<PAGE>
Pursuant to Rule 497(e)
File Nos. 811-05398
33-18647
[LOGO OF ALLIANCE CAPITAL
APPEARS HERE] ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
- -------------------------------------------------------------------------------
P.O. BOX 1520, SECAUCUS, NEW JERSEY 07096-1520
TOLL FREE (800) 221-5672
- -------------------------------------------------------------------------------
Alliance Variable Products Series Fund, Inc. (the "Fund") is an open-end se-
ries investment company designed to fund variable annuity contracts and vari-
able life insurance policies to be offered by the separate accounts of certain
life insurance companies. The Fund currently offers an opportunity to choose
among the separately managed pools of assets (the "Portfolios") described be-
low which have differing investment objectives and policies.
- -------------------------------------------------------------------------------
A DIVERSIFIED SELECTION OF INVESTMENT ALTERNATIVES
- -------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO -- seeks safety of principal, maintenance of liquidity
and maximum current income by investing in a broadly diversified portfolio of
money market securities. An investment in the Money Market Portfolio is nei-
ther insured nor guaranteed by the U.S. Government. There can be no assurance
that the Portfolio will be able to maintain a stable net asset value of $1.00
per share, although it expects to do so.
PREMIER GROWTH PORTFOLIO -- seeks growth of capital rather than current in-
come. In pursuing its investment objective, the Premier Growth Portfolio will
employ aggressive investment policies. Since investments will be made based
upon their potential for capital appreciation, current income will be inciden-
tal to the objective of capital growth. The Portfolio is not intended for in-
vestors whose principal objective is assured income or preservation of capi-
tal.
GROWTH AND INCOME PORTFOLIO -- seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through invest-
ments primarily in dividend-paying common stocks of good quality.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO -- seeks a high level of cur-
rent income consistent with preservation of capital by investing principally
in a portfolio of U.S. Government Securities and other high grade debt securi-
ties.
INTERNATIONAL PORTFOLIO -- seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad port-
folio of marketable securities of established non-United States companies (or
United States companies having their principal activities and interests out-
side the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
GROWTH PORTFOLIO -- seeks long-term growth of capital by investing primarily
in common stocks and other equity securities.
WORLDWIDE PRIVATIZATION PORTFOLIO -- seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are un-
dergoing, or have undergone, privatization. The balance of the Portfolio's in-
vestment portfolio will include equity securities of companies that are be-
lieved by the Fund's Adviser to be beneficiaries of the privatization process.
TECHNOLOGY PORTFOLIO -- seeks growth of capital through investment in compa-
nies expected to benefit from advances in technology. The Portfolio invests
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
(R) :This is a registered mark used under license from the owner, Alliance
Capital Management L.P.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS/May 1, 1998
Investors are advised to carefully read this Prospectus and to retain it for
future reference.
<PAGE>
QUASAR PORTFOLIO -- seeks growth of capital by pursuing aggressive investment
policies. The Portfolio invests principally in a diversified portfolio of eq-
uity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation.
REAL ESTATE INVESTMENT PORTFOLIO -- seeks a total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or re-
lated to the real estate industry.
- -------------------------------------------------------------------------------
PURCHASE INFORMATION
- -------------------------------------------------------------------------------
The Fund will offer and sell its shares only to separate accounts of certain
life insurance companies, for the purpose of funding variable annuity con-
tracts and variable life insurance policies. Sales will be made without sales
charge at each Portfolio's per share net asset value. Further information can
be obtained from Alliance Fund Services, Inc. at the address or telephone num-
ber shown above.
An investment in the Fund is not a deposit or obligation of, or guaranteed or
endorsed by, any bank and is not federally insured by the Federal Deposit In-
surance Corporation, the Federal Reserve Board or any other agency.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
This Prospectus sets forth concisely the information which a prospective in-
vestor should know about the Fund and each of the Portfolios before applying
for certain variable annuity contracts and variable life insurance policies
offered by participating insurance companies. It should be read in conjunction
with the Prospectus of the separate account of the specific insurance product
which accompanies this Prospectus. A "Statement of Additional Information"
dated May 1, 1998, which provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors,
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, call or write Alliance Fund Services,
Inc. at the address or telephone number shown above.
2
<PAGE>
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
The Fund has no sales load on purchases or reinvested dividends, deferred
sales load, redemption fee or exchange fee.
<TABLE>
<CAPTION>
U.S.
GROWTH GOVERNMENT/
MONEY PREMIER AND HIGH GRADE
MARKET GROWTH INCOME SECURITIES INTERNATIONAL
PORTFOLIO PORTFOLIO* PORTFOLIO PORTFOLIO PORTFOLIO+
--------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management Fees........ .50% 1.00% .63% .60% .53%
Other Expenses......... .14% .08% .09% .24% .42%
--- ---- --- --- ---
Total Portfolio
Operating Expenses.... .64% 1.08% .72% .84% .95%
=== ==== === === ===
</TABLE>
<TABLE>
<CAPTION>
WORLDWIDE REAL ESTATE
GROWTH PRIVATIZATION TECHNOLOGY QUASAR INVESTMENT
PORTFOLIO PORTFOLIO+ PORTFOLIO+ PORTFOLIO+ PORTFOLIO(1)+ ++
--------- ------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management Fees........ .75% .40% .76% .58% 0%
Other Expenses......... .09% .55% .19% .37% .95%
--- --- --- --- ---
Total Portfolio
Operating Expenses.... .84% .95% .95% .95% .95%
=== === === === ===
</TABLE>
- --------
* Alliance Capital Management L.P. (the "Adviser") discontinued the expense
reimbursement with respect to the Premier Growth Portfolio effective May 1,
1998.
+ Annualized.
++ Shareholder transaction expenses shown are net of expense reimbursement.
(1) Inception (1/9/97) through 12/31/97.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return (cumulatively through the end of each time period).
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio......................... $ 7 $20 $36 $ 80
Premier Growth Portfolio....................... $11 $34 $60 $132
Growth and Income Portfolio.................... $ 7 $23 $40 $ 89
U.S. Government/High Grade Securities Portfo-
lio........................................... $ 9 $27 $47 $104
International Portfolio........................ $10 $30 $53 $117
Growth Portfolio............................... $ 9 $27 $47 $104
Worldwide Privatization Portfolio.............. $10 $30 $53 $117
Technology Portfolio........................... $10 $30 $53 $117
Quasar Portfolio............................... $10 $30 $53 $117
Real Estate Investment Portfolio............... $10 $30 $53 $117
</TABLE>
3
<PAGE>
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
and indirectly. "Other Expenses" for the Real Estate Investment Portfolio are
based on estimated amounts for that Portfolio's current fiscal year. The ex-
penses listed in the table for the International Portfolio, Worldwide
Privatization Portfolio, Technology Portfolio, Quasar Portfolio and Real Estate
Investment Portfolio are net of voluntary expense reimbursements, which are not
required to be continued indefinitely; however, the Adviser intends to continue
such reimbursements for the foreseeable future. The Adviser discontinued the
expense reimbursement with respect to the Premier Growth Portfolio effective
May 1, 1998. The expenses (as a percentage of average net assets) of the fol-
lowing Portfolios, before expense reimbursements, would be: International Port-
folio: Management Fees -- 1.00%, Other Expenses -- .42% and Total Portfolio
Operating Expenses -- 1.42%; Worldwide Privatization Portfolio: Management
Fee -- 1.00%, Other Expenses -- .55% and Total Portfolio Operating Expenses --
1.55%; Technology Portfolio: Management Fees -- 1.00%, Other Expenses -- .19%
and Total Operating Expenses -- 1.19%; Quasar Portfolio: Management Fees --
1.00%, Other Expenses -- .37% and Total Operating Expenses -- 1.37%. The esti-
mated expenses of the Real Estate Investment Portfolio before expense reim-
bursement would be: Management Fees -- .90%, Other Expenses --1.41% and Total
Operating Expenses -- 2.31%. The example should not be considered representa-
tive of future expenses; actual expenses may be greater or less than those
shown.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following information as to net asset value, ratios and certain supple-
mental data for each of the periods shown below has been audited by Ernst &
Young LLP, the Fund's independent auditors, whose unqualified report thereon
(referring to Financial Highlights) appears in the Statement of Additional In-
formation. The following information should be read in conjunction with the fi-
nancial statements and related notes included in the Statement of Additional
Information. Further information about the Fund's performance is contained in
the Fund's annual report, which is available without charge upon request.
