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PROSPECTUS
RUSSELL INSURANCE FUNDS
909 A Street, Tacoma, WA 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
Russell Insurance Funds ("RIF") is a "series mutual fund" with four
different investment portfolios referred to individually as "Funds." This
Prospectus describes and offers shares of each of the four 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 ("FRIMCo"),
advises, operates and administers RIF.
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 to provide capital appreciation 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 to maximize total return through capital appreciation
and income by assuming a level of volatility consistent with the broad
fixed-income market, by investing in fixed-income securities.
This Prospectus sets forth concisely significant information about RIF and
its four Funds. RIF has filed a Statement of Additional Information dated
October 16, 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 RIF at the address shown above. This Prospectus should be read
carefully and retained for future reference.
SHARES OF THE FUNDS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC") OR BY ANY OTHER GOVERNMENT AGENCY; ARE NOT
OBLIGATIONS OF THE FDIC OR ANY OTHER GOVERNMENT AGENCY; ARE NOT
DEPOSITS OR OBLIGATIONS OF ANY BANK; ARE NOT ENDORSED OR
GUARANTEED BY ANY BANK; ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED; AND MAY FLUCTUATE IN VALUE, SO THAT
WHEN THEY ARE SOLD, THEY MAY BE WORTH MORE
OR LESS THAN WHEN THEY WERE PURCHASED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS DATED OCTOBER 16, 1996
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HIGHLIGHTS AND TABLE OF CONTENTS
RUSSELL INSURANCE FUNDS ("RIF") is organized as a Massachusetts business
trust under a Master Trust Agreement dated July 11, 1996. RIF is authorized to
issue an unlimited number of shares evidencing beneficial interests in different
investment Funds, which interests may be offered in one or more classes. RIF is
a diversified open-end management investment company, commonly known as a
"mutual fund." Frank Russell Company, which is a consultant to RIF, 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."
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 4.
THE PURPOSE OF RIF 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 22 for information concerning monitoring of conflicts which may arise from
sales to a number of Insurance Companies). RIF 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 4.
GENERAL MANAGEMENT OF RIF is provided by Frank Russell Investment Management
Company ("FRIMCo"), a wholly-owned subsidiary of FRC, which also furnishes
officers and staff required to manage and administer RIF on a day-to-day basis.
FRC provides RIF and FRIMCo with comprehensive consulting and money manager
evaluation services. SEE PAGE 5.
SUB-ADVISERS ("MONEY MANAGERS") for the assets of the Funds are evaluated
and recommended to the Board of RIF by FRIMCo 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 FRIMCo. SEE PAGE 6.
EXPENSES OF RIF are borne by RIF. Each Fund pays a management fee to FRIMCo,
its expenses and its portion of the general expenses of RIF. FRIMCo, as agent to
the Funds, pays from its fees, the investment advisory fees of the Money
Managers of the Funds. The remainder of the fee is retained by FRIMCo, for
conducting RIF's general operations and for providing investment supervision for
the Funds. 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 RIF and FRIMCo. SEE PAGE 6.
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 7.
DIVIDENDS AND DISTRIBUTIONS will normally be reinvested in additional shares
by the Insurance Company. Dividends from net investment income are declared
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 Funds will declare
distributions from net realized capital gains, if any, at least annually. SEE
PAGE 17.
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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 18.
VALUATION OF FUND SHARES occurs each business day 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 Fund,
less its liabilities, divided by the number of shares of the Fund. PAGE 20.
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 PAGE 21.
ADDITIONAL INFORMATION is also included in this Prospectus concerning: RIF's
Custodian; Accountants and Reports; Organization, Capitalization and Voting; and
Money Manager Profiles. SEE PAGES 21 AND 22.
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THE PURPOSE OF RIF
RIF 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 RIF'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 RIF.
FRANK RUSSELL COMPANY--CONSULTANT TO RIF
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, Auckland, Tokyo and Hong Kong, and have approximately
1,000 associates.
Three functions are at the core of FRC's consulting service:
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.
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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 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 RIF
RIF's Board of Trustees is responsible for overseeing generally the
operation of RIF, including reviewing and approving RIF's contracts with FRIMCo,
FRC and the Money Managers. RIF's officers, all of whom are employed by and are
officers of FRIMCo or its affiliates, are responsible for the day-to-day
management and administration of RIF's operations. The Money Managers are
responsible for individual portfolio securities selection for the assets
assigned to them.
FRIMCo: (i) provides or oversees the provision of all general management and
administration, investment advisory and portfolio management, and distribution
services for RIF; (ii) provides RIF with office space, equipment, and personnel
necessary to operate and administer RIF's business, and to supervise the
provision of services by third parties, such as the Money Managers and the
custodian bank; (iii) develops the investment programs, selects the Money
Managers, allocates assets among the 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 RIF's
"Liquidity Portfolios" (see, "Investment Policies--Liquidity Portfolios"); and
(v) provides RIF with transfer agent and shareholder recordkeeping services.
FRIMCo 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 FRIMCo. These officers and employees, including their business
experience for the past five years, are identified below:
- Randall P. Lert, who has been Director--Investments, Frank Russell
Investment Management Company since 1989.
- Loran M. Kaufman, who has been Director--Fund Development, Frank Russell
Investment Management Company since 1990.
- 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, Manager--Portfolio Trading, Frank Russell Investment
Management Company, who has managed the day to day management of Frank
Russell Investment Management Company Funds and ongoing analysis and
monitoring of Fund managers since 1989.
- Peter F. Apanovitch, who has been the Manager--Short-Term Investment Funds
for Frank Russell Investment Management Company and Frank Russell Trust
Company since 1991.
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- James A. Jornlin, who has been a Senior Investment Officer of Frank
Russell Investment Management Company since April 1995. From 1994 to 1995
Director of Alpha Strategy Group Frank Russell Company. 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. 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 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 was a member of the Alpha Strategy Group. From 1988 to
1994, Ms. Williams was a Senior Research Analyst with Frank Russell
Company.
