least 90% of its
investment company taxable income (generally, net investment income plus net
short-term capital gain) ("Distribution Requirement") and also must meet several
additional requirements. Among these requirements are the following: (i) at
least
-75-
<PAGE> 76
90% of a Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies (exclusive of
losses), or other income (including gains from options, futures, or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies ("Income Requirement"); (ii) less than 30% of a Fund's
gross income each taxable year may be derived from gains (exclusive of losses)
from the sale or other disposition of any stock or securities; any options,
futures, or forward contracts; foreign currencies including any options or
futures thereon (which are not directly related to a Fund's business in
investing) held for less than three months (the "Short-Short Limitation"); (iii)
at the close of each quarter of a Fund's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, US government
securities, securities of other RICs and other securities, with such other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund and that does not represent more than 10% of
the outstanding voting securities of such issuer; and (iv) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than US government securities or the
securities of other RICs) of any one issuer.
Notwithstanding the Distribution Requirement described above, which only
requires each Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss),
each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year at least 98% of its ordinary
income for that year and 98% of its capital gain net income for the one-year
period ending on October 31 of that year, plus prior-year shortfalls. For this
and other purposes, dividends declared by a RIC in October, November or December
of any calendar year and payable to shareholders of record on a date in such a
month will be deemed to have been paid by the RIC and received by shareholders
on December 31 of such year if the dividends are paid by the RIC at any time
through the end of the following January.
Issues Related to Hedging and Option Investments. The use of
hedging instruments, such as options and futures contracts, involves specialized
and complex rules that will determine the character for income tax purposes of
the income received in connection therewith by the Fund and thereby affect,
among other things, the amount and proportion of distributions that will be
taxable to shareholders as ordinary income or capital gain.
As described above and in the Funds' prospectuses, the Funds
may buy and sell foreign currencies and options on foreign currencies, and may
enter into forward currency contracts and currency futures contracts. The Funds
anticipate that these investment activities will not prevent the Funds from
qualifying as a regulated investment company. As a general rule, gains or losses
on the disposition of debt securities denominated in a foreign currency that are
attributable to fluctuations in exchange rates between the date that the debt
securities are acquired and the date of disposition, gains and losses from the
disposition of foreign currencies, and gains and losses attributable to options
on foreign currencies, forward currency contracts and currency futures contracts
will be treated as ordinary income or loss.
-76-
<PAGE> 77
Gains or losses attributable to fluctuations in exchange rates
which occur between the time the fund accrues interest or other receivables, or
expenses or other liabilities, denominated in a foreign currency and the time
the Fund actually collects such receivables, or pays such liabilities, are
generally treated as ordinary income or loss. Similarly, gains or losses on
disposition of debt securities denominated in a foreign currency between the
date of acquisition of the security and the date of disposition also are treated
as ordinary gain or loss. These gains, referred to under the Code as "Section
988" gains or losses, may increase or decrease the amount of the fund's
investment company taxable income to be distributed to its shareholders, rather
than increasing or decreasing the amount of the Fund's capital gains or losses.
As noted above and in the Prospectus, the Funds may acquire
forward currency contracts, currency futures contracts and options on foreign
currencies to hedge their risk of currency fluctuations with regard to property
held or to be held by the Funds, and before the close of the day on which the
Funds enters into the contract or option, the Funds will, as a general rule,
identify on their records that the contract or option was entered into as part
of a hedging transaction. If the Funds were to invest in a forward currency
contract, currency futures contract or option on a foreign currency and
offsetting positions in such contracts or options, and if the two offsetting
positions were characterized as a straddle (as opposed to a hedge) for federal
income tax purposes, then the Funds might not be able to receive the benefit of
certain realized losses from the liquidation of one of those positions for an
indefinite period of time (i.e., until the gain position and any successor
positions are disposed of). The Funds expect that their activities with respect
to forward foreign currency contracts, currency futures contracts and options on
foreign currencies will not require it, as a general rule, to have to treat such
contracts or options as straddle positions for federal income tax purposes.
