<PAGE>
Filed pursuant to Rule 485(a)
Registration No. 33-18030
811-5371
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
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Post-Effective Amendment No. 1 [X]
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 5
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Russell Insurance Funds
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(Exact Name of Registrant as Specified in Charter
909 A Street, Tacoma, Washington 98402
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (206) 627-7001
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Karl J. Ege, Esq.
Russell Insurance Funds
909 A Street
Tacoma, Washington 98402
(Name and Address of Agent for Service)
Approximate date of commencement of proposed sale to the public:
As soon as practical after the effective date of the Registration Statement.
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate
box)
( ) immediately upon filing pursuant to paragraph (b)
( ) on (date) pursuant to paragraph (b)
(X) 60 days after filing pursuant to paragraph (a)(i)
( ) on (date) pursuant to paragraph (a)(i)
( ) 75 days after filing pursuant to paragraph (a)(ii)
( ) on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
( ) this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
Registrant has declared its intention to register an indefinite number of
shares of beneficial interest, par value of $.01, of Russell Insurance Funds
pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940, as
amended. The Registrant filed its Rule 24f-2 notice for the fiscal year ended
December 31, 1996 on February 25, 1997.
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Russell Insurance Funds
File No. 33-18030
P/E Amt #1
FORM N-1A
CROSS REFERENCE SHEET
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Part A
Item No. Prospectus Heading
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1. Cover Page Cover Page
2. Synopsis Highlights and Table of
Contents
3. Condensed Financial Information Not Applicable
4. General Description of Registrant Investment Objectives and
Policies; Risk Factors;
Fund Instruments and
Other Investment
Information; Investment
Limitations
5. Management of the Fund Management of the Funds
6. Capital Stock and Other Securities Description of Capital
Stock; Dividends and
Distributions; Taxes;
Miscellaneous
7. Purchase of Securities Being Offered How to Purchase and
Redeem Shares; Pricing of
Shares
8. Redemption or Repurchase How to Purchase and
Redeem Shares
9. Pending Legal Proceedings Not Applicable
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Part B Heading in Statement
Item No. of Additional Information
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10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Description of Capital
Stock
13. Investment Objectives and Policies Investment Objectives and
Policies; Additional
Information on Fund
Instruments; Additional
Investment Limitations
14. Management of the Registrant Management of the Funds
15. Control Persons and Principal Management of the Funds
Holders of Securities
16. Investment Advisory and Other Services Management of the Funds;
Independent Auditors
17. Brokerage Allocation Fund Transactions
18. Capital Stock and Other Securities Description of Capital
Stock
19. Purchase, Redemption, and Pricing of Additional Purchase and
Securities Being Offered Redemption Information;
Net Asset Value and Net
Income-Money Market
Liquidity Fund
20. Tax Status Additional Information
Concerning Taxes
21. Underwriters Additional Purchase and
Redemption Information
22. Calculation of Performance Data Performance and Yield
Information
23. Financial Statements Financial Statements
Part C
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Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
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<PAGE>
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 to provide 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 to provide 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
____________, 1997, 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
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UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Statement of Additional Information, material incorporated by reference
into this Prospectus, and other information regarding the Investment Company and
the Funds is maintained electronically with the SEC at its Internet web site
(http://www.sec.gov).
PROSPECTUS DATED _____________, 1997
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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 accordance 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 ___.
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 ___
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 ___.
GENERAL MANAGEMENT OF RIF is provided by Frank Russell Investment Management
Company ("FRIMCo"), a wholly-owned subsidiary of FRC. FRIMCo furnishes
offices 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 ___.
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, restrictions as specified in this prospectus,
and the specific strategies developed by FRC and FRIMCo. SEE PAGE ___.
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 ___.
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 ___.
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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 ___.
TAXES PAYABLE BY THE FUNDS are expected to be nominal, since each Fund will seek
to reduce taxes by distributing substantially all of its net investment income
and realized capital gains to Insurance Company separate accounts ("Separate
Accounts") for the benefit of policyholders. Policyholders should review the
section on "Taxes" in the prospectus of the Policies for a description of the
federal tax effects concerning the Policies, and should consult a tax adviser
concerning state or local taxes. SEE PAGE ___.
VALUATION OF FUND SHARES occurs each business day 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. SEE PAGE ___.
SHARES OF EACH FUND ARE SOLD AND REDEEMED at the net asset value next computed
after receipt of the order. The Funds do not assess a redemption charge. SEE
PAGE ___.
ADDITIONAL INFORMATION is also included in this Prospectus concerning: RIF's
Custodian; Independent Accountants and Reports; Organization, Capitalization and
Voting; and Money Manager Profiles. SEE PAGES ___ AND ___.
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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 one or more Insurance
Companies. 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 1,300 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
FRIMCo and Frank Russell Company believe 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
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particular asset class or investment style--or particular fund investing in one
asset class or using a particular style--may not achieve above-average
performance at any given point in the market.