FRC provides to each Fund and to FRIMCo 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 RIF or FRIMCo for these
consulting services. FRC and FRIMCo, as affiliated companies, may establish
certain intercompany cost allocations for budgeting and product profitability
purposes which may reflect FRC services supplied to FRIMCo.
George F. Russell, Jr., Chairman of the Board of Trustees of RIF, is the
Chairman of the Board and controlling shareholder of FRC. FRIMCo is a
wholly-owned subsidiary of FRC.
RIF has received an exemptive order from the U.S. Securities and Exchange
Commission (the "SEC") which permits RIF, with the approval of its Board of
Trustees, 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
RIF Fund.
For its services, FRIMCo receives a management fee from each Fund. From this
fee, FRIMCo, acting as agent for RIF, is responsible for paying the Money
Managers for their investment selection services. The remainder is retained by
FRIMCo as compensation for the services described above and to pay expenses. The
Management Fee of each Fund is payable monthly on a pro rata basis, at the
annual rate of: Multi-Style Equity Fund, .78%; Aggressive Equity Fund, .95%;
Non-U.S. Fund, .95%; and Core Bond Fund, .60% of average daily net assets. The
fee paid by some of the Funds may be higher than the 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 FRIMCo. The Funds' principal expenses are expected to include the management
and transfer agent fees payable to FRIMCo; fees for custodial, portfolio
accounting, tax accounting and yield calculation services payable to State
Street
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Bank and Trust 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 FRIMCo. THE ALLOCATION OF A
FUND'S ASSETS AMONG MONEY MANAGERS AND FRIMCO MAY BE CHANGED AT ANY TIME BY
FRIMCO. MONEY MANAGERS ARE EMPLOYED FOR MANAGEMENT OF THE ASSETS OF A FUND
PURSUANT TO MANAGEMENT CONTRACTS APPROVED BY THE BOARD OF TRUSTEES OF RIF
(INCLUDING A MAJORITY OF CERTAIN TRUSTEES WHO ARE NOT INTERESTED PERSONS OF RIF
OR FRIMCO), AND A MONEY MANAGER'S SERVICES MAY BE TERMINATED AT ANY TIME BY
FRIMCO, THE BOARD OF TRUSTEES, 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. RIF
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, FRIMCo, as agent for RIF, 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. Fees will begin to
accrue and be paid once each Fund commences operation. FRIMCo will retain, as
compensation for the services described under "General Management of the Funds"
and to pay its expenses, the difference between these fees and the management
fee of the applicable Fund. The difference is retained by FRIMCo. 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 Funds through
broker-dealer affiliates.
Each Money Manager has agreed that once RIF has advanced fees to FRIMCo as
agent to make payment of the Money Manager's fee, that Money Manager will look
only to FRIMCo as agent to make the payment of its fee.
Money Managers are selected for RIF'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.
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
FRIMCo 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 Trustees and officers of RIF, neither the
Board, the officers, FRIMCo nor FRC evaluate the investment merits of the Money
Managers' portfolio security selections. However, the Funds' cash holdings may
be managed by FRIMCo to achieve economies of scale.
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
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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
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 seek to provide capital
appreciation by assuming a higher level of volatility than is ordinarily
expected from Multi-Style Equity Fund by investing in equity 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-Registered
Trademark- 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 Managers believe
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 of the United
States.
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 maximize total return, through capital
appreciation and income by assuming a level of volatility consistent with the
broad fixed-income market, by investing in fixed-income securities.
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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 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 European Currency
Unit (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
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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.
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
Ratings Group ("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 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 RIF's
Statement of Additional Information.
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).
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3. Acquire more than 5% of the outstanding voting securities, or 10% of all of
the securities, of any one issuer.
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. The
Funds also have certain non-fundamental investment restrictions, including a
restriction that no Fund will invest more than 5% of its assets in
securities of issuers which, together with any predecessor, have 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 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, including shares of unaffiliated money
market funds, and in debt securities which are at least comparable in quality to
the Fund's permitted investments, including call deposits with the RIF's
custodian.
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 the 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.
LIQUIDITY PORTFOLIOS. FRIMCo will exercise investment discretion or select
a Money Manager to exercise investment discretion for approximately 5%-15% of
each of the Multi-Style Equity, Aggressive Equity, and Non-U.S. Funds' assets
assigned to a "Liquidity Portfolio." Each Fund's Liquidity Portfolio will be
used to create temporarily, through investments in options and futures
contracts, an equity exposure for that Fund's 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 applicable
Fund's portfolios or of securities that the Funds intend to purchase.
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 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
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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 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 reverse
repurchase agreements maturing in more than seven days.
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. RIF 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 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, 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 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 (the "1933 Act"). These policies do not include (1)
commercial paper issued under Section 4(2) of the 1933 Act or (2) restricted
securities eligible for resale to qualified institutional purchasers pursuant to
Rule 144A under the 1933 Act 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.
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 associated with investing in
obligations issued by the US government and domestic corporations. Less
information may be available about foreign
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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 exchange 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 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 Funds' 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
Funds' commitment with respect to these contracts.
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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 currency 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 currency contract. There can be
no assurance that new forward currency 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 date. The amount the
Funds may invest in forward currency contracts is limited to the amount of the
Funds' aggregate investments denominated 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 currency 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
currency 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 currency 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 currency 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, 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, may also
purchase and sell put and call options on foreign currencies.
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.
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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.
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. Only the Multi-Style Equity,
Aggressive Equity, and Non-U.S. Funds, currently intend 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.
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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 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 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 certificates issued by the Government
National Mortgage Association ("GNMA") 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 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.
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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.
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 Managers 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 of, in a
prudent and orderly fashion, securities whose ratings drop below these minimum
ratings. For additional information, please refer to the Funds' Statement of
Additional Information.
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 outweighed by large uncertainties or major risk
exposure to adverse conditions. The Money Managers of the Core Bond 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 Statement of
Additional Information.
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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 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, which are supported
by any of the following: (a) the full faith and credit of the US Treasury (such
as GNMA 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 FRIMCo 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 within the
investment guidelines and restrictions imposed on 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 rate is not expected 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"). RIF's Board of Trustees monitors portfolio activities to minimize
possible adverse consequences.