Under current law, unless certain requirements are satisfied, the Funds, will be
required to calculate separately certain gains and losses attributable to
certain of their forward currency contracts, currency futures contracts and
options on foreign currencies even if the Funds acquired the contract or option
to hedge their risk of currency fluctuations with regard to capital assets held
or to be held by the Funds. The Internal Revenue Service, however, has the
authority to issue additional regulations that would permit or require the Funds
either to integrate some or all if their forward currency contracts, currency
futures contracts, options on foreign currencies and hedged investments as a
single transaction or otherwise to treat the contracts or options in the manner
that is consistent with the hedged investments. It is uncertain if or when these
regulations will be issued.
To the extent that the Fund's forward contracts, currency
futures contracts or options on foreign currencies can be classified as either
regulated futures contracts or foreign currency contracts (as described in
section 1256(b) of the Code) (collectively referred to herein as "section 1256
contracts"), such investments will be taxed pursuant to a special
"mark-to-market" system. Under the mark-to-market system, the Funds may be
treated as realizing a greater or lesser amount of gains or losses than actually
realized. As a general rule, except for certain currency related activities (as
described above) in which gain or loss is treated as ordinary income or loss,
gain or loss on section 1256
-77-
<PAGE> 78
contracts is treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, and accordingly, the mark-to-market system generally will
affect the amount of capital gains or losses taxable to the Funds and the amount
of distributions taxable to a shareholder. Moreover, if the Funds invested in
both section 1256 contracts and offsetting positions with respect to such
contracts, then the Funds might not be able to receive the benefit of certain
realized losses for an indeterminate period of time (i.e., until disposition of
the "gain leg" of the straddle and any successor position). The Funds expect
that its activities with respect to section 1256 contracts and offsetting
positions in such contracts (a) will not cause it or its shareholders to be
treated as receiving a materially greater amount of ordinary income, capital
gains, dividends, or distributions than actually realized or received by the
Funds and (b) will permit it to use substantially all of the losses of the Funds
for the fiscal years in which such losses actually occur.
Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by a Fund may
result in "straddles" for U.S. federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by a Fund. In addition,
losses realized by a Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
forward contracts to a Fund are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by a Fund which is taxed
as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under
the Code which are applicable to straddles. If a Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition of
gains or losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gains, may be increased or decreased substantially
in any given fiscal year as compared to a fund that did not engage in such
hedging transactions.
The 30% limit on gains from the disposition of certain
options, futures and forward contracts held less than three months and the
qualifying income and diversification requirements applicable to a Fund's assets
may limit the extent to which a Fund will be able to engage in transactions in
options, futures contracts or forward contracts.
Income (excluding certain gains) from transactions in options
and futures contracts derived by the Fund with respect to its business of
investing in securities, will qualify as permissible income under the Income
Requirement. Furthermore, any increase in value on a position that is part of a
"designated hedge" will be offset by any decrease in value (whether realized or
not) of the offsetting hedging position during the period of the hedge for
purposes of determining whether the Fund satisfies the Short-Short Limitation.
Thus, only the net gain (if any) from the designated hedge will be included in
gross income for purposes of that limitation.
-78-
<PAGE> 79
The Fund anticipates engaging in hedging transactions that are intended to
qualify for this treatment, but at the present time it is not clear whether this
treatment will be available to all of the Fund's hedging transactions. To the
extent this treatment is not available, the Fund may be forced to defer the
closing out of certain options and futures contracts beyond the time when it
otherwise would be advantageous to do so, in order for the Fund to qualify as a
RIC. Income derived from currencies, options, futures and forward contracts on
currencies directly related to the Fund's principal business of investing in
stocks or securities is excluded from the Short-Short Limitation computation.
If a call option written by the Fund expires, the Fund will
realize a short-term capital gain equal to the amount of the premium it received
for writing the option. If the Fund terminates its obligations under a call
option it has written, or if the Fund writes a put option terminating its rights
as the holder of a put option, the Fund will realize a short-term capital gain
or loss, depending on whether the cost of the closing transaction is less than
or exceeds the premium received when the option was written. If a call option
written by the Fund is exercised, the Fund will be treated as having sold the
underlying security and will realize a long-term or short-term capital gain and
loss, depending on the holding period of the underlying security and on whether
the sum of the option price received upon the exercise plus the premium received
when the option was written exceeds or is less than the basis of the optioned
security.