Similarly, FRIMCo and Frank Russell Company believe 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 Chief Investment Officer of FRIMCo since
1989.
- Loran M. Kaufman, who has been a Portfolio Manager of FRIMCo since
1990. Ms. Kaufman jointly with another portfolio manager identified
herein has primary responsibility for management of the Core Bond
Fund.
- Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in the Investment
Group of the Frank Russell
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Company. Ms. Carter jointly with another portfolio manager identified
herein has primary responsibility for management of the Non-U. S. Fund.
- James M. Imhof, Manager of Portfolio Trading of FRIMCo, who has
supervised the day to day management of the FRIMCo Managed funds and
ongoing analysis and monitoring of such funds money managers since
1989.
- Randal C. Burge, who has been a Portfolio Manager of FRIMCo since June
1995. From 1990 to 1995, Mr. Burge was a Client Executive for Frank
Russell Australia. Mr. Burge jointly with another portfolio manager
identified herein has primary responsibility for management of the
Non-U.S. and Core Bond Funds.
- Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of the US
Equity Manager Research Department with Frank Russell Company. Mr.
Trittin jointly with another portfolio manager identified herein has
primary responsibility for management of the Aggressive Equity and
Multi-Style Equity Funds.
- C. Nola Williams, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1994 to 1995, Ms. Williams was a member of the
Alpha Strategy Group. From 1988 to 1994, Ms. Williams was Senior
Research Analyst with Frank Russell Company. Ms. Williams jointly with
another portfolio manager identified herein has primary responsibility
for management of the Aggressive Equity and Multi-Style Equity Funds.
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 annual rate of the management fees payable to FRIMCo monthly on a pro rata
basis, are equal to the following percentages of the average daily net assets of
each fund: Multi-Style Equity Fund, .78%; Aggressive Equity Fund, .95%; Non-U.S.
Fund, .95%; 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.
Until further notice, FRIMCo intends to voluntarily waive all or a portion of
its management fees, and, if necessary, reimburse Fund total operation
expenses, to the extent necessary for each of the Funds to maintain annual
expenses ratios of not more than 0.92% for the Multi-Style Equity Fund; 1.25%
for the Aggressive Equity Fund; 1.30% for the Non-U.S. Fund and 0.80% for the
Core Bond Fund. Any such waiver may be revised or eliminated at any time.
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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 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. Management fees
payable to the money managers are equivalent to the following annual rates
expressed as a percentage of the average daily net assets of each fund:
Multi-Style Equity Fund .31%, Aggressive Equity Fund .52%, Non-U.S. Fund .38%
and Core Bond Fund .19%. 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. 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.
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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 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.
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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.
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.
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Investments in bank certificates of deposit, time deposits and bankers'
acceptances include Eurodollar Certificates of Deposit ("ECD"), which are issued
by foreign branches of US or foreign banks; Eurodollar Time Deposits ("ETD"),
which are issued by foreign branches of US or foreign banks; and Yankee
Certificates of Deposit ("Yankee CDs"), which are issued by US branches of
foreign banks. These instruments may be US dollar or foreign currency
denominated and are subject to the risks of non-US issuers described under
"Investment Policies--Investment in Foreign Securities."
The variable and floating rate securities the Fund may invest in provide for a
periodic adjustment in the interest rate paid on the obligations. The terms of
such obligations must provide that interest rates are adjusted periodically
based upon some appropriate interest rate adjustment index as provided in the
respective obligations. The adjustment intervals may be regular, and range from
daily up to annually, or may be event based, such as on a change in the prime
rate. The Fund may also invest in zero coupon, US Treasury, foreign government
and US and foreign corporate debt securities, which are bills, notes and bonds
that have been stripped of their unmatured interest coupons and receipts or
certificates representing interests in such stripped debt obligations and
coupons. A zero coupon security pays no interest to its holder prior to
maturity. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest.
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
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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).
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
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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 securities 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
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 33.33% 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
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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 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
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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.
DEPOSITORY RECEIPTS. The Funds may invest in securities of foreign issuers in
the form of American Depository Receipts ("ADRs") or other similar securities
convertible into securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a United States
bank and trust company evidencing ownership of the underlying securities.
Generally, ADRs in registered form are designed for use in the U.S. Securities
markets.
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.
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
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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<PAGE>
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.
FRIMCo arranges for the purchase and sale of RIF's securities and selects
brokers and dealers (including affiliates), which in its best judgment
provide prompt and reliable execution at favorable prices and reasonable
commission rates. FRIMCo may select brokers and dealers which provide it
with research services and may cause RIF to pay such brokers and dealers
commissions at rates that exceed rates that other brokers and dealers may
have charged if it views the commissions as reasonable in relation to the
value of the brokerage and/or research services. In selecting a broker,
including affiliates, for a transaction, FRIMCo's primary consideration is
prompt and effective execution of orders at the most favorable prices.