The Funds may effect portfolio transactions with or through Frank Russell
Securities, Inc., an affiliate of FRIMCo, when a 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 FRIMCo, 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 the Money
Managers (or their affiliates).
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DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
The Board of Trustees presently intends to declare dividends from net
investment income, for payment on the following schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE
- ----------- ----------------------------
<S> <C> <C>
Mid: February, April, July Multi-Style Equity, Aggressive Equity and Core
Quarterly and October Bond Funds
Annually Mid-February Non-U.S. Fund
</TABLE>
CAPITAL GAINS DISTRIBUTIONS
The Board intends to declare distributions from capital gains through
December 31 (excess of capital gains over capital losses) annually, generally in
mid-February. In addition, in order to satisfy certain distribution
requirements, a Fund may declare special year-end dividend and capital gains
distributions. Such distributions, if received by shareholders by January 31,
are deemed to have been paid by a Fund and received by shareholders on December
31 of the prior year.
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, RIF'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 (the "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
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related separate account, these limitations also 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
Statement of Additional Information and Policy Prospectus 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 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, or information prepared by the Variable Annuity
Research and Data Service (VARDS) which is the most widely quoted and referenced
variable products analytical resource. 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 1000r Index, an index of the 1,000
largest US companies by capitalization.
Performance 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 performance of the Funds. From time to time, each
of the 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.
20
<PAGE>
YIELD
From time to time, in advertisements, sales literature, or reports to
shareholders, the yield of the Core Bond Fund may be quoted and compared to
those of other mutual funds with a similar investment objective 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.
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.
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. This income is then annualized.
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 corresponding yield information of a separate account that invests in the
relevant Fund.
FRIMCO'S HISTORICAL PERFORMANCE
Since RIF Funds are new portfolios, there is no information regarding their
past investment performance. However, FRIMCo has a history of investment
performance managing other investment portfolios with investment objectives,
strategies, policies, and restrictions substantially similar to the Funds'. Set
forth below are historical performance data provided by FRIMCo pertaining to
those investment portfolios. The data is provided to illustrate past performance
in managing similar portfolios. The results presented are not intended to
predict or suggest the return to be experienced by any Funds or the return an
individual investor might achieve by investing in a Fund. A Fund's investment
returns may differ from those of the relevant portfolio because, among other
things, the Fund's fees and expenses may differ from those of the applicable
portfolio.
21
<PAGE>
PERCENTAGE TOTAL RETURNS(1)
PERIODS ENDING DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ANNUALIZED
-------------------------------------------------------
THREE FIVE INCEPTION INCEPTION
ONE YEAR YEARS YEARS TEN YEARS TO DATE DATE
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
FRANK RUSSELL INVESTMENT COMPANY
[RIF Multi-Style Equity Fund comparable]
DIVERSIFIED EQUITY FUND 35.17 14.31 16.22 13.76 15.06 10/01/85
[RIF Aggressive Equity Fund comparable]
SPECIAL GROWTH FUND 28.52 12.63 18.13 12.34 13.69 10/01/85
[RIF Non-US Fund comparable]
INTERNATIONAL SECURITIES FUND 10.20 15.54 9.95 13.33 14.36 10/01/85
FRANK RUSSELL TRUST COMPANY
[RIF Core Bond Fund comparable]
FIXED INCOME I FUND 19.09 8.99 10.35 10.48 12.40 11/01/80
</TABLE>
- ------------------------
(1) Performance is calculated based on the SEC standardized method, except for
Frank Russell Trust Company Fixed Income I Fund, the performance of which is
calculated using a time-weighted method. Periods of 12 months and over are
annualized. Indexes are unmanaged. Performance is reported net of fund
investment management fees except for Frank Russell Trust Company Fixed
Income I Fund which is shown gross of management fees. The performance for
that Fund would have been reduced if management fees had been deducted. The
annual management fee over the period(s) shown was 0.78% for Diversified
Equity Fund; 0.95% for Special Growth Fund; and 0.95% for International
Securities Fund. These fees are the same as those of each of the comparable
RIF Funds.
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
a business day is one on which the New York Stock Exchange is open for trading.
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).
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
22
<PAGE>
and fixed-income securities and options are valued on the basis of the closing
bid price, and 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 securities 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.
Money market instruments maturing within 60 days of the valuation date held
by Funds are 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 Fund would
receive if it 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 Trustees.
PURCHASE OF FUND SHARES
Separate accounts of the Insurance Companies 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 RIF. 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 RIF 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 RIF on such next business
day in accordance with applicable requirements. It is each Insurance Company's
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 RIF 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.
23
<PAGE>
RIF ordinarily will make payment for all shares redeemed within seven days
after receipt by RIF or its transfer agent of a redemption request in proper
form, except as provided by rules of the SEC.
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 policy owners.
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS
Russell Fund Distributors, Inc., a wholly owned subsidiary of FRIMCo, is the
principal Distributor for RIF shares sold to the Insurance Company. The
Distributor receives no compensation from RIF for its services.
State Street Bank and Trust Company ("State Street"), 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 RIF.
Coopers & Lybrand L.L.P., Boston, Massachusetts, are the Fund's independent
accountants. Shareholders will receive unaudited semiannual financial statements
and annual financial statements audited by Coopers & Lybrand L.L.P. Shareholders
may also receive additional reports concerning the Funds, or their accounts from
FRIMCo.
ORGANIZATION, CAPITALIZATION AND VOTING
RIF was organized as a Maryland corporation on October 8, 1987, and was
reorganized by changing its domicile and legal status to a Massachusetts
business trust under a Master Trust Agreement dated July 11, 1996. 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 RIF the use of the name "Frank Russell" or its
derivations.
RIF issues shares of beneficial interest divisible into an unlimited number
of funds, each of which is a separate trust under Massachusetts law, and the
funds' shares may be offered in multiple classes. (The Funds do not presently
offer interests in multiple classes, although they may do so in the future.)