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year........................... $ 15.70 $ 17.80 $ 12.37 $ 12.79 $ 11.38
-------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERA-
TIONS
Net investment income(a)(b).... .04 .08 .09 .03 -0-
Net realized and unrealized
gain (loss) on investments.... 5.27 3.29 5.44 (.41) 1.43
-------- ------- ------- ------- -------
Net increase (decrease) in net
asset value from operations... 5.31 3.37 5.53 (.38) 1.43
-------- ------- ------- ------- -------
LESS: DIVIDENDS AND DISTRIBU-
TIONS
Dividends from net investment
income........................ (.02) (.10) (.03) (.01) (.01)
Distributions from net realized
gains......................... -0- (5.37) (.07) (.03) (.01)
-------- ------- ------- ------- -------
Total dividends and distribu-
tions......................... (.02) (5.47) (.10) (.04) (.02)
-------- ------- ------- ------- -------
Net asset value, end of year... $ 20.99 $ 15.70 $ 17.80 $ 12.37 $ 12.79
======== ======= ======= ======= =======
TOTAL RETURN
Total investment return based
on net asset value(c)......... 33.86% 22.70% 44.85% (2.96)% 12.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's
omitted)...................... $472,326 $96,434 $29,278 $37,669 $13,659
Ratio to average net assets of:
Expenses, net of waivers and
reimbursements................ .95% .95% .95% .95% 1.18%
Expenses, before waivers and
reimbursements................ 1.10% 1.23% 1.19% 1.40% 2.05%
Net investment income(a)....... .21% .52% .55% .42% .22%
Portfolio turnover rate........ 27% 32% 97% 38% 42%
Average commission rate
paid(d)....................... $ .0541 $ .0609 -0- -0- -0-
</TABLE>
- --------
(a) Net of expenses reimbursed or waived by the Adviser.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
5
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 16.40 $ 15.79 $ 11.85 $ 12.18 $ 10.99
---------- ---------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .21 .24 .27 .10 .01
Net realized and
unrealized gain (loss)
on investments........ 4.39 3.18 3.94 (.16) 1.27
---------- ---------- --------- --------- ---------
Net increase (decrease)
in net asset value
from operations....... 4.60 3.42 4.21 (.06) 1.28
---------- ---------- --------- --------- ---------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.13) (.25) (.13) (.10) (.06)
Distributions from net
realized gains........ (.94) (2.56) (.14) (.17) (.03)
---------- ---------- --------- --------- ---------
Total dividends and
distributions......... (1.07) (2.81) (.27) (.27) (.09)
---------- ---------- --------- --------- ---------
Net asset value, end of
year.................. $ 19.93 $ 16.40 $ 15.79 $ 11.85 $ 12.18
========== ========== ========= ========= =========
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 28.80% 24.09% 35.76% (.35)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $ 250,202 $126,729 $41,993 $ 41,702 $ 22,756
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .72% .82% .79% .90% 1.18%
Expenses, before waiv-
ers and reimburse-
ments................. .72% .82% .79% .91% 1.28%
Net investment
income(a)............. 1.16% 1.58% 1.95% 1.71% 1.76%
Portfolio turnover
rate.................. 86% 87% 150% 95% 69%
Average commission rate
paid(d)............... $ .0581 $ .0602 -0- -0- -0-
<CAPTION>
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $11.52 $11.66 $ 9.94 $10.72 $ 9.89
---------- ---------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b).......... .68 .66 .65 .28 .43
Net realized and
unrealized gain (loss)
on investments........ .29 (.39) 1.25 (.71) .48
---------- ---------- --------- --------- ---------
Net increase (decrease)
in net asset value
from operations....... .97 .27 1.90 (.43) .91
---------- ---------- --------- --------- ---------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.54) (.28) (.18) (.21) (.08)
Distributions from net
realized gains........ (.02) (.13) -0- (.14) -0-
---------- ---------- --------- --------- ---------
Total dividends and
distributions......... (.56) (.41) (.18) (.35) (.08)
---------- ---------- --------- --------- ---------
Net asset value, end of
year.................. $11.93 $11.52 $11.66 $ 9.94 $10.72
========== ========== ========= ========= =========
TOTAL RETURN
Total investment return
based on net asset
value(c).............. 8.68% 2.55% 19.26% (4.03)% 9.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted)....... $36,198 $29,150 $16,947 $ 5,101 $ 1,350
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .84% .92% .95% .95% 1.16%
Expenses, before waiv-
ers and reimburse-
ments................. .84% .98% 1.58% 3.73% 5.42%
Net investment
income(a)............. 5.89% 5.87% 5.96% 5.64% 4.59%
Portfolio turnover
rate.................. 114% 137% 68% 32% 177%
</TABLE>
- -------
(a) Net of expenses reimbursed or waived by the Adviser.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
6
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.. $ 14.89 $ 14.07 $ 12.88 $12.16 $10.00
------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a)(b)........ .13 .19 .18 .10 .03
Net realized and unrealized gain on
investments and foreign
currency transactions............. .39 .83 1.08 .72 2.13
------- ------- ------- ------ ------
Net increase in net asset value
from operations................... .52 1.02 1.26 .82 2.16
------- ------- ------- ------ ------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment in-
come.............................. (.15) (.08) (.03) (.02) -0-
Distributions from net realized
gains............................. (.24) (.12) (.04) (.08) -0-
------- ------- ------- ------ ------
Total dividends and distributions.. (.39) (.20) (.07) (.10) -0-
------- ------- ------- ------ ------
Net asset value, end of year....... $ 15.02 $ 14.89 $ 14.07 $12.88 $12.16
======= ======= ======= ====== ======
TOTAL RETURN
Total investment return based on
net asset value(c)................ 3.33% 7.25% 9.86% 6.70% 21.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's
omitted).......................... $60,710 $44,324 $16,542 $7,276 $ 688
Ratio of average net assets of:
Expenses, net of waivers and reim-
bursements........................ .95% .95% .95% .95% 1.20%
Expenses, before waivers and reim-
bursements........................ 1.42% 1.91% 2.99% 7.26% 39.28%
Net investment income(a)........... .87% 1.29% 1.41% .90% .26%
Portfolio turnover rate............ 134% 60% 87% 95% 85%
Average commission rate paid(d) ... $ .0272 $ .0431 -0- -0- -0-
<CAPTION>
MONEY MARKET PORTFOLIO
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a)........... .05 .05 .05 .03 .22
------- ------- ------- ------ ------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment
income............................ (.05) (.05) (.05) (.03) (.22)
------- ------- ------- ------ ------
Net asset value, end of year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ====== ======
TOTAL RETURN
Total investment return based on
net asset value(c)................ 5.11% 4.71% 4.97% 3.27% 2.25%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's
omitted).......................... $67,584 $64,769 $28,092 $6,899 $ 102
Ratio of average net assets of:
Expenses, net of waivers and reim-
bursements....................... .64% .69% .95% .95% 1.16%
Expenses, before waivers and reim-
bursements....................... .64% .69% 1.07% 4.46% 68.14%
Net investment income(a).......... 5.00% 4.64% 4.85% 3.98% 2.15%
</TABLE>
- --------
(a) Net of expenses reimbursed or waived by the Adviser.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
7
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GROWTH
PORTFOLIO
-------------------------------------------------
YEAR ENDED SEPTEMBER 15, 1994(e)
DECEMBER 31, TO
-------------------------- DECEMBER 31,
1997 1996 1995 1994
-------- ------- ------- ---------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 17.92 $ 14.23 $ 10.53 $10.00
-------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income(a)(b) .07 .06 .17 .03
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions............... 5.18 3.95 3.54 .50
-------- ------- ------- ------
Net increase (decrease) in
net asset value from
operations................. 5.25 4.01 3.71 .53
-------- ------- ------- ------
LESS: DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income.......... (.03) (.04) (.01) -0-
Distributions from net
realized gains ............ (.72) (.28) -0- -0-
-------- ------- ------- ------
Total dividends and
distributions ............. (.75) (.32) (.01) -0-
-------- ------- ------- ------
Net asset value, end of
period..................... $ 22.42 $ 17.92 $ 14.23 $10.53
======== ======= ======= ======
TOTAL RETURN
Total investment return
based on net asset
value(c)................... 30.02% 28.49% 35.23% 5.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)............ $235,875 $138,688 $45,220 $5,492
Ratio to average net assets
of:
Expenses, net of waivers and
reimbursements............. .84% .93% .95% .95%(f)
Expenses, before waivers and
reimbursements............. .84% .93% 1.27% 4.19%(f)
Net investment income(a).... .37% .35% 1.31% 1.17%(f)
Portfolio turnover rate..... 62% 98% 86% 25%
Average commission rate paid
(d)........................ $ .0548 $.0578 -0- -0-
</TABLE>
<TABLE>
<CAPTION>
WORLDWIDE PRIVATIZATION PORTFOLIO
----------------------------------------------------
SEPTEMBER 23,
1994(e)
YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 13.13 $ 11.17 $10.10 $10.00
------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(a)(b)........... .25 .28 .32 .10
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions........... 1.17 1.78 .78 -0-
------- ------- ------ ------
Net increase in net
asset value from
operations............. 1.42 2.06 1.10 .10
------- ------- ------ ------
LESS: DISTRIBUTIONS
Dividends from net
investment income...... (.16) (.10) (.03) -0-
Distributions from net
realized gains......... (.19) -0- -0- -0-
------- ------- ------ ------
Total dividends and dis-
tributions............. (.35) (.10) (.03) -0-
------- ------- ------ ------
Net asset value, end of
period................. $ 14.20 $ 13.13 $11.17 $10.10
======= ======= ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(c)............... 10.75% 18.51% 10.87% 1.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's omitted). $41,818 $18,807 $5,947 $1,127
Ratio to average net as-
sets of:
Expenses, net of waivers
and reimbursements..... .95% .95% .95% .95%(f)
Expenses, before waivers
and reimbursements..... 1.55% 1.85% 4.17% 18.47%(f)
Net investment
income(a).............. 1.76% 2.26% 2.96% 4.27%(f)
Portfolio turnover rate. 58% 47% 23% 0%
Average commission rate
paid(d)................ $.0137 $.0148 -0- -0-
</TABLE>
- --------
(a) Net of expenses reimbursed or waived by the Adviser.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
(e) Commencement of operations.