Subject to that primary consideration, dealers may be selected for research,
statistical or other services to enable FRIMCo to supplement its own research
and analysis.
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).
DIVIDENDS AND DISTRIBUTIONS
-20-
<PAGE>
INCOME DIVIDENDS
The Board of Trustees presently intends that dividends will be declared from net
investment income, for payment on the following schedule:
- -------------------------------------------------------------------------------
Declared Payable
- -------- -------
Quarterly Mid: February, April, Multi-Style Equity, Aggressive Equity
July and October and Core Bond Funds
Annually Mid-February Non-U.S. Fund
- -------------------------------------------------------------------------------
CAPITAL GAINS DISTRIBUTIONS
The Board intends that distributions will be declared 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
-21-
<PAGE>
place certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because Section 817(h) and the
regulations thereunder treat a Fund's assets as assets of the related separate
account, these limitations also 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 1000-Registered Trademark- 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.
-22-
<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
Because the RIF Funds commenced operations on January 2, 1997, they do not have
a significant performance history. 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.
-23-
<PAGE>
PERCENTAGE TOTAL RETURNS(1)
PERIODS ENDING DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ANNUALIZED
---------------------------------------------------------------------
One Five Ten Inception Inception
Year Years Years to Date Date
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FRANK RUSSELL INVESTMENT COMPANY
[RIF Multi-Style Equity Fund comparable]
DIVERSIFIED EQUITY FUND - Class S 25.51 16.09 13.74 16.15 9/5/85
[RIF Aggressive Equity Fund comparable]
SPECIAL GROWTH FUND - Class S 23.04 13.52 12.28 14.33 9/5/85
[RIF Non-US Fund comparable]
INTERNATIONAL SECURITIES FUND - Class S 3.09 8.52 8.78 13.35 9/5/85
FRANK RUSSELL TRUST COMPANY
[RIF Core Bond Fund comparable]
FIXED INCOME I FUND 4.46 7.83 8.96 11.89 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 the 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).
-24-
<PAGE>
VALUATION OF PORTFOLIO SECURITIES
With the exceptions noted below, the Funds value portfolio securities at "fair
market value." This generally means that equity securities and fixed-income
securities listed and traded principally on any national securities exchange are
valued on the basis of the last sale price or, lacking any sale, at the closing
bid price, on the primary exchange on which the security is traded. United
States over-the-counter equity and fixed-income securities and options are
valued on the basis of the closing bid price, 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 before 8:00 am, pacific time, 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 by 11:00 am, pacific time. 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.
-25-
<PAGE>
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.
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
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<PAGE>
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 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, FRIMCo 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 LGT ASSET MANAGEMENT INC.,. ("Chancellor"), 1166 Avenue of the
Americas, New York, NY 10036, is wholly-owned by Liechtenstein Global Trust
which, in turn, is controlled by the Prince of Liechtenstein Foundation. The
Price of Liechtenstein Foundation serves as the parent organization for the
various business enterprises of the Princely Family of Liechtenstein.
EQUINOX CAPITAL MANAGEMENT INC., 590 Madison Ave, 41st Floor, New York, NY
10022. Equinox is a registered investment adviser with majority ownership held
by Ron Ulrich.
-27-
<PAGE>
WESTPEAK INVESTMENT ADVISORS, LP, 1011 Walnut Street, Suite 400, Boulder, CO
80302, is indirectly controlled by Metropolitan Life Insurance Company.
AGGRESSIVE EQUITY FUND
ROTHSCHILD ASSET MANAGEMENT, INC., 1251 Avenue of the Americas, 51st Floor, 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, 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 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, One Boston Place, 14th Floor, 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
-28-
<PAGE>
PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED
OR SUPPLEMENTED ACCORDINGLY.
-29-
<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 LGT Asset 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,
The Boston Company Asset Management,
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
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<PAGE>
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
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<PAGE>
FINANCIAL STATEMENTS
RIF commenced operations on January 2, 1997. Audited Financial Statements
with respect to RIF's initial capitalization as of December 31, 1996
including notes therein and the Report of the Independent Auditors are
included in RIF's annual report to shareholders and incorporated herein by
reference.
<PAGE>
RUSSELL INSURANCE FUNDS
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (206) 627-7001
STATEMENT OF ADDITIONAL INFORMATION
____________, 1997
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":
As of the date of this Statement of Additional Information, RIF is comprised of
the following investment portfolios, each of which commenced operations on the
date set forth opposite the Fund's name.
Fund Fund Inception Date Prospectus Date
---- ------------------- ---------------
Multi-Style Equity January 2, 1997 _________, 1997
Aggressive Equity January 2, 1997 _________, 1997
Non-U.S. Fund January 2, 1997 _________, 1997
Core Bond January 2, 1997 _________, 1997
The Funds had net assets of $_______________on_______________,1997.
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 ___________, 1997. 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.
Capitalized terms not otherwise defined in this Statement shall have the
meanings assigned to them in the Prospectuses.