Each Fund share represents an equal proportionate interest in the assets of that
Fund, has a par value of $.01 per share, and is entitled to such dividends and
distributions earned on the assets belonging to such Fund as may be declared by
the Board of Trustees. Shares of a Fund are fully paid and nonassessable and
have no preemptive or conversion rights. Each Fund share has one vote; there are
no cumulative voting rights. There is no Annual Meeting of shareholders, but
Special Meetings may be held. On any matter which affects only a particular
Fund, only shareholders of that Fund vote unless otherwise required by the 1940
Act or the Master Trust Agreement.
The Trustees of RIF hold office for the life of RIF. A Trustee may resign or
retire, and a Trustee may be removed at any time by, in substance, a vote of
two-thirds of RIF's shares. A vacancy in the Board of Trustees shall be filled
by the vote of a majority of the remaining Trustees so long as, in substance,
two-thirds of the Trustees have been elected by shareholders.
In connection with an exemptive order which RIF received from the SEC, it
has committed to a "pass-through" voting procedure which will generally require
an Insurance Company to cast votes at RIF
24
<PAGE>
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 a second exemptive order received by RIF from the SEC,
shares of a Fund may be sold to separate accounts of more than one Insurance
Company to fund variable life and variable annuity Policies. RIF's Board of
Trustees 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, 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 RIF Funds,
or to other clients of Frank Russell Company, including its wholly owned
subsidiary, Frank Russell Trust Company.
MULTI-STYLE EQUITY FUND
CHANCELLOR CAPITAL MANAGEMENT, INC. ("Chancellor"), 1166 Avenue of the
Americas, New York, NY 10036, is a Delaware Corporation indirectly controlled by
Robert George Wade, Jr. and USF&G Corporation. Mr. Wade is the general partner
of a partnership whose limited partners are Chancellor employees, and who own a
controlling interest in Chancellor. Chancellor recently agreed to be acquired in
its entirety by Liechtenstein Global Trust. It is expected that the acquisition
will be consummated by the end of 1996.
EQUINOX CAPITAL MANAGEMENT INC., 399 Park Ave., 28th Floor, New York, NY
10022. Equinox is a registered investment adviser with majority ownership held
by Ron Ulrich.
WESTPEAK INVESTMENT ADVISORS, LP, 1011 Walnut Street, Suite 300, Boulder, CO
80302, is indirectly controlled by Metropolitan Life Insurance Company.
AGGRESSIVE EQUITY FUND
ROTHSCHILD ASSET MANAGEMENT, INC., 1251 Avenue of the Americas, New York, NY
10020, is a wholly owned subsidiary of Rothschild North America, Inc., whose
indirect parent is Rothschild Concordia A.G., a Swiss-based holding company for
the Rothschild Group.
WESTPEAK INVESTMENT ADVISORS, LP, see Multi-Style Equity Fund.
NON-U.S. FUND
J.P. MORGAN INVESTMENT MANAGEMENT, INC., 522 Fifth Ave., 14th Floor, New
York, NY 10036, is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a
publicly held bank holding company.
OECHSLE INTERNATIONAL ADVISORS L.P., One International Place, 44th Floor,
Boston, MA 02110, is a limited partnership which is 100% controlled by its
general partners of its general partner, Oechsle
25
<PAGE>
Group, L.P. The general partners are: S. Dewey Keesler, Stephen P. Langer,
Walter Oechsle, L. Sean Roche, Steven H. Schaefer, Tetsuo Shiozumi, Andrew
Paslin and Warren Walker.
THE BOSTON COMPANY ASSET MANAGEMENT, INC., One Boston Place, Boston, MA
02108, is 100% owned by Mellon Bank Corporation, a publicly held corporation.
CORE BOND FUND
PACIFIC INVESTMENT MANAGEMENT COMPANY, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660, is a subsidiary partnership of PIMCO Advisors L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly by
a group comprised of PIMCO Managing Directors.
STANDISH, AYER & WOOD, INC., One Financial Center, Boston, MA 02110, is a
company whose ownership is divided among seventeen directors, with no director
having more than a 25% ownership interest.
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.
26
<PAGE>
RUSSELL INSURANCE FUNDS
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
MONEY MANAGERS
MULTI-STYLE EQUITY FUND
Chancellor Capital Management, Inc.
Equinox Capital Management Inc.
Westpeak Investment Advisors, LP
AGGRESSIVE EQUITY FUND
Rothschild Asset Management, Inc.
Westpeak Investment Advisors, LP
NON-U.S. FUND
J.P. Morgan Investment Management, Inc.
Oechsle International Advisors L.P.
The Boston Company Asset Management, Inc.
CORE BOND FUND
Pacific Investment Management Company
Standish. Ayer & Wood, Inc.
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, Washington 98402
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, Washington 98402
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, Pennsylvania 19103-7098
OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 972-0700
In Washington (206) 627-7001
<PAGE>
RUSSELL INSURANCE FUNDS
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
STATEMENT OF ADDITIONAL INFORMATION
October 16, 1996
Russell Insurance Funds ("RIF") is a single legal entity organized as
a business trust under the laws of The Commonwealth of Massachusetts. RIF
operates four investment portfolios, each referred to as a "Fund":
Multi-Style Equity Fund
Aggressive Equity Fund
Non-U.S. Fund
Core Bond 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 (each
referred to herein as an "Insurance Company").
This Statement of Additional Information supplements or describes in greater
detail information concerning RIF and the Funds contained in the Prospectus
of the Funds dated October 16, 1996. This Statement is not a Prospectus;
the Statement should be read in conjunction with the Funds' Prospectus.
Prospectuses may be obtained without charge by telephoning or writing RIF at
the number or address shown above. You should retain this Statement of
Additional Information for future reference.
<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE
Organization and Business History
Shareholder Meetings
Controlling Shareholders
Trustees and Officers
OPERATION OF INVESTMENT COMPANY
Service Providers
Consultant
Manager
Money Managers
Distributor
Custodian
Transfer and Dividend Disbursing Agent
Independent Accountants
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
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. RIF was originally organized as a Maryland
corporation, and on July 11, 1996, was reorganized as a Massachusetts
business trust. RIF had not commenced business operations prior to the date
of this Statement of Additional Information.