(f) Annualized.
8
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO
-------------------------
JANUARY 11,
1996(e)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net asset value, beginning of period............... $ 11.04 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a)(b)....................... .02 .11
Net realized and unrealized gain (loss) on
investments and foreign currency transactions.... .69 .93
------- -------
Net increase (decrease) in net asset value from
operations....................................... .71 1.04
------- -------
LESS: DISTRIBUTIONS
Dividends from net investment income.............. (.03) -0-
Distributions from net realized gains............. -0- -0-
------- -------
Total dividends and distributions................. (.03) -0-
------- -------
Net asset value, end of period.................... $ 11.72 $ 11.04
======= =======
TOTAL RETURN
Total investment return based on net asset
value(c)......................................... 6.47% 10.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)......... $69,240 $28,083
Ratio to average net assets of:
Expenses, net of waivers and reimbursements....... .95% .95%(f)
Expenses, before waivers and reimbursements....... 1.19% 1.62%(f)
Net investment income(a).......................... .16% 1.17%(f)
Portfolio turnover rate........................... 46% 22%
Average commission rate paid(d)................... $.0542 $.0553
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE
QUASAR PORTFOLIO INVESTMENT PORTFOLIO
------------------------- --------------------
AUGUST 5, JANUARY 9,
1996(e) 1997(e)
YEAR ENDED TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997
------------ ------------ --------------------
<S> <C> <C> <C>
Net asset value, beginning of
period........................ $ 10.64 $10.00 $ 10.00
------- ------ -------
INCOME FROM INVESTMENT OPERA-
TIONS
Net investment income(a)(b)... .02 .04 .56
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions................. 1.96 .60 1.78
------- ------ -------
Net increase (decrease) in net
asset value from operations.. 1.98 .64 2.34
------- ------ -------
LESS: DISTRIBUTIONS
Dividends from net investment
income....................... (.01) -0- -0-
------- ------ -------
Net asset value, end of peri-
od........................... $ 12.61 $10.64 $ 12.34
======= ====== =======
TOTAL RETURN
Total investment return based
on net asset value(c)........ 18.60% 6.40% 23.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted).............. $59,277 $8,842 $13,694
Ratio to average net assets
of:
Expenses, net of waivers and
reimbursements............... .95% .95%(f) .95%(f)
Expenses, before waivers and
reimbursements............... 1.37% 4.44%(f) 2.31%(f)
Net investment income(a)...... .17% .93%(f) 5.47%(f)
Portfolio turnover rate....... 210% 40% 26%
Average commission rate
paid(d)...................... $.0521 $.0511 $.0526
</TABLE>
- --------
(a) Net of expenses reimbursed or waived by the Adviser.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
(e) Commencement of operations.
(f) Annualized.
9
<PAGE>
DESCRIPTION OF THE PORTFOLIOS
INTRODUCTION TO THE FUND
The Fund was established as a corporation in Maryland. The Fund is an open-end
management investment company commonly known as a "mutual fund" whose shares
are offered in separate series each referred to as a "Portfolio." Because the
Fund offers multiple Portfolios, it is known as a "series fund." Each Portfo-
lio is a separate pool of assets constituting, in effect, a separate fund with
its own investment objectives and policies.
A shareholder in a Portfolio will be entitled to his or her pro rata share of
all dividends and distributions arising from that Portfolio's assets and, upon
redeeming shares of that Portfolio, the shareholder will receive the then cur-
rent net asset value of that Portfolio represented by the redeemed shares.
(See "Purchase and Redemption of Shares"). While the Fund has no present in-
tention of doing so, the Fund is empowered to establish, without shareholder
approval, additional portfolios which may have different investment objec-
tives.
The Fund currently has 19 Portfolios, 10 of which are offered by this Prospec-
tus: the Money Market Portfolio, the Premier Growth Portfolio, the Growth and
Income Portfolio, the U.S. Government/High Grade Securities Portfolio, the In-
ternational Portfolio, the Growth Portfolio, the Worldwide Privatization Port-
folio, the Technology Portfolio, the Quasar Portfolio and the Real Estate In-
vestment Portfolio.
The Fund is intended to serve as the investment medium for variable annuity
contracts and variable life insurance policies to be offered by the separate
accounts of certain life insurance companies.
It is conceivable that in the future it may be disadvantageous for variable
annuity and variable life insurance separate accounts to invest simultaneously
in the Fund. Currently, however, the Fund does not foresee any disadvantage to
the holders of variable annuity contracts and variable life insurance policies
arising from the fact that the interests of the holders of such contracts and
policies may differ. Nevertheless, the Fund's Directors intend to 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 re-
sponse thereto.
The investment objectives and policies of each Portfolio are set forth below.
There can be, of course, no assurance that any of the Portfolios will achieve
its respective investment objectives.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Each Portfolio has different investment objectives which it pursues through
separate investment policies as described herein. The differences in objec-
tives and policies among the Portfolios determine the types of portfolio secu-
rities in which each Portfolio invests, and can be expected to affect the de-
gree of risk to which each Portfolio is subject and each Portfolio's yield or
return. Each Portfolio's investment objectives cannot be changed without ap-
proval by the holders of
10
<PAGE>
a majority of such Portfolio's outstanding voting securities, as defined in
the Investment Company Act of 1940, as amended (the "Act"). The Fund may
change each Portfolio's investment policies that are not designated "fundamen-
tal policies" within the meaning of the Act upon notice to shareholders of the
Portfolio, but without their approval. The types of portfolio securities in
which each Portfolio may invest are described in greater detail below.
MONEY MARKET PORTFOLIO
The Money Market Portfolio's investment objectives are in the following order
of priority -- safety of principal, excellent liquidity, and maximum current
income to the extent consistent with the first two objectives. An investment
in the Money Market Portfolio is neither insured nor guaranteed by the U.S.
Government. As a matter of fundamental policy, the Money Market Portfolio pur-
sues its objectives by maintaining a portfolio of high quality money market
securities, all of which at the time of investment have remaining maturities
of one year or less (which maturities may extend to 397 days).
The securities in which the Money Market Portfolio invests include: (1) mar-
ketable obligations of, or guaranteed by, the United States Government, its
agencies or instrumentalities (collectively, the "U.S. Government"); (2) cer-
tificates of deposit, bankers' acceptances and interest bearing savings depos-
its issued or guaranteed by banks or savings and loan associations having to-
tal assets of more than $1 billion and which are members of the Federal De-
posit Insurance Corporation; (3) commercial paper of prime quality (i.e.,
rated A-1+ or A-1 by Standard & Poor's Corporation ("S&P"), Prime-1 by Moody's
Investors Service, Inc. ("Moody's"), D-1 by Duff & Phelps Credit Rating Co.