If an option purchased by the Fund expires, the Fund generally
will realize a capital loss equal to the cost of the option, long term if the
option was held for more than one year. If the Fund sells the option, it
generally will realize a capital gain or loss, depending on whether the proceeds
from the sale are greater or less than the cost of the option plus the
transaction costs. If the Fund exercises a call option, the cost of the option
will be added to the basis of the security purchased. If the Fund exercises a
put option, it will realize a capital gain or loss (depending on the Fund's
basis for the underlying security), which will be long-term or short-term
depending on the holding period of the underlying security. Any such capital
gain will be decreased (or loss increased) by the premium paid for the option.
FOREIGN INCOME TAXES. Investment income received from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Fund to a reduced rate on such taxes or
exemption from taxes on such income. It is impossible to determine the effective
rate of foreign tax for a Fund in advance since the amount of the assets to be
invested within various countries is not known.
If a Fund invests in an entity that is classified as a
"passive foreign investment company" ("PFIC") for federal income tax purposes,
the application of certain provisions of the Code applying to PFICs could result
in the imposition of certain federal income taxes on the Fund. Under U.S.
Treasury regulations for PFICs, the Non-US Fund can elect to mark-to-market its
PFIC holdings in lieu of paying taxes on gains or distributions therefrom.
STATE AND LOCAL TAXES. Depending upon the extent of a Fund's
activities in states and localities in which its offices are maintained, in
which its agents or independent contractors
-79-
<PAGE> 80
are located or in which it is otherwise deemed to be conducting business, a Fund
may be subject to the tax laws of such states or localities.
RATINGS OF DEBT INSTRUMENTS
Corporate and Municipal Bond Ratings.
Moody's Investors Service, Inc. (Moody's):
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large
or exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great period of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time
may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal and interest.
-80-
<PAGE> 81
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic
category; the modifier 2 indicates a mid-range ranking; and modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation ("S&P"):
AAA -- This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the
majority of instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. While bonds with this rating normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to
pay interest and repay principal for debt in this category than debt in
higher rated categories.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual implied BBB- rating.
B -- Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay
-81-
<PAGE> 82
principal. The B rating category is also used for debt subordinated to
senior debt that is assigned an actual implied BB or BB- rating.
CCC -- Bonds rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual implied B or B-
rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating. The C
rating has been used to cover a situation where a bankruptcy petition
has been filed but debt service payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.
D -- Bonds rated D are in payment default. The D rating is used when
interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
appropriate category.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic issues. The ratings measure
the creditworthiness of the obligor but do not take into account currency
exchange and related uncertainties.
State, Municipal Notes and Tax Exempt Demand Notes.
Moody's:
Moody's rating for state, municipal and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). This distinction is
in recognition of the differences between short-term credit risk and
long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors
of the first importance in bond risk are of lesser importance in the
short run. Symbols used are as follows:
MIG-1--Notes bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing or both.
-82-
<PAGE> 83
MIG-2--Notes bearing this designation are of high quality, with margins
of protection ample although not so large as in the preceding group.
S&P:
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making
that assessment.
-- Amortization schedule (the larger the final maturity relative
to other maturities, the more likely it will be treated as a
note).
-- Source of Payment (the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note).
Note rating symbols are as follows:
SP-1--Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
S&P assigns "dual" ratings to all long-term debt issues that have as
part of their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand
feature. The long-term debt rating symbols are used to denote the put
option (for example, "AAA/A-1+") or if the nominal maturity is short, a
rating of "SP-1+/AAA" is assigned.
Commercial Paper Ratings.
Moody's:
Commercial paper rated Prime by Moody's is based upon its evaluation of
many factors, including: (1) management of the issuer; (2) the issuer's
industry or industries and the speculative-type risks which may be
inherent in certain areas; (3) the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationships
which exist with the issue; and (8) recognition by the management of
obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations. Relative
differences in these factors determine whether the issuer's commercial
paper is rated Prime-1, Prime-2, or Prime-3.