RIF is currently organized and operates under a Master Trust Agreement dated
July 11, 1996 and the provisions of Massachusetts law governing the operation
of a Massachusetts business trust. The Board of Trustees may amend the
Master Trust Agreement from time to time; provided, however, that any
amendment which would materially and adversely affect shareholders of RIF as
a whole, or shareholders of a particular Fund, must be approved by the
holders of a majority of the shares of RIF or Fund, respectively.
RIF is authorized to issue shares of beneficial interest, and may divide the
shares into two or more series, each of which evidences a pro rata ownership
interest in a different investment portfolio -- a "Fund." The Trustees may,
without seeking shareholder approval, create additional Funds at any time.
The Master Trust Agreement provides that a shareholder may be required to
redeem shares in a Fund under circumstances set forth in the Master Trust
Agreement.
Under the Master Trust Agreement, RIF's Funds are authorized to issue shares
of beneficial interest in one or more classes. The Funds do not presently
offer shares in multiple classes, although they may do so in the future.
Under certain unlikely circumstances, as is the case with any Massachusetts
business trust, a shareholder of a Fund may be held personally liable for the
obligations of the Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation or other
undertaking of the Funds shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust
Agreement also provides that RIF shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of a Fund
and satisfy any judgment thereon. Thus, the risk of any shareholder
incurring financial loss beyond his investment on account of shareholder
liability is limited to circumstances in which a Fund itself would be unable
to meet its obligations.
SHAREHOLDER MEETINGS. RIF will not have an annual meeting of shareholders,
but special meetings may be held. Special meetings may be convened by (i)
the Board of Trustees, (ii) upon written request to the Board by shareholders
holding at least 10% of the outstanding shares, or (iii) upon the Board's
failure to honor the shareholders' request described above, by shareholders
holding at least 10% of the outstanding shares by giving notice of the
special meeting to shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and responsibility
to manage the business of RIF, and hold office for life unless they resign or
are removed by, in substance, a vote of two-thirds of RIF shares outstanding.
Under these circumstances, no one person, entity or shareholder "controls"
RIF.
<PAGE>
The following shareholders owned 5% or more of the voting shares of RIF or of
the Fund at September 16, 1996:
Russell Insurance Funds: General American Life Insurance Co., 700 Market
Street, St. Louis, MO 63166, owns 100% of outstanding shares.
Multi-Style Equity Fund: General American Life Insurance Co., 700 Market
Street, St. Louis, MO 63166, owns 100% of the outstanding shares.
Aggressive Equity Fund: General American Life Insurance Co., 700 Market
Street, St. Louis, MO 63166, owns 100% of the outstanding shares.
Non-U.S. Fund: General American Life Insurance Co., 700 Market Street, St.
Louis, MO 63166, owns 100% of the outstanding shares.
Core Bond Fund: General American Life Insurance Co., 700 Market Street, St.
Louis, MO 63166, owns 100% of the outstanding shares.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operations of RIF. The officers, all of whom are employed by
Frank Russell Investment Management Company ("FRIMCo") or its affiliates, are
responsible for the day-to-day management and administration of RIF's
operations. RIF did not pay any amounts for the year ended December 31, 1995
to the Trustees as a group who are not officers or employees of FRIMCo or its
affiliates. Trustees are paid an annual fee plus travel and other expenses
incurred in attending Board meetings. The Funds' officers and employees,
including those who are Trustees, are paid by Frank Russell Investment
Management Company or its affiliates.
The following table lists the Trustees and officers and their positions with
RIF, their present and principal occupations during the past five years, and
the mailing addresses of Trustees who are not affiliated with RIF. The
mailing address for all Trustees and officers affiliated with RIF is Russell
Insurance Funds, 909 A Street, Tacoma, WA 98402.
An asterisk (*) indicates that the Trustee or officer is an "interested
person" of RIF as defined in RIF Act of 1940, as amended (the "1940 Act"). As
used in the table, "Frank Russell Company" includes its corporate
predecessor, Frank Russell Co., Inc.
*George F. Russell, Jr. -- 64 years old -- Trustee and Chairman of the Board.
Trustee and Chairman of the Board, Frank Russell Investment Company. Director
and Chairman of the Board, Frank Russell Company; Director, Chief Executive
Officer and 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.
-2-
<PAGE>
*Lynn L. Anderson -- 57 years old -- Trustee, President and Chief Executive
Officer. Trustee, President and Chief Executive Officer, Frank Russell
Investment Company. Director, Chief Executive Officer and Chairman of the
Board, Russell Fund Distributors, Inc.; Trustee, Chairman of the Board 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 and Frank
Russell Investments (UK) Limited. Until September 1994, Director and
President, The Laurel Funds, Inc. (investment company).
Paul E. Anderson -- 65 years old -- Trustee. 23 Forest Glen Lane, Tacoma,
Washington 98409. Trustee, Frank Russell Investment Company. President,
Vancouver Door Company, Inc.
Paul Anton, Ph.D. -- 76 years old -- Trustee. 2218 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). 1991-1994, Adjunct Professor,
International Marketing, University of Washington, Tacoma, Washington.
William E. Baxter -- 71 years old -- Trustee. 800 North C Street, Tacoma,
Washington 98403. Trustee, Frank Russell Investment Company. Retired.
Lee C. Gingrich -- 65 years old -- Trustee. 1730 North Jackson, Tacoma,
Washington 98406. Trustee, Frank Russell Investment Company. President,
Gingrich Enterprises, Inc. (Business and Property Management).
Eleanor W. Palmer -- 70 years old -- Trustee. 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 -- 45 years old -- Treasurer and Chief Accounting Officer.
Treasurer and Chief Accounting Officer, Frank Russell Investment Company;
Director of Fund Administration and Operations, Frank Russell Investment
Management Company and Russell Fund Distributors, Inc.; Director of Finance
and Operations, Frank Russell Trust Company; Senior Vice President and Fund
Treasurer, The Seven Seas Series Fund (investment 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.
*Randall P. Lert -- 42 years old -- Director of Investments. 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.