("Duff & Phelps") or F1 by Fitch IBCA, Inc. ("Fitch") or, if not rated, issued
by companies having outstanding debt securities rated AAA or AA by S&P, Duff &
Phelps or Fitch, or Aaa or Aa by Moody's) and participation interests in loans
extended by banks to such companies; and (4) repurchase agreements that are
collateralized fully as that term is defined in Rule 2a-7 under the Act. (See
"Other Investment Policies and Techniques -- Repurchase Agreements"). The
Money Market Portfolio may also invest in certificates of deposit issued by,
and time deposits maintained at, foreign branches of domestic banks described
in (2) above, prime quality dollar-denominated commercial paper issued by for-
eign companies meeting the criteria specified in (3) above, and in certifi-
cates of deposit and bankers' acceptances denominated in U.S. dollars that are
issued by U.S. branches of foreign banks having total assets of at least $1
billion that are believed by Alliance Capital Management L.P. (the "Adviser")
to be of quality equivalent to that of other such investments in which the
Portfolio may invest.
The Money Market Portfolio complies with Rule 2a-7 under the Act, as amended
from time to time, including the diversification, quality and maturity condi-
tions imposed by the Rule. Accordingly, in any case in which there is a varia-
tion between the conditions imposed by the Rule and the Portfolio's investment
policies and restrictions, the Portfolio is governed by the more restrictive
of the two requirements. See the Statement of Additional Information for a
further description of Rule 2a-7.
11
<PAGE>
The Portfolio may purchase restricted securities that are determined by the
Adviser to be liquid in accordance with procedures adopted by the Directors of
the Fund. Restricted Securities are securities subject to contractual or legal
restrictions on resale, such as those arising from an issuer's reliance upon
certain exemptions from registration under the Securities Act of 1933, as
amended (the "Securities Act").
PREMIER GROWTH PORTFOLIO
General. The investment objective of the Premier Growth Portfolio is growth of
capital by pursuing aggressive investment policies. Since investments are made
based upon their potential for capital appreciation, current income is inci-
dental to the objective of capital growth. Because of the market risks inher-
ent in any investment, the selection of securities on the basis of their ap-
preciation possibilities cannot ensure against possible loss in value, and
there is, of course, no assurance that the Portfolio's investment objective
will be met. The Portfolio is therefore not intended for investors whose prin-
cipal objective is assured income and conservation of capital.
The Portfolio invests predominantly in the equity securities (common stocks,
securities convertible into common stocks and rights and warrants to subscribe
for or purchase common stocks) of a limited number of large, carefully select-
ed, high-quality U.S. companies that, in the judgment of the Adviser, are
likely to achieve superior earnings growth. Normally, about 40 companies are
represented in the Portfolio's investment portfolio, with the 25 most highly
regarded of these companies usually constituting approximately 70% of the
Portfolio's net assets. The Portfolio thus differs from more typical equity
mutual funds by investing most of its assets in a relatively small number of
intensively researched companies and is designed for those seeking to accumu-
late capital over time with less volatility than that associated with invest-
ment in smaller companies.
The Portfolio, under normal circumstances, invests at least 85% of the value
of its total assets in the equity securities of U.S. companies. The Portfolio
defines U.S. companies to be entities (i) that are organized under the laws of
the United States and have their principal office in the United States, and
(ii) the equity securities of which are traded principally in the United
States securities markets.
Within the investment framework described herein, Alfred Harrison, who heads
the Adviser's "Large Cap Growth Group," is ultimately responsible for the in-
vestment decisions for the Portfolio. In managing the Portfolio's assets, the
Adviser's investment strategy emphasizes stock selection and investment in the
securities of a limited number of issuers. As one of the largest multinational
investment firms, the Adviser has access to considerable information concern-
ing all of the companies followed, an in-depth understanding of the products,
services, markets and competition of these companies and a good knowledge of
the managements of most of the companies in its research universe.
The Adviser's analysts prepare their own earnings estimates and financial mod-
els for each company followed. While each analyst has responsibility for fol-
lowing companies in one or more identified sectors and/or
12
<PAGE>
industries, the lateral structure of the Adviser's research organization and
constant communication among the analysts result in decision-making based on
the relative attractiveness of stocks among industry sectors. The focus during
this process is on the early recognition of change on the premise that value
is created through the dynamics of changing company, industry and economic
fundamentals. Research emphasis is placed on the identification of companies
whose substantially above average prospective earnings growth is not fully re-
flected in current market valuations.
The Adviser's investment strategy for the Fund emphasizes stock selection and
investment in the securities of a limited number of issuers. The Adviser re-
lies heavily upon the fundamental analysis and research of its large internal
research staff, which generally follows a primary research universe of more
than 600 companies that have strong management, superior industry positions,
excellent balance sheets and superior earnings growth prospects. An emphasis
is placed on identifying companies whose substantially above average prospec-
tive earnings growth is not fully reflected in current market valuations.
In the managing of the Portfolio's investment portfolio, the Adviser seeks to
utilize market volatility judiciously (assuming no change in company fundamen-
tals) to adjust the Portfolio's positions. The Portfolio strives to capitalize
on apparently unwarranted price fluctuations, both to purchase or increase po-
sitions on weaknesses and to sell or reduce overpriced holdings. Under normal
circumstances, the Portfolio will remain substantially fully invested in eq-
uity securities and will not take significant cash positions for market timing
purposes. Rather, during a market decline, while adding to positions in fa-
vored stocks, the Portfolio will tend to become somewhat more aggressive,
gradually reducing somewhat the number of companies represented in the Portfo-
lio's portfolio. Conversely, in rising markets, while reducing or eliminating
fully valued positions, the Portfolio will tend to become somewhat more con-
servative, gradually increasing the number of companies represented in the
Portfolio's portfolio. Through this "buying into declines" and "selling into
strength," the Adviser seeks to gain positive returns in good markets while
providing some measure of protection in poor markets.
The Adviser expects the average weighted market capitalization of companies
represented in the Portfolio's portfolio (i.e., the number of a company's
shares outstanding multiplied by the price per share) to normally be in the
range of or exceed the average weighted market capitalization of companies
comprising the "S&P 500" (Standard & Poor's 500 Composite Stock Price Index, a
widely recognized unmanaged index of market activity) based upon the aggregate
performance of a selected portfolio of publicly traded stocks, including
monthly adjustments to reflect the reinvestment of dividends and distribu-
tions.
The Portfolio intends to invest in special situations from time to time. A
special situation arises when, in the opinion of the Portfolio's management,
the securities of a particular company will, within a reasonably estimable pe-
riod of time, be accorded market recognition at an appreciated value solely by
reason of a development particularly or uniquely applicable to that company
13
<PAGE>
and regardless of general business conditions or movements of the market as a
whole.
Short Sales. The Premier Growth Portfolio may not sell securities short, ex-
cept that it may make short sales "against the box." A short sale is effected
by selling a security which the Portfolio does not own, or if the Portfolio
does own such security, it is not to be delivered upon consummation of the
sale. A short sale is "against the box" to the extent that the Portfolio con-
temporaneously owns or has the right to obtain securities identical to those
sold short without payment. Not more than 15% of the value of the Portfolio's
net assets will be in deposits on short sales "against the box."
Puts and Calls. The Premier Growth Portfolio may write call options and may
purchase and sell put and call options written by others, combinations thereof
or similar options. The Portfolio may not write put options. The buyer of an
option, upon payment of a premium obtains, in the case of a put option, the
right to deliver to the writer of the option and, in the case of a call op-
tion, the right to call upon the writer to deliver, a specified number of
shares of a specified stock on or before a fixed date at a predetermined
price.
Writing, purchasing and selling call options are highly specialized activities
and entail greater than ordinary investment risks. When calls written by the
Portfolio are exercised, the Portfolio will be obligated to sell stocks below
the current market price. A call written by the Portfolio will not be sold un-
less the Portfolio at all times during the option period owns either (a) the
optioned securities, or securities convertible into or carrying rights to ac-
quire the optioned securities, or (b) an offsetting call option on the same
securities.