<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
Fund Expenses
Valuation of Fund Shares
Portfolio Transaction Policies
Portfolio Turnover Rate
Brokerage Allocations
Brokerage Commissions
Yield and Total Return Quotations
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS
Investment Restrictions
Investment Policies
Certain Investments
TAXES
RATINGS OF DEBT INSTRUMENTS
FINANCIAL STATEMENTS
<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 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.
The following shareholders owned 5% or more of the voting shares of RIF or of
the Fund at February 24th, 1997:
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.
<PAGE>
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 began paying each Trustee an annual fee equal to $8,000
starting on January 2, 1997, the date the Funds commenced operations. 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 Investment Company 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.,
January 1957 to March 1993, Chief Executive Officer of Frank Russell Company;
March 1982 to November 1995, Chairman of the Board of Frank Russell Investment
Management Company.
*Lynn L. Anderson -- 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,
SSgA Funds (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, 1997 to present,
President, Forest Limited Partnership; from 1984 to 1996, President,
Vancouver Door Company, Inc.
Paul Anton, Ph.D. -- 77 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.
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<PAGE>
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. Trustee, Frank Russell Investment Company.
Retired.
*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, SSgA Funds (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 -- 43 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 and
Chief Investment Officer, Russell Fund Distributors, Inc. April 1990 to November
1995, Director of Investments of Frank Russell Investment Management Company.
*Karl J. Ege -- 55 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 and A Street Investment
Associates, Inc., 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 Company PTY 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.
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<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
Trustee Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From RIF Paid to
from RIF Benefits Accrued Retirement Trustees
as part of RIF
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
Paul E. Anderson $8,000 $0 $0 $0*
Paul Anton, PhD. $8,000 $0 $0 $0*
William E. Baxter $8,000 $0 $0 $0*
Lee C. Gingrich $8,000 $0 $0 $0*
Eleanor W. Palmer $8,000 $0 $0 $0*
George F. Russell, Jr. $0 $0 $0 $0
* Russell Insurance Funds has not completed a full year of operations since its organization, therefore the aggregate
compensation represents the estimated future payments that will be paid.
</TABLE>
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 Frank Russell Investment Management Company
Dividend Disbursing Agent
Money Managers Multiple professional discretionary
investment management organizations
Custodian and Portfolio State Street Bank and Trust Company
Accountant
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. FRIMCo
does not pay Frank Russell Company an annual fee for consulting services. The
Funds did not commence operations until January 2, 1997, therefore there were
no fees paid to FRC for the year ended December, 1996.
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
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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. 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.
RIF commenced operations on January 2, 1997, therefore none of the Funds had
paid a management fee to FRIMCo for the period ended December 31, 1996.
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
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<PAGE>
average for the quarter of all the assets allocated to the Money Manager.
The Funds commenced operations on January 2, 1997, therefore no management
fees had been paid to the Money Managers for the year ended December 31, 1996.
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.
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 and financial
reporting purposes. For these services, State Street is paid an annual fee, in
accordance with the following: domestic custody - (i) an annual fee of $3,000
per portfolio per fund, (ii) an annual fee, payable monthly on a pro rata basis,
based on the following percentages of the month end net assets of all domestic
funds; $0 up to and including $10 billion - .0075%; over $10 billion - .0065%;
global custody - an annual fee, payable monthly on a pro rata basis, based on
the month-end net assets and geographic classification of the investments in the
international funds; fund accounting - (i) an annual fee of $10,000 - $24,000
per portfolio per fund, (ii) an annual fee of 0.015% - 0.030%, payable monthly
on a pro rata basis, based on daily average net assets of each Fund; securities
transaction charges from $6.50 to $100.00 per transaction; monthly pricing fees
of $375.00 per portfolio and %6.00 to $12.00 per security; multiple class fee of
$15,000 per year for each additional class of shares; and yield calculation fees
of $4,200 per fixed income fund per year. State Street is reimbursed by the
funds for supplying certain out-of-pocket expenses including postage, transfer
fees, stamp duties, taxes, wire fees, telexes and freight. In addition,
interest earned on invested cash balances is used to offset the Funds' custodian
expense. The mailing address of State Street and Trust Company 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 the following asset-based fee: $0-$25
million - 7 basis points; $26-$50 million - 5 basis points; $51-$100 million -
3 basis points; $101-$500 million - 2 basis points; and over $500 million -
l basis point. FRIMCo is also reimbursed by RIF for certain out-of-pocket
expenses, including postage, taxes, wires, stationery, and telephone. FRIMCo
mailing address is 909 A Street, Tacoma WA 98402.
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.
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<PAGE>
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.
VALUATION OF FUND SHARES. 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. 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.