-3-
<PAGE>
*Karl J. Ege -- 54 years old -- Secretary and General Counsel. 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.Z.) Limited, Frank Russell Investments (UK) 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).
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Estimated Annual Total Compensation
Compensation as part of RIF Benefits Upon From RIF Paid to
Trustee from RIF Expenses Retirement Trustees
- ------------------- ------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
Paul E. Anderson $0 $0 $0 $0*
Paul Anton, PhD. $0 $0 $0 $0*
William E. Baxter $0 $0 $0 $0*
Lee C. Gingrich $0 $0 $0 $0*
Eleanor W. Palmer $0 $0 $0 $0*
George F. Russell $0 $0 $0 $0
</TABLE>
- -------------
* As of the date of this Statement of Additional Information, the Funds had
not commenced operations therefore no fees were paid. Trustee compensation
is anticipated to be $8,000 per disinterested trustee on an annual basis.
-4-
<PAGE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of RIF's necessary day-to-day operations are
performed by separate business organizations under contract to RIF. The
principal service providers are:
Consultant Frank Russell Company
Manager, Transfer and Dividend Frank Russell Investment Management Company
Disbursing Agent
Money Managers Multiple professional discretionary
investment management organizations
Custodian and Portfolio State Street Bank and Trust Company
Accountant
Principal Underwriter Russell Fund Distributors, Inc.
CONSULTANT. Frank Russell Company, the corporate parent of FRIMCo, was
responsible for organizing and reorganizing RIF and provides ongoing
consulting services, described in the Prospectus, to RIF and FRIMCo. Frank
Russell Company provides analytical data to the Funds. The reports are paid
for by the Funds. FRIMCo does not pay Frank Russell Company an annual fee for
consulting services. RIF had not yet commenced operations as of the date of
this Statement of Additional Information, and therefore, no Fund paid any
fees to Frank Russell Company for analytical data for those periods.
Frank Russell Company provides comprehensive consulting and Money Manager
evaluation services to institutional clients, including FRIMCo 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), 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),
and (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 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
seconded to overseas enterprises.
-5-
<PAGE>
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. FRIMCo provides or oversees the provision of all general management
and administration, investment advisory and portfolio management, and
distribution services for the Funds. FRIMCo 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. FRIMCo also develops the investment
programs for each of the Funds, selects Money Managers for the Funds (subject
to approval by the Board of Trustees), allocates assets among the 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.")
FRIMCo also acts as RIF's transfer agent, dividend disbursing agent. FRIMCo,
as agent for RIF, pays the Money Managers' fees for the Funds, as a fiduciary
for the Funds.
Each of the Funds pays an annual management fee to FRIMCo, billed monthly on
a pro rata basis and calculated as a specified percentage of the average
daily net assets of each of the Funds. FRIMCo, on behalf of RIF, uses a
portion of the Management Fee to pay the Money Managers' fees for the Funds.
In doing so, FRIMCo acts as a fiduciary for the Funds.
Because RIF had not commenced operations prior to the date of this Statement
of Additional Information, no Fund has yet paid any management fee to FRIMCo.
FRIMCo is a wholly owned subsidiary of Frank Russell Company. FRIMCo's
mailing address is 909 A Street, Tacoma, WA 98402.
MONEY MANAGERS. The Money Managers have no affiliations or relationships with
RIF or FRIMCo, 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"). The Money Managers may serve as advisers or
discretionary managers for Frank Russell Trust Company, Frank Russell
Investment Company, 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, FRIMCo, as agent for RIF, 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. Because the
Funds had not commenced operations prior to the date of this Statement of
Additional Information, no management fees have yet been paid to the 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
Funds through broker-dealer affiliates.
-6-
<PAGE>
DISTRIBUTOR. Russell Fund Distributors, Inc. serves as the distributor of
Investment Company shares. The distributor receives no compensation from RIF
for its services. The distributor is a wholly owned subsidiary of FRIMCo and
its mailing address is: 909 A Street, Tacoma, WA 98402.
CUSTODIAN. State Street Bank and Trust Company ("State Street") serves as the
custodian for RIF. State Street also provides fund accounting, yield
calculation and tax accounting services for each of the Funds for regulatory,
tax and financial reporting purposes. For its services, State Street is paid
a fixed, asset-based and various transaction fees. The mailing address of
State Street is 1776 Heritage Drive, North Quincy, MA 02171.
TRANSFER AND DIVIDEND DISBURSING AGENT. FRIMCo serves as the transfer agent
for RIF. For this service, FRIMCo is paid a fee of $20.00 per shareholder
transaction. FRIMCo is also reimbursed by RIF 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 RIF. Coopers & Lybrand L.L.P. is responsible for performing
annual audits of the financial statements and financial highlights of the
Funds in accordance with generally accepted auditing standards, a review of
federal tax returns, and, pursuant to Rule 17f-2 of the 1940 Act, three
security counts of positions held at the Custodian. 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 FRIMCo. The principal expense of the Funds is the annual
management fee payable to FRIMCo. The Funds' other expenses include: fees for
independent accountants, legal, transfer agent, registrar, custodian, fund
accounting, tax accounting, dividend disbursement, 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 with litigation
proceedings and claims and the legal obligations of RIF to indemnify its
Trustees, 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.
FRIMCo 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 certain expenses of any Fund exceed the expense
limitations established by the State of California, FRIMCo will pay the
excess amount. California's expense limitation is 2.5% of RIF'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 (the "Exchange") is
open for trading. Currently, the 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.
-7-
<PAGE>
The Non-U.S. 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 FRIMCo determines that a particular event would
materially affect the net asset value.
PORTFOLIO TRANSACTION POLICIES. Generally, securities are purchased for the
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 their 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 is purchasing the same security, thereby increasing the Fund's 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 had no operations prior to the date of this Statement of
Additional Information, 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 U.S. stock exchanges involve the
payment of negotiated brokerage commissions; on non-U.S. 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. RIF'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
-8-
<PAGE>
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 FRIMCo and the 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, FRIMCo
and/or to the Money Manager (or their affiliates). FRIMCo and the 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. RIF,
FRIMCo or the 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 FRIMCo or the Money
Manager exercises investment discretion. Any commission, fee or other
remuneration paid to an affiliated broker-dealer is paid in compliance with
RIF's procedures adopted in accordance with Rule 17e-1 of 1940 Act.