The Premier Growth Portfolio will not sell a call option written or guaranteed
by it if, as a result of such sale, the aggregate of the Portfolio's securi-
ties subject to outstanding call options (valued at the lower of the option
price or market value of such securities) would exceed 15% of the Portfolio's
total assets. The Portfolio will not sell any call option if such sale would
result in more than 10% of the Portfolio's assets being committed to call op-
tions written by the Portfolio, which, at the time of sale by the Portfolio,
have a remaining term of more than 100 days.
As noted, the Portfolio may also purchase and sell put and call options writ-
ten by others, combinations thereof, or similar options, but the aggregate
cost of all outstanding options purchased and held by the Portfolio shall at
no time exceed 10% of the Portfolio's total assets. If an option is not so
sold and is permitted to expire without being exercised, the Portfolio would
suffer a loss in the amount of the premium paid by the Portfolio for the op-
tion.
Options on Market Indices. The Portfolio may purchase and sell exchange-traded
index options. An option on a securities index is similar to an option on a
security except that, rather than the right to take or make delivery of a se-
curity at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the chosen index is greater than (in
14
<PAGE>
the case of a call) or less than (in the case of a put) the exercise price of
the option.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek reasonable
cur-rent income and reasonable opportunity for appreciation through invest-
ments primarily in dividend-paying common stocks of good quality. Whenever the
economic outlook is unfavorable for investment in common stock, investments in
other types of securities, such as bonds, convertible bonds, preferred stock
and convertible preferred stocks may be made by the Portfolio. Purchases and
sales of portfolio securities are made at such times and in such amounts as
are deemed advisable in light of market, economic and other conditions.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
The investment objective of the U.S. Government/High Grade Securities Portfo-
lio is high current income consistent with preservation of capital. In seeking
to achieve this objective, the Portfolio invests principally in a portfolio
of: (i) obligations issued or guaranteed by the U.S. Government and repurchase
agreements pertaining to U.S. Government Securities, and (ii) other high grade
debt securities rated AAA, AA or A by S&P, Duff & Phelps or Fitch or Aaa, Aa
or A by Moody's or that have not received a rating but are determined to be of
comparable quality by the Adviser. As a fundamental investment policy, the
Portfolio invests at least 65% of its total assets in these types of securi-
ties, including the securities held subject to repurchase agreements. The av-
erage weighted maturity of the Portfolio's portfolio of U.S. Government secu-
rities is expected to vary between one year or less and 30 years. See "Other
Investment Policies and Techniques -- Fixed-Income Securities." The Portfolio
may utilize certain other investment techniques, including options and futures
contracts, intended to enhance income and reduce market risk. The Portfolio is
designed primarily for long-term investors and investors should not consider
it a trading vehicle. As with all investment company portfolios, there can be
no assurance that the Portfolio's objective will be achieved.
The Portfolio is subject to the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended, which, among other things, limits
the Portfolio to investing no more than 55% of its total assets in any one in-
vestment. For this purpose, all securities issued or guaranteed by the U.S.
Government are considered a single investment. Accordingly, the U.S. Govern-
ment/High Grade Securities Portfolio limits its purchases of U.S. Government
Securities to 55% of the total assets of the Portfolio. Consistent with this
limitation, the Portfolio, as a matter of fundamental policy, invests at least
45% of its total assets in U.S. Government Securities. Nevertheless, the Port-
folio reserves the right to modify the percentage of its investments in U.S.
Government Securities in order to comply with all applicable tax requirements.
U.S. Government Securities. Securities issued or guaranteed by the U.S. Gov-
ernment include: (i) U.S. Treasury obligations, which differ only in their in-
terest rates, maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less), U.S. Treasury notes (maturities of one to 10 years), and
15
<PAGE>
U.S. Treasury bonds (generally maturities of greater than 10 years), all of
which are backed by the full faith and credit of the United States; and (ii)
obligations issued or guaranteed by the U.S. Government, including government
guaranteed mortgage-related securities, some of which are backed by the full
faith and credit of the U.S. Treasury, e.g., direct pass-through certificates
of the Government National Mortgage Association; some of which are supported by
the right of the issuer to borrow from the U.S. Government, e.g., obligations
of Federal Home Loan Banks; and some of which are backed only by the credit of
the issuer itself, e.g., obligations of the Student Loan Marketing Association.
See the Statement of Additional Information of the Fund for a description of
obligations issued or guaranteed by the U.S. Government.
High Grade Securities. High grade debt securities which, together with U.S.
Government Securities, constitute at least 65% of the Portfolio's assets, in-
clude:
1. Debt securities which are rated AAA, AA or A by S&P, Duff & Phelps or
Fitch or Aaa, Aa or A by Moody's;
2. Obligations of, or guaranteed by, national or state bank holding compa-
nies, which obligations, although not rated as a matter of policy by either
S&P or Moody's, are rated AAA, AA or A by Fitch;
3. Commercial paper rated A-1+, A-1, A-2 or A-3 by S&P, Prime-1, Prime-2 or
Prime-3 by Moody's, D-1, D-2 or D-3 by Duff & Phelps or F1, F2 or F3 by
Fitch; and
4. Bankers' acceptances or negotiable certificates of deposit issued by
banks rated AAA, AA or A by Fitch.
Other Securities. While the Portfolio's investment strategy normally emphasizes
U.S. Government Securities and high grade debt securities, the Portfolio may,
where consistent with its investment objective, invest up to 35% of its total
assets in other types of securities, including, (i) investment grade corporate
debt securities of a type other than the high grade debt securities described
above (including collateralized mortgage obligations), (ii) certificates of de-
posit, bankers' acceptances and interest-bearing savings deposits of banks hav-
ing total assets of more than $1 billion and which are members of the Federal
Deposit Insurance Corporation, and (iii) put and call options, futures con-
tracts and options on futures contracts. Investment grade debt securities de-
scribed in (i) above are those rated BBB or higher by S&P, Duff & Phelps or
Fitch or Baa or higher by Moody's or, if not so rated, are of equivalent in-
vestment quality in the opinion of the Adviser. Securities rated BBB by S&P,
Duff & Phelps or Fitch or Baa by Moody's normally provide higher yields but may
be considered to have speculative characteristics. See "Other Investment Poli-
cies and Techniques -- Securities Ratings." " -- Investment in Securities Rated
Baa and BBB" and Appendix A.
INTERNATIONAL PORTFOLIO
The International Portfolio's primary investment objective is to seek to obtain
a total return on its assets from long-term growth of capital principally
through a broad portfolio of marketable securities of established non-United
States companies (e.g., companies incorporated outside the United States), com-
panies participating in foreign economies with prospects for growth, and for-
eign government securities. As a second-
16
<PAGE>
ary objective, the Portfolio attempts to increase its current income without
assuming undue risk. The Adviser considers it consistent with these objectives
to acquire securities of companies incorporated in the United States and hav-
ing their principal activities and interests outside of the United States. The
International Portfolio intends to be invested primarily in such issuers and
under normal circumstances more than 80% of its assets will be so invested.
In seeking its objective, the International Portfolio invests its assets pri-
marily in common stocks of established non-United States companies which in
the opinion of the Adviser have potential for growth of capital or income or
both. There is no requirement, however, that the Portfolio invest exclusively
in common stocks or other equity securities, and, if deemed advisable, the In-
ternational Portfolio may invest in any other type of security including, but
not limited to, convertible securities preferred stocks, bonds, notes and
other debt securities of foreign issuers (Euro-dollar securities), as well as
warrants, or obligations of the United States or foreign governments and their
political subdivisions. When the Adviser believes that the total return on
debt securities will equal or exceed the return on common stocks, the Interna-
tional Portfolio may, in seeking its objective of total return, substantially
increase its holdings in such debt securities. The International Portfolio may
establish and maintain temporary balances for defensive purposes or to enable
it to take advantage of buying opportunities. The International Portfolio's
temporary cash balances may be invested in United States as well as foreign
short-term money-market instruments, including, but not limited to, government
obligations, certificates of deposit, bankers' acceptances, commercial paper,
short-term corporate debt securities and repurchase agreements.
The International Portfolio diversifies investments broadly among countries
and normally has represented in its portfolio, business activities of not less
than three different countries excluding the United States. The Portfolio may
invest all or a substantial portion of its assets in one or more of such coun-
tries. The Portfolio may purchase securities of companies, wherever organized,
which, in the judgment of the Adviser, have their principal activities and in-
terests outside the United States determined on the basis of such factors as
location of the company's assets, or personnel, or sales and earnings. See
"Other Investment Policies and Techniques -- Foreign Securities."