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 were not in operation as of December 31, 1996, 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
-7-
<PAGE>
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 either made by the Money
Manager or by FRIMCo when directly commissions under Section 28(e) of the
Securities Exchange Act of 1934 for Brokerage and research services. 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 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 arranges for the purchase and sale of Investment Company's securities and
selects brokers and dealers (including affiliates), which in its best judgment
provide prompt and reliable execution at favorable prices and reasonable
commission rates. FRIMCo may select brokers and dealers which provide it with
research services and may cause Investment Company to pay such brokers and
dealers commissions which exceed those other brokers and dealers may have
charged, if it views the commissions as reasonable in relation to the value of
the brokerage and/or research services. In selecting a broker, including
affiliates, for a transaction, the primary consideration is prompt and effective
execution of orders at the most favorable prices. Subject to that primary
consideration, dealers may be selected for research, statistical or other
services to enable FRIMCo to supplement its own research and analysis.
Frank Russell Securities, Inc., an affiliate of FRIMCo, refunds up to 70% of the
commissions paid to the Funds effecting such transactions, after reimbursement
for research services provided to FRIMCo. As to brokerage transactions effected
by money managers on behalf of the Funds through Frank Russell Securities, Inc.
at the request of the Manager, research services obtained from third party
service providers at market rates are provided to the Funds by Frank Russell
Securities, Inc. Such research services include performance measurement
statistics, fund analytics systems and market monitoring systems. As to other
brokerage transactions effected by the Funds through Frank Russell Securities,
research services provided by Frank Russell Company and Russell Data Services
are provided to the money managers. Such services include market performance
indices, investment adviser performance information and market analysis. This
arrangement is used by Multi-Style Equity, Aggressive Equity and Non-US Funds.
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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 commenced operations on January 2, 1997, they do not yet have
a history of paying brokerage commissions.
YIELD AND TOTAL RETURN QUOTATIONS. The Funds compute their average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission (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:
n
P(1+T) = 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:
6
YIELD = 2[(a-b+1) -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.
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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.
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.
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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 Exchange 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.
INVESTMENT POLICIES.
CASH RESERVES. Each Fund may invest its cash reserves in one or more
unaffiliated money market funds. Such investments will not exceed 15% of the
investing Fund's net assets.
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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.
CERTAIN INVESTMENTS.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with the
seller--a bank or securities dealer--who agrees to repurchase the securities at
the Fund's cost plus interest within a specified time (normally one day). The
securities purchased by the Fund have a total value in excess of the value of
the repurchase agreement and are held by the Fund's custodian bank until
repurchased. Repurchase agreements assist a Fund in being invested fully while
retaining "overnight" flexibility in pursuit of investments of a longer-term
nature.
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.
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.
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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 growth of the market for lower rated debt securities 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 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
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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).
DEPOSITORY RECEIPTS. Each Fund may hold securities of foreign issuers in the
form of American Depository Receipts ("ADRs"), American Depository Shares
("ADSs") and European Depository Receipts ("EDRs"), or other securities
convertible into securities of eligible European or Far Eastern issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. ADRs and ADSs typically are issued
by an American bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depository Receipts ("CDRs"), are issued in Europe typically
by foreign banks and trust companies and evidence ownership of either foreign or
domestic securities. Generally, ADRs and ADSs in registered form are designed
for use in United States securities markets and EDRs in bearer form are designed
for use in European securities markets. For purposes of a Fund's investment
policies, the Fund's investment in ADRs, ADSs and EDRs will be deemed to be
investments in the equity securities representing securities of foreign issuers
into which they may be converted.
ADR facilities may be established as either "unsponsored" or "sponsored." While
ADRs issued under these two types of facilities are in some respects similar,
there are distinctions between them relating to the rights and obligations of
ADR holders and the practices of market participants. A depository may
establish an unsponsored facility without participation by (or even necessarily
the acquiescence of) the issuer of the deposited securities, although typically
the depository requests a letter of non-objection from such issuer prior to the
establishment of the facility. Holders of unsponsored ADRs generally bear all
the costs of such facilities. The depository usually charges fees upon the
deposit and withdrawal of the deposited securities, the conversion of dividends
into U.S. dollars, the disposition of non-cash distributions, and the
performance of other services. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders with respect to the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities entered into a deposit
agreement the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depository), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information
to
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the ADR holders at the request of the issuer of the deposited securities. The
Funds may invest in sponsored and unsponsored ADRs.
OPTIONS ON SECURITIES AND INDEXES. Each Fund, except as noted above, may
purchase and write both call and put options on securities and securities
indexes in standardized contracts traded on foreign or national securities
exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on a
regulated foreign over-the-counter market, and agreements, sometimes called cash
puts, which may accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the holder of the
option, in return for a premium, the right to buy from (in the case of a call)
or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value or
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect specified facets of a particular
financial or securities market, a specified group of financial instruments or
securities, or certain economic indicators.)
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
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the holding period of the option closed out. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset of the
Fund. The premium received for an option written by a Fund is recorded as a
deferred credit. The value of an option purchased or written is marked-to-market
daily and is valued at the closing 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 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-Registered Trademark-;
Nikkei 225; CAC-40; FT-SE 100; the NYSE composite; U.S. Treasury
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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.