-83-
<PAGE> 84
Prime-1 - indicates a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: (1) leading market positions
in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate
reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial
markets and assured sources of alternative liquidity.
Prime-2 - indicates a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.
S&P:
Commercial paper rated A by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements. Long-term
senior debt is rated A or better. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically,
the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management
are unquestioned. Relative strength or weakness of the above factors
determine whether the issuer's commercial paper is rated A-1, A-2, or
A-3.
A-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.
Duff and Phelps, Inc.:
Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank
loans, master notes, bankers acceptances, irrevocable letters of credit,
and current maturities of long-term debt. Asset-backed commercial paper
is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including
trade credit, bank lines, and the capital markets. An important
consideration is the level of an obligor's reliance on short-term funds
on an ongoing basis.
-84-
<PAGE> 85
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term
debt issuers carry the highest rating, yet quality differences exist
within that tier. As a consequence, Duff & Phelps has incorporated
gradations of '1+' (one plus) and '1-' (one minus) to assist investors
in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free US
Treasury short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1- --High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are
very small.
Good Grade
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.
Satisfactory Grade
Duff 3--Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
Non-Investment Grade
Duff 4--Speculative investment characteristics. Liquidity is not
sufficient to ensure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation.
Default
Duff 5--Issuer failed to meet scheduled principal and/or interest
payments.
IBCA, Inc.:
In addition to conducting a careful review of an institution's reports
and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to
the preparation of individual reports and ratings. To keep abreast of
any changes that may affect assessments, analysts maintain contact
throughout the year with the management of the companies they cover.
-85-
<PAGE> 86
IBCA's analysts speak the languages of the countries they cover, which
is essential to maximize the value of their meetings with management and
to properly analyze a company's written materials. They also have a
thorough knowledge of the laws and accounting practices that govern the
operations and reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position,
companies entrust IBCA with confidential data. While these data cannot
be disclosed in reports, they are taken into account when assigning
ratings. Before dispatch to subscribers, a draft of the report is
submitted to each company to permit correction of any factual errors and
to enable clarification of issues raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for
institutions in all the countries covered. Following the Committee
meetings, ratings are issued directly to subscribers. At the same time,
the company is informed of the ratings as a matter of courtesy, but not
for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely
repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher
categories.
B2--Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial
conditions.
C1--Obligations for which there is an inadequate capacity to ensure
timely repayment.
D1--Obligations which have a high risk of default or which are currently
in default.
Fitch Investors Service, Inc.:
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes,
and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in
a timely manner.
-86-
<PAGE> 87
Fitch short-term ratings are as follows:
F-1+--Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1--Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2--Good credit quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned 'F-1+' and 'F-1' ratings.
F-3--Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-5--Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
D--Default. Issues assigned this rating are in actual or imminent
payment default.
Thomson BankWatch (TBW) Short-Term Ratings:
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned. These ratings are derived exclusively from a quantitative analysis of
publicly available information. Qualitative judgments have not been
incorporated. The ratings are intended to be applicable to all operating
entities of an organization but there may be in some cases more credit liquidity
and/or risk in one segment of the business than another.
The TBW short-term rating applies only to unsecured instruments that have a
maturity of one year or less, and reflects the likelihood of an untimely payment
of principal or interest.
TBW-1 The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a
timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as for
issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and
external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is
considered adequate.
-87-
<PAGE> 88
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
-88-
<PAGE> 89
FINANCIAL STATEMENTS
[TO BE FILED BY AMENDMENT]
-89-
<PAGE> 90
RUSSELL INSURANCE FUNDS, INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements: [To be filed by Amendment]
(b) Exhibits
1 Articles of Incorporation (incorporated by reference to
Pre-Effective Amendment No. 2, filed March 17, 1995 -- File
No. 33-18030).
2 Form of By-Laws (incorporated by reference to Pre-Effective
Amendment No. 2, filed March 17, 1995 -- File No. 33-18030).