The Portfolio may purchase or sell forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Portfolio from
adverse changes in the relationship between the U.S. Dollar
and other currencies. A forward contract is an obligation to purchase or sell
a specific currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. The
Portfolio'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 forward contracts with respect to specific receivables
or payables of the Portfolio accruing in connection with the purchase and sale
of its portfolio securities or the payment of dividends and distributions by
the Portfolio. Position hedging is the sale of forward contracts with respect
to portfolio security positions denominated or
17
<PAGE>
quoted in such foreign currency. The Portfolio does not speculate in forward
contracts and, therefore, the Adviser believes that the Portfolio is not sub-
ject to the risks frequently associated with the speculative use of such trans-
actions. The Portfolio may not position hedge with respect to the currency of a
particular country 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 that particular foreign currency. If the Portfolio enters into a
position hedging transaction, its custodian bank will place liquid assets in a
separate account of the Portfolio in an amount equal to the value of the Port-
folio's total assets committed to the consummation of such forward contract. If
the value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account so that the value of the ac-
count will equal the amount of the Portfolio's commitment with respect to such
contracts. Hedging against a decline in the value of a currency does not elimi-
nate fluctuations in the prices of portfolio securities or prevent losses if
the prices of such securities decline. Such transactions also preclude the op-
portunity for gain if the value of the hedge currency should rise. Moreover, it
may not be possible for the Portfolio to hedge against a devaluation that is so
generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The Portfolio
will not enter into a forward contract with a term of more than one year or if,
as a result thereof, more than 50% of the Portfolio's total assets would be
committed to such contracts.
The Portfolio may also invest in warrants which entitle the holder to buy eq-
uity securities at a specific price for a specific period of time.
It is the present intention of the Adviser to invest the Portfolio's assets in
companies based in (or governments of or within) East Asia (Japan, Hong Kong,
Singapore and Malaysia), Western Europe (the United Kingdom, Germany, The Neth-
erlands, France and Switzerland), Australia, Canada, and such other areas and
countries as the Adviser may determine from time to time. However, investments
may be made from time to time in companies in, or governments of, developing
countries as well as developed countries. Shareholders should be aware that in-
vesting in the equity and fixed-income markets of developing countries involves
exposure to economic structures that are generally less diverse and mature, and
to political systems which can be expected to have less stability than those of
developed countries. The Adviser at present does not intend to invest more than
10% of the International Portfolio's total assets in companies in, or govern-
ments of, developing countries. For a description of certain risks associated
with investing in foreign securities, see "Other Investment Policies and Tech-
niques -- Foreign Securities."
GROWTH PORTFOLIO
General. The Growth Portfolio's investment objective is to provide long-term
growth of capital. Current income is only an incidental consideration. The
Portfolio seeks to achieve its objective by investing primarily in equity secu-
rities of companies with a favorable outlook for earnings and whose rate of
growth is expected to exceed that of the United States economy over time.
18
<PAGE>
The Portfolio invests primarily in common stocks and securities convertible
into common stocks such as convertible bonds, convertible preferred stocks and
warrants convertible into common stocks. Because the values of fixed-income se-
curities are expected to vary inversely with changes in interest rates general-
ly, when the Adviser expects a general decline in interest rates, the Portfolio
may also invest for capital growth in fixed-income securities. The Portfolio
may invest up to 25% of its total assets in fixed-income securities rated at
the time of purchase below investment grade, that is, securities rated Ba or
lower by Moody's or BB or lower by S&P, Duff & Phelps or Fitch, or in unrated
fixed income securities determined by the Adviser to be of comparable quality.
For a description of the ratings referred to above, see Appendix A. For tempo-
rary defensive purposes, the Portfolio may invest in money market instruments
and repurchase agreements.
Foreign Securities. The Portfolio may invest without limit in securities which
are not publicly traded in the United States, although the Portfolio generally
will not invest more than 15% of its total assets in such securities.
The value of foreign investments measured in U.S. dollars will rise or fall be-
cause of decreases or increases, respectively, in the value of the U.S. dollar
in comparison to the value of the currency in which the foreign investment is
denominated. The Fund may buy or sell foreign currencies, options on foreign
currencies, foreign currency futures contracts (and related options) and deal
in forward foreign currency exchange contracts in connection with the purchase
and sale of foreign investments. For a description of certain risks associated
with investing in foreign securities, see "Other Investment Policies and Tech-
niques -- Foreign Securities," below.
Non-Publicly Traded Securities. The Portfolio may invest in securities which
are not publicly traded, including securities sold pursuant to Rule 144A under
the Securities Act of 1933 ("Rule 144A Securities"). The sale of these securi-
ties is usually restricted under Federal securities laws, and market quotations
may not be readily available. As a result, the Portfolio may not be able to
sell these securities (other than Rule 144A Securities) unless they are regis-
tered under applicable Federal and state securities laws, or may have to sell
them at less than fair market value. Investment in these securities is re-
stricted to 5% of the Portfolio's total assets (not including for these pur-
poses Rule 144A Securities, to the extent permitted by applicable law) and is
also subject to the Portfolio's restriction against investing more than 15% of
total assets in illiquid securities. To the extent permitted by applicable law,
Rule 144A Securities will not be treated as "illiquid" for purposes of the
foregoing restriction so long as such securities meet liquidity guidelines es-
tablished by the Board of Directors. See "Other Investment Policies and Tech-
niques -- Illiquid Securities," below.
Investments in High-Yield Securities. The Growth Portfolio may invest in high-
yield, high-risk, fixed-income and convertible securities rated at the time of
purchase Ba or lower by Moody's BB or lower by S&P, Duff & Phelps or Fitch, or,
if unrated, judged by the Adviser to be of comparable quality ("high-yield se-
curities"). The Portfolio generally invests in securities with a minimum
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<PAGE>
rating of Caa- by Moody's or CCC- by S&P, Duff & Phelps or Fitch or in unrated
securities judged by the Adviser to be of comparable quality. However, from
time to time, the Portfolio may invest in securities rated in the lowest
grades of Moody's, S&P or Fitch (C) or Duff & Phelps (CC) or in unrated secu-
rities judged by the Adviser to be of comparable quality, if the Portfolio's
management determines that there are prospects for an upgrade or a favorable
conversion into equity securities (in the case of convertible securities). Se-
curities rated Ba or BB or lower (and comparable unrated securities) are com-
monly referred to as "junk bonds." Securities rated D by S&P and Fitch or DD
by Duff & Phelps are in default. See "Other Investment Policies and Tech-
niques -- Securities Ratings," "Investment in Lower-Rated Fixed-Income Securi-
ties" and Appendix A. As of December 31, 1997, the percentages of the Portfo-
lio's assets invested in securities rated (or considered by the Adviser to be
of equivalent quality to securities rated) in particular rating categories
were 0% in A and above, 0% in Ba or BB, .53% in B, 0% in CCC or Caa and .30%
in unrated securities. The Fund did not invest in securities rated below Caa
by Moody's or CCC by each of S&P, Duff & Phelps and Fitch or, if not rated,
considered by the Adviser to be of equivalent quality to securities so rated.
In the event that the credit rating of a high-yield security held by the Port-
folio falls below its rating at the time of purchase (or, in the case of
unrated securities, the Adviser determines that the quality of such security
has deteriorated since purchased by the Portfolio), the Portfolio will not be
obligated to dispose of such security and may continue to hold the obligation
if, in the opinion of the Adviser, such investment is considered appropriate
in the circumstances.
Convertible Securities. The Growth Portfolio may invest in convertible securi-
ties. These securities normally provide a higher yield than the underlying
stock but lower than a fixed-income security without the conversion feature.
Also, the price of the convertible security will normally vary to some degree
with changes in the price of the underlying stock although in some market con-
ditions the higher yield tends to make the convertible security less volatile
than the underlying common stock. In addition, the price of the convertible
security will also vary to some degree inversely with interest rates. Convert-
ible debt securities that are rated below BBB (S&P, Duff & Phelps or Fitch) or
Baa (Moody's) or comparable unrated securities as determined by the Adviser
may share some or all of the risks of high-yield securities. For a description
of these risks, see "Investments in High-Yield Securities" above.