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
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"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.
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
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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 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
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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 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
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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.
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.
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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 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.
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
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include certificates representing interests in such stripped coupons and
receipts. Zero coupon securities trade at a discount from their par value and
are subject to greater fluctuations of market value in response to changing
interest rates.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES. The forms of
mortgage-related and other asset-backed securities the Funds may invest in
include the securities described below:
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities are
securities representing interests in "pools" of mortgages in which payments
of both interest and principal on the securities are generally made
monthly. The securities are "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.
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
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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.
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
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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.
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.
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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.
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 amount and 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
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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 enter into the
contract or option, the Funds will, as a general rule, identify on their records
that the contract or option was entered into as part of a hedging transaction.
If the Funds were to invest in a forward currency contract, currency futures
contract or option on a foreign currency and offsetting positions in such
contracts or options, and if the two offsetting positions were characterized as
a straddle (as opposed to a hedge) for federal income tax purposes, then the
Funds might not be able to receive the benefit of certain realized losses from
the liquidation of one of those positions for an indefinite period of time
(i.e., until the gain position and any successor positions are disposed of). The
Funds expect that their activities with respect to forward foreign currency
contracts, currency futures contracts and options on foreign currencies will not
require it, as a general rule, to have to treat such contracts or options as
straddle positions for federal income tax purposes. Under current law, unless
certain requirements are satisfied, the Funds, will be required to calculate
separately certain gains and losses attributable to certain of their forward
currency contracts, currency futures contracts and options on foreign currencies
even if the Funds acquired the contract or option to hedge their risk of
currency fluctuations with regard to capital assets held or to be held by the
Funds.
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.
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
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<PAGE>
received by the Funds and (b) will permit it to use substantially all of the
losses of the Funds for the fiscal years in which such losses actually occur.
Generally, the hedging transactions and certain other transactions in options,
futures and forward contracts undertaken by a Fund may result in "straddles" for
U.S. federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by a Fund. In addition, losses realized by a Fund on
positions that are part of a straddle may be deferred under the straddle rules,
rather than being taken into account in calculating the taxable income for the
taxable year in which such losses are realized. Because only a few regulations
implementing the straddle rules have been promulgated, the tax consequences of
transactions in options, futures and forward contracts to a Fund are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by a Fund which is taxed as ordinary income when distributed to
shareholders.
A Fund may make one or more of the elections available under the Code which are
applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gains, may be increased or decreased substantially in any
given fiscal year as compared to a fund that did not engage in such hedging
transactions.
The 30% limit on gains from the disposition of certain options, futures and
forward contracts held less than three months and the qualifying income and
diversification requirements applicable to a Fund's assets may limit the extent
to which a Fund will be able to engage in transactions in options, futures
contracts or forward contracts.
Income (excluding certain gains) from transactions in options and futures
contracts derived by the Fund with respect to its business of investing in
securities, will qualify as permissible income under the Income Requirement.
Furthermore, any increase in value on a position that is part of a "designated
hedge" will be offset by any decrease in value (whether realized or not) of the
offsetting hedging position during the period of the hedge for purposes of
determining whether the Fund satisfies the Short-Short Limitation. Thus, only
the net gain (if any) from the designated hedge will be included in gross income
for purposes of that limitation.
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,
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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
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, (which have expired but are anticipated to be issued
with a retroactive effective date), 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.
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.
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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.
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
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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.
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.
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Prime-1 - indicates a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: (1) leading market positions in
well established industries; (2) high rates of return on funds employed;
(3) conservative capitalization structures with moderate reliance on debt
and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternative liquidity.
Prime-2 - indicates a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
S&P:
Commercial paper rated A by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements. Long-term senior
debt is rated A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances. Typically, the issuer's
industry is well established and the issuer has a strong position within
the industry. The reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated A-1, A-2, or A-3.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
sign designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated A-1.
DUFF & 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.
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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
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.
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IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for
institutions in all the countries covered. Following the Committee
meetings, ratings are issued directly to subscribers. At the same time, the
company is informed of the ratings as a matter of courtesy, but not for
discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic,
or financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
FITCH INVESTORS SERVICE, INC.:
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
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.
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F-5--Weak credit quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D--Default. Issues assigned this rating are in actual or imminent payment
default.
THOMSON BANKWATCH (TBW) SHORT-TERM RATINGS:
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned. These ratings are derived exclusively from a
quantitative analysis of publicly available information. Qualitative
judgments have not been incorporated. The ratings are intended to be
applicable to all operating entities of an organization but there may be in
some cases more credit liquidity and/or risk in one segment of the business
than another.
The TBW Short-Term Rating applies only to unsecured instruments that have a
maturity of one year or less, and 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
RIF commenced operations on January 2, 1997. Audited Financial Statements
with respect to RIF's initial capitalization as of December 31, 1996
including notes thereto and the Report of the Independent Auditors are
included in RIF's annual report to shareholders and incorporated herein by
reference.