FRIMCo does not expect RIF ordinarily to effect a significant portion of
RIF's total brokerage business with broker-dealers affiliated with its Money
Managers. However, a Money Manager may effect portfolio transactions for the
segment of a Fund's portfolio assigned to the Money Manager with a
broker-dealer affiliated with the manager, as well as with brokers affiliated
with other Money Managers.
RIF effects portfolio transactions with or through Frank Russell Securities,
Inc. only when it has been determined by the applicable Money Managers that
RIF 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
FRIMCo. This arrangement is used by Multi-Style Equity, Aggressive Equity and
Non-U.S. Funds.
BROKERAGE COMMISSIONS. The Board of Trustees 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 FRIMCo or the 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.
-9-
<PAGE>
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 (the "SEC"). 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 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) to the power of 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 SEC. 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)to the power of 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 Prospectus. Yield may fluctuate daily and does not provide a
basis for determining future yields.
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 the VARDS Report, Lipper Analytical Services, Inc. or
other industry publications, business periodicals, rating services and market
indices.
-10-
<PAGE>
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
U.S. 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
U.S. government, its agencies and instrumentalities), but such concentration
may occur incidentally as a result of changes in the market value of
portfolio securities.
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
and options written 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.
-11-
<PAGE>
10. RIF 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 1940 Act,
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 FRIMCo
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.
11. 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 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 Prospectus section "Investment
Policies -- Lending Portfolio Securities."
12. 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.
13. RIF will not purchase the securities of other investment companies except
to the extent permitted by the 1940 Act, and any applicable rules and
regulations and except as permitted by any applicable exemptive orders from
the 1940 Act.
14. Purchase from or sell portfolio securities to its officers, Trustees or
other "interested persons" (as defined in the 1940 Act) of the Fund,
including the Fund's Money Managers and their affiliates, except as permitted
by the 1940 Act, SEC rules or exemptive orders.
15. 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.
16. Purchase or retain the securities of an issuer if, to the Fund's
knowledge, one or more of the Trustees or officers of the Fund, or one or
more of the officers or directors of the Money Manager responsible for the
investment, 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 Trustees 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; or
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<PAGE>
3) 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.
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.
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 FRIMCo or
a Money Manager selected for this purpose create an equity exposure for each
equity funds 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 will be used for each of the Funds except the Core Bond
Fund.
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.
The Fund will limit repurchase transactions to those member banks of the
Federal Reserve System and primary dealers in U.S. 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 Managers 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.
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<PAGE>
HIGH RISK BONDS. The Funds, other than the Core Bond Fund, 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 Managers 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, other than
the Core Bond Fund, 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.
RISK FACTORS. The market for lower rated debt securities is relatively new,
its operating history is not extensive, and its growth has paralleled a long
period of economic expansion. Lower rated debt securities may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The prices of low rated debt
securities have been found to be less sensitive to interest rate changes than
investment grade securities, but more sensitive to economic downturns,
individual corporate developments, and price fluctuations in response to
changing interest rates. A projection of an economic downturn or of a period
of rising interest rates, for example, could cause a sharper decline in the
prices of low rated debt securities because the advent of a recession could
lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of low rated debt
securities owned by the Fund defaults, the Core Bond Fund may incur
additional expenses to seek financial recovery.
In addition, the markets in which low rated debt securities are traded are
more limited than those for higher rated securities. The existence of
limited markets for particular securities may diminish the Core Bond Fund's
ability to sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in the financial markets
and could adversely affect and cause fluctuations in the daily net asset
value of the Core Bond Fund's shares.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the credit
worthiness of issuers of low rated securities may be more complex than for
issuers of other investment grade securities, and the ability of the Core
Bond Fund to achieve its investment objectives may be more dependent on
credit analysis than would be the case if the Fund was investing only in
investment grade securities.
The Money Managers of the Core Bond Fund may use ratings to assist in
investment decisions. Ratings of debt securities represent a rating agency's
opinion regarding their quality and are not a guarantee of quality. Rating
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agencies attempt to evaluate the safety of principal and interest payments
and do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than a rating indicates.
ILLIQUID SECURITIES. The expenses of registration of restricted securities
that are illiquid (excluding securities that may be resold by a 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 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 the Non-U.S. 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 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.
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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.)
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
multiplied by the number of contracts multiplied by a multiplier, 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
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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 bid price.
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,
while a call option gives the purchaser the right to sell the foreign
currency at such price. Currency options traded on U.S. 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 the Fund
in the 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
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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; U.S. Treasury
bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S. 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 U.S. 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 U.S. 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.
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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, U.S. 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, U.S. 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, U.S. government
securities, or other highly 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.
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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 credit
worthiness 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.
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 CONTRACTS 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
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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 States of data on which to make trading
decisions, (3) delays in a 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, except the Core Bond Fund. As a result, such 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 such 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, U.S. 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.
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 Funds may sell a foreign currency futures contract to hedge against
possible variations in the exchange rate of the foreign currency in relation
to the U.S. dollar. When a Money Manager anticipates a significant change in
a foreign exchange rate while intending to invest in a foreign security, a
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
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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 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 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 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 Funds' portfolio securities are or are expected to be
denominated. A 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. A Fund 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). A Fund 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 U.S. dollars or into other appropriate currencies.
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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, a Fund may be able to contract to
sell the currency at a price above the devaluation level that it anticipates.
A Fund will not enter 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 U.S.-dollar denominated
commercial paper the yield of which is linked to certain foreign exchange
rate movements. The yield to the investor on indexed commercial
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paper is established at maturity as a function of spot exchange rates between
the U.S. 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
U.S.-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 a Fund to hedge (or cross-hedge) against a decline in the U.S.-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.