Zero-Coupon and Payment-in-Kind Bonds. The Portfolio may at times invest in
so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds
are issued at a significant discount from their principal amount in lieu of
paying interest periodically. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. Because zero-coupon bonds do not pay current interest in
cash, their value is generally subject to greater fluctuation in response to
changes in market interest rates than bonds which pay interest in cash cur-
rently. Both zero-coupon and pay-
20
<PAGE>
ment-in-kind bonds allow an issuer to avoid the need to generate cash to meet
current interest payments. Accordingly, such bonds may involve greater credit
risks than bonds paying interest currently. Even though such bonds do not pay
current interest in cash, the Fund is nonetheless required to accrue interest
income on such investments and to distribute such amounts at least annually to
shareholders. Thus, the Fund could be required at times to liquidate other in-
vestments in order to satisfy its dividend requirements.
Futures and Options. The Portfolio may buy and sell stock index futures con-
tracts ("index futures") and may buy options on index futures and on stock in-
dices for hedging purposes. The Portfolio may buy and sell call and put op-
tions on index futures or on stock indices in addition to, or as an alterna-
tive to, purchasing or selling index futures or, to the extent permitted by
applicable law, to earn additional income. The Portfolio may also, for hedging
purposes, purchase and sell futures contracts, options thereon and options
with respect to the U.S. Treasury securities, including U.S. Treasury bills,
notes and bonds. The Portfolio may also seek to increase its current return by
writing covered call and put options on securities its owns or in which it may
invest.
The use of futures and options involves certain special risks. Futures and op-
tions transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
stock index or security or of the securities in the Portfolio's investment
portfolio that are the subject of the hedge. The successful use of the strate-
gies described above further depends on the Adviser's ability to forecast mar-
ket movements correctly. Other risks arise from the Portfolio's potential in-
ability to close out its futures or options positions. In addition there can
be no assurance that a liquid secondary market will exist for any future op-
tion at any particular time. Certain provisions of the Internal Revenue Code
and certain regulatory requirements may limit the Portfolio's ability to en-
gage in futures and options transactions.
Securities Loans, Repurchase Agreements and Forward Commitments. The Portfolio
may lend portfolio securities amounting to not more than 25% of its total as-
sets and may enter into repurchase agreements on up to 25% of its total as-
sets. These transactions must be fully collateralized at all times but involve
some risk to the Portfolio if the other party should default on its obligation
and the Portfolio is delayed or prevented from recovering the collateral. The
Portfolio may also purchase securities for future delivery, which may increase
its overall investment exposure and involve a risk of loss if the value of the
securities declines prior to the settlement date.
WORLDWIDE PRIVATIZATION PORTFOLIO
The Worldwide Privatization Portfolio's investment objective is to seek long
term capital appreciation. In seeking to achieve its investment objective, as
a fundamental policy, the Portfolio invests at least 65% of its total assets
in equity securities that are issued by enterprises that are undergoing, or
that have undergone, privatization (as described below), although normally,
significantly more of the Portfolio's total assets will be in-
21
<PAGE>
vested in such securities. The balance of the Portfolio's investment portfolio
includes securities of companies that are believed by the Adviser to be bene-
ficiaries of privatizations. Equity securities include common stock, preferred
stock, rights or warrants to subscribe for or purchase common or preferred
stock, securities (including debt securities) convertible into common or pre-
ferred stock and securities that give the holder the right to acquire common
or preferred stock.
Investment in Privatizations. The Portfolio is designed for investors desiring
to take advantage of investment opportunities, historically inaccessible to
U.S. individual investors, that are created by privatizations of state enter-
prises in both established and developing economies, including those in West-
ern Europe and Scandinavia, Australia, New Zealand, Latin America, Asia and
Eastern and Central Europe and, to a lesser degree, Canada and the United
States.
The Portfolio's investments in the securities of enterprises undergoing
privatization may comprise three distinct situations. First, the Portfolio may
invest in the initial offering of publicly traded equity securities (an "ini-
tial equity offering") of a government- or state-owned or controlled company
or enterprise (a "state enterprise"). Secondly, the Portfolio may invest in
the securities of a current or former state enterprise following its initial
equity offering. Finally, the Portfolio may make privately negotiated invest-
ments in a state enterprise that has not yet conducted an initial equity of-
fering. Investments of this type may be structured, for example, as privately
negotiated sales of stock or other equity interests in joint ventures, cooper-
atives or partnerships. In the opinion of the Adviser, substantial potential
for appreciation in the value of equity securities of an enterprise undergoing
or following privatization exists as the enterprise rationalizes its manage-
ment structure, operations and business strategy to position itself to compete
efficiently in a market economy, and the Portfolio will seek to emphasize in-
vestments in the equity securities of such enterprises.
The Portfolio intends to spread its portfolio investments among the capital
markets of a number of countries and, under normal market conditions, invests
in the equity securities of issuers based in at least four, and normally con-
siderably more, countries. The percentage of the Portfolio's assets invested
in equity securities of companies based in a particular country will vary in
accordance with the Adviser's assessment of the appreciation potential of such
securities. There is no restriction, however, on the percentage of the Portfo-
lio's assets that may be invested in countries within any one region of the
world. To the extent that the Portfolio's assets are invested within any one
region, the Portfolio may be subject to any special risks that may be associ-
ated with that region. Notwithstanding the foregoing, no more than 15% of the
Portfolio's total assets will be invested in securities of issuers in any one
foreign country, except that the Portfolio may invest up to 30% of its total
assets in securities of issuers in any one of France, Germany, Great Britain,
Italy and Japan. The Portfolio may invest all of its assets within a single
region of the world. To the extent that the Portfolio's assets are invested
within any one region, the Portfolio may be subject to any special risks that
may be associated with that region.
22
<PAGE>
Privatization is a process through which the ownership and control of compa-
nies or assets changes in whole or in part from the public sector to the pri-
vate sector. Through privatization a government or state divests or transfers
all or a portion of its interest in a state enterprise to some form of private
ownership. Governments and states with established economies, including
France, Great Britain, Germany and Italy, and those with developing economies,
including Argentina, Mexico, Chile, Indonesia, Malaysia, Poland and Hungary,
are currently engaged in privatizations. The Portfolio will invest in any
country that presents attractive investment opportunities, and the countries
in which the Portfolio will invest may change from time to time. It is the Ad-
viser's intention to invest approximately 70% of the Portfolio's total assets
in securities of enterprises located in countries with established economies
and the remainder of the Portfolio's assets in securities of enterprises lo-
cated in countries with developing economies.
A major premise of the Portfolio's investment approach is that, because of the
particular characteristics of privatized companies, their equity securities
offer investors opportunities for significant capital appreciation. In partic-
ular, because privatization programs are an important part of a country's eco-
nomic restructuring, equity securities that are brought to the market by means
of initial equity offerings frequently are priced to attract investment in or-
der to secure the issuer's successful transition to private sector ownership.
In addition, these enterprises generally tend to enjoy dominant market posi-
tions in their local markets. Because of the relaxation of government controls
upon privatization, these enterprises typically have the potential for signif-
icant managerial and operational efficiency gains, which, among other factors,
can increase their earnings due to the restructuring that accompanies
privatization and the incentives management frequently receives.
Privatization programs are established to address a range of economic, politi-
cal or social needs. Privatization is generally viewed as a means to achieve
increased efficiency and improve the competitiveness of state enterprises.
Western European countries are currently engaged in privatization programs
partly as a means of increasing government revenues, thereby reducing budget
deficits. The reduction of budget deficits recently has become an important
objective as Western European countries attempt to meet the directives of the
European Commission regarding debt and achieve the target budget deficit lev-
els established by the Maastricht Treaty. In developing market countries, in-
cluding many of those in Latin America and Asia, privatization is viewed as an
integral part of broad economic measures that are designed to reduce external
debt and control inflation as these countries attempt to meet the directives
of the International Bank for Reconstruction and Development (the World Bank)
and the International Monetary Fund regarding desirable debt levels. Within
Eastern and Central Europe, privatization is also being used as a means of
achieving structural economic changes that will enable Eastern and Central
European countries to develop market economies and compete in the world mar-
kets.
The privatization of state enterprises is achieved through various methods. A
gradual approach is commonly taken at the early stages of privatization within
a country.
23
<PAGE>
Oftentimes, the government will transfer partial ownership of the enterprise
to a corporation or similar entity and occasionally also broaden ownership to
employees and citizens while retaining an interest. Occasionally, a few se-
lected foreign minority shareholders are permitted to make private investments
at this stage. After the new corporation has operated under this form of own-
ership for a few years, the government may divest itself completely by means
of an equity offering in national and international securities markets. An-
other approach is the formation of an investment fund owned by employees and
citizens that, with the assistance of international managers, operates one or
many state enterprises for a set term, after which the government may divest
itself of its remaining interest. Foreign investors are often permitted to be-
come minority shareholders of these investment funds. In less gradual
privatizations, state enterprises are auctioned to qualified investors through
competitive bidding processes in private transactions. Alternatively, equity
offerings may be made directly through the local and international securities
markets.