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Russell Insurance Funds
File No. 33-18030
1933 Act Post-Effective Amend No. 1
1940 Act Amend No. 5
PART C
Other Information
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements: [To be filed by Amendment]
(b) Exhibits
1 Master Trust Agreement (incorporated by reference to Pre-
effective Amendment No. 4 filed September 20, 1996).
2 Bylaws (incorporated by reference to Pre-effective Amendment
No. 4 filed September 20, 1996).
5(a) Management Agreement between Russell Insurance Funds ("RIF") and
Frank Russell Investment Management Company ("FRIMCo") dated
August 5, 1996 (incorporated by reference to Pre-effective
Amendment No. 4 filed September 20, 1996).
5(b) Form of Portfolio Management Agreement among RIF, FRIMCo and
Money Managers (incorporated by reference to Pre-effective
Amendment No. 4 filed September 20, 1996).
6 Distribution Agreement between RIF and Russell Fund
Distributors, Inc. dated August 5, 1996 (incorporated by
reference to Pre-effective Amendment No. 4 filed September 20,
1996).
8(a) Custody Agreement between RIF and State Street Bank and Trust
Company ("State Street") dated August 5, 1996 (incorporated by
reference to Pre-effective Amendment No. 4 filed September 20,
1996).
9(a) Form of Participation Agreement between RIF and General American
Life Insurance Company ("General American") (incorporated by
reference to Pre-effective Amendment No. 4 filed September 20,
1996).
9(b) Transfer and Dividend Disbursing Agency Agreement between RIF and
FRIMCo dated August 5, 1996 (incorporated by reference to
Pre-effective Amendment No. 4 filed September 20, 1996).
9(c) Form of Tax Accounting Services Agreement between RIF and State
Street (incorporated by reference to Pre-effective Amendment
No. 4 filed September 20, 1996).
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<PAGE>
9(d) Form of Yield Calculation Services Agreement between RIF and
State Street (incorporated by reference to Pre-effective
Amendment No. 4 filed September 20, 1996).
9(e) Joint Insurance Agreement between RIF and Frank Russell
Investment Company dated August 5, 1996 (incorporated by
reference to Pre-effective Amendment No. 4 filed September 20,
1996).
10 Opinion and Consent of Counsel regarding the legality of the
securities being registered, together with consent to the
inclusion of that opinion in this Registration Statement (to be
filed by Amendment).
11(a) Consent of Independent Auditors. (To be filed by Amendment)
11(b) Limited Powers of Attorney of RIF Trustees with respect to
Amendments to the SEC Registration Statement of RIF (incorporated
by reference to Pre-effective Amendment No. 4 filed September 20,
1996).
11(c) Limited Power of Attorney of RIF Trustee with respect to
Amendment to the SEC Registration of RIF.
13 Form of Seed Money Subscription Agreement between RIF and General
American (incorporated by reference to Pre-effective Amendment
No. 4 filed September 20, 1996).
16 Schedules of performance quotation computation (to be filed by
Amendment).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Directors.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Number of Record Holders as of
February 24, 1997
Title of Class
--------------
Multi-Style Equity Fund 1
Aggressive Equity Fund 1
Non-U.S. Fund 1
Core Bond Fund 1
ITEM 27. INDEMNIFICATION
(Incorporated by reference to Pre-effective Amendment No. 4 filed September 20,
1996).
ITEM 28(A). BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
SEE, Registrant's prospectus sections "Frank Russell Company -- Consultant to
the Funds," "The Money Managers" and Money Manager Profiles," the Statement of
Additional Information
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<PAGE>
sections "Structure and Governance -- Trustees and Officers," and "Operation of
Investment Company -- Consultant."
Item 29. Principal Underwriter
a) SSgA Funds
b) Frank Russell Investment Company
c) Russell Fund Distributors, Inc. is the principal underwriter of the
Registrant with respect to sales of Registrant's shares to Insurance Companies.