5(a) Management Agreement between RIF and Frank Russell Investment
Management Company. [To be filed by Amendment]
8(a) Custody Agreement between RIF and State Street Bank and Trust
Company. [To be filed by Amendment]
9(a) Participation Agreement between RIF and General American Life
Insurance Company. [To be filed by Amendment]
10 Opinion of Counsel regarding the legality of the securities
being registered, together with consent to the inclusion of
that opinion in this Registration Statement. [To be filed by
Amendment]
11 Consent of Independent Auditors. [To be filed by Amendment]
Item 25. Persons Controlled By or Under Common Control with Registrant
Registrant is controlled by its Board of Directors.
Item 26. Number of Holders of Securities
As of the date of the filing of this registration statement, there were no
record holders of Registrant's shares:
Item 27. Indemnification
Section 2-418 of the General Corporation Law of the State of Maryland provides
for the indemnification of Registrant's officers and directors. Registrant will
obtain from a major insurance carrier a directors' and officers' liability
policy covering certain types of errors and omissions. In no event will
Registrant indemnify any of its directors, officers, employees, or
-90-
<PAGE> 91
agents against any liability to which such person would otherwise be subject by
reason of his willful misfeasance, bad faith, gross negligence in the
performance of his duties, or by reason of his reckless disregard of the duties
involved in the conduct of his office or arising under his agreement with
Registrant. Registrant will comply with Rule 484 under the Securities Act of
1933, as amended, and Release No. 11330 under the Investment Company Act of
1940, as amended, in connection with any indemnification.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
Item 28(a). Business and Other Connections of Investment Adviser
See, Registrant's prospectus sections "Frank Russell Company -- Consultant to
the Funds," "The Money Managers" and Money Manager Profiles," the Statement of
Additional Information sections "Structure and Governance -- Trustees and
Officers," and "Operation of Investment Company -- Consultant."
Item 29. Principal Underwriter
Not applicable.
Item 30. Location of Accounts and Records
RIF FRIMCo
Russell Insurance Funds Frank Russell Investment
909 A Street Management Company
Tacoma, Washington 98402 909 A Street
Tacoma, Washington 98402
SS MM
State Street Bank & Trust Company Money Managers
1776 Heritage Drive JA4N See, Prospectus Section
North Quincy, Massachusetts 02171 "Money Manager Profiles"
for Names and Addresses
-91-
<PAGE> 92
Item 31 Management Services
None as described in Parts A and B.
Item 31a-1
(a) Records forming basis for financial statements - at principal
offices of SS, RIF FRIMCo and MM for each entity
(b) FRIC Records:
(1) SS - Journals, etc.
(2) SS - Ledgers, etc.
(3) Inapplicable
(4) RIF - Corporate charter, etc.
(5) MM - Brokerage orders
(6) MM - Other portfolio purchase orders
(7) SS - Contractual commitments
(8) SS and RIF - Trial balances
(9) MM - Reasons for brokerage allocations
(10) MM - Persons authorizing purchases and sales
(11) FRIC and MM - Files of advisory material
(12) ---
(c) Inapplicable
(d) FRIMCo - Broker-dealer records, to the extent applicable
(e) Inapplicable
(f) FRIMCo and MM - Investment adviser records
Item 32. Undertakings
The Registrant undertakes to file a post-effective amendment, including
financial statements which need not be certified, within four to six months from
the effective date of the Registrant's 1933 Act Registration Statement.
The Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
The Registrant undertakes, if requested to do so by the holders of at least 10%
of the Registrant's outstanding shares, to call a meeting of shareholders for
the purpose of voting upon the question of removal of a director or directors
and to assist in communications with other shareholders as required by Section
16(c).
-92-
<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Tacoma in the State of Washington on the 22nd
day of March, 1996.
RUSSELL INSURANCE FUNDS, INC.
By: /s/Lynn L. Anderson
------------------------
Lynn L. Anderson
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Lynn L. Anderson Director and President, in March 22, 1996
- ------------------------------- his capacity as Chief -------------------
Lynn L. Anderson Executive Officer
/s/ George W. Weber Director, Treasurer, in his March 22, 1996
- ------------------------------- capacity as Chief Accounting -------------------
George W. Weber Officer
/s/ Karl J. Ege Director, Secretary and March 22, 1996
- ------------------------------- General Counsel -------------------
Karl J. Ege
</TABLE>
-93-