U.S. GOVERNMENT OBLIGATIONS. The types of U.S. government obligations the
Funds may purchase include: (1) a variety of U.S. Treasury obligations which
differ only in their interest rates, maturities and times of issuance: (a)
U.S. Treasury bills at time of issuance have maturities of one year or less,
(b) U.S. Treasury notes at time of issuance have maturities of one to ten
years and (c) U.S. Treasury bonds at time of issuance generally have
maturities of greater than ten years; (2) obligations issued or guaranteed by
U.S. government agencies and instrumentalities are supported by any of the
following: (a) the full faith and credit of the U.S. 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 U.S. Treasury, (c) discretionary authority of the U.S. 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 U.S. government will provide financial
support to such U.S. 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 U.S. 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 its 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 U.S. 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.
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
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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 "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 U.S. 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.
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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
completion of the project, FNMA or GNMA frequently provides
permanent financing.
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PRE-REFUNDED MUNICIPAL BONDS - are bonds no longer secured by the
credit of the issuing entity, having been escrowed with U.S.
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 a 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 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.
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The Funds will enter into put and stand-by commitments with
institutions, such as banks and broker-dealers, that the Funds'
Money Managers continually believe satisfy the Funds' credit quality
requirements. The ability of a Fund 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 a Fund 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 Funds
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 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, U.S. 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 U.S. government securities or the
securities of other RICs) of any one issuer.
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As noted in the Prospectus, each Fund must, and intends to, comply with the
diversification requirements imposed by Section 817(h) of the Code and the
regulations thereunder. For information concerning the consequences of
failure to meet the requirements of Section 817(h), see the prospectus for
the variable contracts.
The Funds will not be subject to the 4% Federal excise tax imposed on RICs
that do not distribute substantially all their income and gains each calendar
year because that tax does not apply to a RIC whose only shareholders are
segregated asset accounts of life insurance companies held in connection with
variable annuity contracts and/or variable life insurance policies.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Funds and their
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Funds' activities, and this discussion and the
discussion in the prospectuses and/or statements of additional information
for variable contracts are not intended as a substitute for careful tax
planning. Accordingly, potential investors are urged to consult their own
tax advisers for more detailed information and for information regarding any
state, local, or foreign taxes applicable to the variable contracts and the
holders thereof.
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 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.
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 a 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 a 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
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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 of 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 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.
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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.
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 a 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
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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-U.S. 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 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.
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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.
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 RATINGS GROUP ("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.
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<PAGE>
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 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.
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<PAGE>
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 credit
worthiness 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.
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.
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<PAGE>
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.
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.
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<PAGE>
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 & 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.
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
U.S. 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
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<PAGE>
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.
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 this data cannot
be disclosed in reports, it is 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.
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<PAGE>
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.
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.
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<PAGE>
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 reflect 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.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
FINANCIAL STATEMENTS
As of the date of this Statement of Additional Information, RIF had not yet
commenced operations. However, audited financial statements with respect to
RIF's initial capitalization are set forth below. Additionally, after RIF
commences operations, financial statements of RIF, including notes thereto
and financial highlights and the Report of the Independent Auditors will be
included in RIF's annual report to shareholders and incorporated herein by
reference.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
of Russell Insurance Funds:
We have audited the accompanying statements of assets and liabilities of each
of the series of Russell Insurance Funds (comprised of Multi-Style Equity
Fund, Aggressive Equity Fund, Non-U.S. Fund, and Core Bond Fund (the
"Funds")), as of August 30, 1996. These financial statements are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit of the financial
statements provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Funds enumerated above
as of August 30, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 12, 1996
<PAGE>
RUSSELL INSURANCE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
August 30, 1996
<TABLE>
<CAPTION>
Multi-Style Aggressive Non-U.S. Core
Equity Fund Equity Fund Fund Bond Fund
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Cash....................................... $ 25,000 $ 25,000 $25,000 $ 25,000
Deferred organization costs (Note)......... 10,000 10,000 10,000 10,000
--------- --------- ------- --------
TOTAL ASSETS............................... 35,000 35,000 35,000 35,000
LIABILITIES:
Payable to Manager (Note).................. 10,000 10,000 10,000 10,000
--------- --------- ------- --------
NET ASSETS................................. $ 25,000 $ 25,000 $25,000 $ 25,000
--------- --------- ------- --------
--------- --------- ------- --------
NET ASSETS CONSIST OF:
Shares of beneficial interest.............. $ 25 $ 25 $ 25 $ 25
Additional paid-in capital................. 24,975 24,975 24,975 24,975
--------- --------- ------- --------
NET ASSETS................................. $ 25,000 $ 25,000 $25,000 $ 25,000
--------- --------- ------- --------
--------- --------- ------- --------
Net asset value, offering and redemption
price per share ($25,000 divided by 2,500
shares of $.01 par value shares of beneficial
interest outstanding, respectively)........ $10.00 $10.00 $10.00 $10.00
--------- --------- ------- --------
--------- --------- ------- --------
</TABLE>
NOTE:
The Russell Insurance Funds (the "Investment Company") is an open-end
Investment Company established as a "Massachusetts Business Trust" under a
Declaration of Trust dated July 11, 1996 and is registered under the
Investment Company Act of 1940, as amended. The Multi-Style Equity Fund,
Aggressive Equity Fund, Non-U.S. Fund, and Core Bond Fund (the "Funds") are
new series of the Russell Insurance Funds. The Funds' authorized capital
consists of an unlimited number of shares of beneficial interest at a $.01
par value.
The deferred organization costs are estimated by the Funds in connection with
their organization. The Funds are expected to reimburse Frank Russell
Investment Management Company (the "Manager"), for the payment of these costs
made in advance by the Manager. The costs have been deferred and will be
amortized on a straight-line basis over a five-year period beginning at the
commencement of operations of the Funds. In the event that any of the initial
shares of the Funds are redeemed during the amortization period, the
redemption proceeds will be reduced by any unamortized organizational
expenses in the same proportion as the number of initial shares being
redeemed bears to the number of initial shares outstanding at the time of
such redemption. Offering costs, including all initial registration costs,
will be charged to expense during each Fund's first twelve months of
operation.
The cash is in a non-interest bearing account at the Funds' custodian bank
and will be held until the Funds become operational.