The directors and officers of Russell Fund Distributors, Inc., their principal
business address in each case is 909 A Street, Tacoma, Washington 98402, and
their respective positions and offices with the Registrant and Russell Fund
Distributors, Inc. are set forth below:
Name Positions and Offices with Positions and Offices with
- ---- Registrant Underwriter
---------- -----------
Lynn L. Anderson Trustee, President, Director, Chairman of the
Chief Executive Officer Board and Chief Executive
Officer
Eric A. Russell None Director, President
George W. Weber Treasurer, Chief Accounting Director, Fund
Officer Administration and
Operations
Karl J. Ege Secretary and General Secretary and General
Counsel Counsel
Randall P. Lert Director of Investments Director, Chief Investment
Officer
Gregory J. Lyons Assistant Secretary and Assistant Secretary
Associate General Counsel
Norma Schellberg None Treasurer
J. David Griswold None Assistant Secretary and
Associate General Counsel
Mary E. Hughs None Assistant Secretary
Sandra J. Burke Assistant Secretary None
Deedra S. Walkey Assistant Secretary None
Amy L. Osler Assistant Secretary None
Mark E. Swanson Assistant Treasurer Manager, Fund Accounting
-6-
<PAGE>
and Taxes
Kenneth W. Lamb Assistant Treasurer Manager, Funds
Administration
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
RIF FRIMCo
- --- ------
Russell Insurance Funds Frank Russell Investment
909 A Street Management Company
Tacoma, Washington 98402 909 A Street
Tacoma, Washington 98402
SS MM
- -- --
State Street Bank & Trust Company Money Managers
1776 Heritage Drive JA4N SEE, Prospectus Section
North Quincy, Massachusetts 02171 "Money Manager Profiles"
for Names and Addresses
ITEM 31 MANAGEMENT SERVICES
None as described in Parts A and B.
ITEM 31A-1
(a) Records forming basis for financial statements - at principal
offices of SS, RIF FRIMCo and MM for each entity
(b) RIF Records:
(1) SS - Journals, etc.
(2) SS - Ledgers, etc.
(3) Inapplicable
(4) RIF - Corporate charter, etc.
(5) MM - Brokerage orders
(6) MM - Other portfolio purchase orders
(7) SS - Contractual commitments
(8) SS and RIF - Trial balances
(9) MM - Reasons for brokerage allocations
(10) MM - Persons authorizing purchases and sales
(11) FRIC and MM - Files of advisory material
(12) ---
(c) Inapplicable
(d) FRIMCo - Broker-dealer records, to the extent applicable
(e) Inapplicable
-7-
<PAGE>
(f) FRIMCo and MM - Investment adviser records
ITEM 32. UNDERTAKINGS
The Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
The Registrant undertakes, if requested to do so by the holders of at least
10% of the Registrant's outstanding shares, to call a meeting of shareholders
for the purpose of voting upon the question of removal of a director or
directors and to assist in communications with other shareholders as required
by section 16(c).
-8-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Tacoma in the State of Washington on the 25th
day of February, 1997.
RUSSELL INSURANCE FUNDS
By:/s/Lynn L. Anderson
---------------------------
Lynn L. Anderson
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on February 25, 1997.
Signature Title(s) Date
- --------- -------- ----
/s/Lynn L. Anderson Trustee and President, in
- ------------------ his capacity as Chief
Lynn L. Anderson* Executive Officer
/s/George W. Weber Treasurer, in his capacity
- --------------------------- as Chief Accounting Officer
George W. Weber
Trustee
- ---------------------------
Paul E. Anderson*
Trustee
- ---------------------------
Paul Anton, PhD*
Trustee
- ---------------------------
William E. Baxter*
Trustee
- ---------------------------
Lee C. Gingrich*
Trustee
- ---------------------------
Eleanor W. Palmer*
<PAGE>
Trustee
- ---------------------------
George F. Russell, Jr.*
By: /s/Gregory J. Lyons
-----------------------
Gregory J. Lyons
* Original Powers of Attorney authorizing the persons holding the offices of
President, Treasurer, any Assistant Treasurer, Secretary or any Assistant
Secretary of Russell Insurance Funds, and each of them singly to sign this
Amendment thereto on behalf of the Board of Trustees of Russell Insurance
Funds are on file with the Securities and Exchange Commission.
-2-
<PAGE>
Russell Insurance Funds
FILE NO. 33-18030
FILE NO. 811-5371
-----------------
EXHIBITS
Listed in Part C, Item 1(b)
To Post-Effective Amendment No. 1
and Amendment No. 5
to
Registration Statement on Form N-1A
Under
Securities Act of 1933
and
Investment Company Act of 1940
-3-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description Page
No. of Exhibit No.
- ------- ----------- ----
99.11(c) Limited Power of Attorney of RIF Trustees with respect to
Amendments to the SEC Registration Statement of RIF
<PAGE>
Exhibit 99.11(c)
LIMITED POWER OF ATTORNEY
with repect to
AMENDMENTS TO THE SECURITIES AND EXCHANGE COMMISSION
REGISTRATION STATEMENTS
of
RUSSELL INSURANCE FUNDS
Know by all men these presents that the undersigned hereby constitutes and
appoints the persons holding the offices of President, Treasurer, any Assistant
Treasurer, Secretary or any Assistant Secretary of Russell Insurance Funds from
time to time, and each of them, his or her attorneys-in-fact, each with the
power of substitution, for him or her in any and all capacities, to sign
amendments to Securities and Exchange Commission registration statements of
Russell Insurance Funds, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
or her substitutes, may do or cause to be done by virtue hereof.
/s/ LEE C. GINGRICH
-----------------------------------
Name Lee C. Gingrich
Trustee, Russell Insurance Funds
SEPT. 13, 1996
- --------------
Date