Although the Portfolio anticipates that it generally will not concentrate its
investments in any industry, it is permitted to invest more than 25% of its
total assets in the securities of issuers whose primary business activity is
that of national commercial banking. Prior to concentrating in the securities
of national commercial banks, the Portfolio's Board of Directors would have to
determine that the Portfolio's ability to achieve its investment objective
would be adversely affected if the Portfolio were not permitted to concen-
trate. The staff of the Securities and Exchange Commission is of the view that
registered investment companies may not, absent shareholder approval, change
between concentration and non-concentration in the securities of issuers in a
single industry. The Portfolio disagrees with the staff's position but has un-
dertaken that it will not concentrate in the securities of national commercial
banks until, if ever, the issue is resolved. If the Portfolio were to invest
more than 25% of its total assets in the national commercial banks, the Port-
folio's performance could be significantly influenced by events or conditions
affecting this industry, which is subject to, among other things, increases in
interest rates and deteriorations in general economic conditions, and the
Portfolio's investments may be subject to greater risk and market fluctuation
than if its portfolio represented a broader range of investments.
Warrants. The Portfolio may invest up to 20% of its total assets in rights or
warrants which entitle the holder to buy equity securities at a specific price
for a specific period of time, but will do so only if the equity securities
themselves are deemed appropriate by the Adviser for inclusion in the Portfo-
lio's portfolio. Rights are similar to warrants except that they have a sub-
stantially shorter duration. Rights and warrants may be considered more specu-
lative than certain other types of investments in that they do not entitle a
holder to dividends or voting rights with respect to the securities which may
be purchased nor do they represent any rights in the assets of the issuing
company. The value of a right or warrant does not necessarily change with the
value of the underlying security, although the value of a right or warrant may
decline because of a decrease in the value of the underlying security, the pas-
24
<PAGE>
sage of time or a change in perception as to the potential of the underlying
security, or any combination thereof. If the market price of the underlying se-
curity is below the exercise price set forth in the warrant on the expiration
date, the warrant will expire worthless. Moreover, a right or warrant ceases to
have value if it is not exercised prior to the expiration date.
Debt Securities and Convertible Debt Securities. The Portfolio may invest up to
35% of its total assets in debt securities and convertible debt securities of
issuers whose common stocks are eligible for purchase by the Portfolio under
the investment policies described above. Debt securities include bonds, deben-
tures, corporate notes and preferred stocks. Convertible debt securities are
such instruments that are convertible at a stated exchange rate into common
stock. Prior to their conversion, convertible securities have the same general
characteristics as non-convertible debt securities which provide a stable
stream of income with generally higher yields than those of equity securities
of the same or similar issuers. The market value of debt securities and con-
vertible debt securities tends to decline as interest rates increase and, con-
versely, to increase as interest rates decline. While convertible securities
generally offer lower interest yields than non-convertible debt securities of
similar quality, they do enable the investor to benefit from increases in the
market price of the underlying common stock.
The Portfolio may maintain not more than 5% of its net assets in debt securi-
ties rated below Baa by Moody's and BBB by S&P, Duff & Phelps or Fitch, or, if
not rated, determined by the Adviser to be of equivalent quality. See "Other
Investment Policies and Techniques -- Securities Ratings," "-- Investment in
Securities Rated Baa and BBB," "-- Investment in Lower-Rated Fixed-Income Secu-
rities" and Appendix A.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The Portfolio may, but is not required to, utilize various investment strate-
gies to hedge its portfolio against currency and other risks. These investment
strategies entail risks. Although the Adviser believes that these investment
strategies may further the Portfolio's investment objective, no assurance can
be given that they will achieve this result. The Portfolio may write covered
put and call options and purchase put and call options on U.S. and foreign se-
curities exchanges and over-the-counter, enter into contracts for the purchase
and sale for future delivery of fixed-income securities or foreign currencies
or contracts based on financial indices, including any index of U.S. Government
Securities or securities issued by foreign government entities or common stocks
and purchase and write put and call options on such futures contracts or on
foreign currencies, purchase or sell forward foreign currency exchange con-
tracts, enter into forward commitments for the purchase or sale of securities,
enter into repurchase agreements, standby commitment agreements and currency
swaps, make short sales of securities and make secured loans of its portfolio
securities. Certain of these investment strategies may not currently be avail-
able in many of the countries in which the Portfolio may invest or may not be
permissible under current law. The Portfolio may engage in these investment
strategies in those countries when and to the extent such strat-
25
<PAGE>
egies become available or permissible in the future. Except with regard to
those investment strategies discussed immediately below, each of these invest-
ment strategies is discussed under the caption "Other Investment Policies and
Techniques," below.
Currency Swaps. The Portfolio may enter into currency swaps for hedging purpos-
es. Currency swaps involve the exchange by the Portfolio with another party of
a series of payments in specified currencies. Since currency swaps are individ-
ually negotiated, the Portfolio expects to achieve an acceptable degree of cor-
relation between its portfolio investments and its currency swaps positions. A
currency swap may involve the delivery at the end of the exchange period of a
substantial amount of one designated currency in exchange for the other desig-
nated currency. Therefore the entire principal value of a currency swap is sub-
ject to the risk that the other party to the swap will default on its contrac-
tual delivery obligations. The net amount of the excess, if any, of the Portfo-
lio's obligations over its entitlements with respect to each currency swap will
be accrued on a daily basis and an amount of cash or high-grade liquid debt se-
curities having an aggregate net asset value at least equal to the accrued ex-
cess will be maintained in a segregated account by the Portfolio's custodian.
The Portfolio will not enter into any currency swap unless the credit quality
of the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in the highest rating category of at least one nationally rec-
ognized rating organization at the time of entering into the transaction. If
there is a default by the other party to such a transaction, the Portfolio will
have contractual remedies pursuant to the agreements related to the transac-
tions.
Short Sales. The Portfolio may make short sales of securities or maintain a
short position only for the purpose of deferring realization of gain or loss
for U.S. federal income tax purposes, provided that at all times when a short
position is open the Portfolio owns an equal amount of such securities of the
same issue as, and equal in amount to, the securities sold short. In addition,
the Portfolio may not make a short sale if more than 10% of the Portfolio's net
assets (taken at market value) is held as collateral for short sales at any one
time. If the price of the security sold short increases between the time of the
short sale and the time the Portfolio replaces the borrowed security, the Port-
folio will incur a loss; conversely, if the price declines, the Portfolio will
realize a capital gain.
Future Developments. The Portfolio may, following written notice to its share-
holders, take advantage of other investment practices which are not at present
contemplated for use by the Portfolio or which currently are not available but
which may be developed, to the extent such investment practices are both con-
sistent with the Portfolio's investment objective and legally permissible for
the Portfolio. Such investment practices, if they arise, may involve risks
which exceed those involved in the activities described above.
CERTAIN RISK CONSIDERATIONS
Investment in the Portfolio involves the special risk considerations described
below.
Investment in Privatized Enterprises. The governments of certain foreign coun-
tries have,
26
<PAGE>
to varying degrees, embarked on privatization programs contemplating the sale
of all or part of their interests in state enterprises. In certain jurisdic-
tions, the ability of foreign entities, such as the Portfolio, to participate
in privatizations may be limited by local law, or the price or terms on which
the Portfolio may be able to participate may be less advantageous than for lo-
cal investors. Moreover, there can be no assurance that governments that have
embarked on privatization programs will continue to divest their ownership of
state enterprises, that proposed privatizations will be successful or that
governments will not re-nationalize enterprises that have been privatized.
Furthermore, in the case of certain of the enterprises in which the Portfolio
may invest, large blocks of the stock of those enterprises may be held by a
small group of stockholders, even after the initial equity offerings by those
enterprises. The sale of some portion or all of those blocks could have an ad-
verse effect on the price of the stock of any such enterprise.
Most state enterprises or former state enterprises go through an internal re-
organization of management prior to conducting an initial equity offering in
an attempt to better enable these enterprises to compete in the private sec-
tor. However, certain reorganizations could result in a management team that
does not function as well as the enterprise's prior management and may have a
negative effect on such enterprise. After making an initial equity offering,
enterprises which may have enjoyed preferential treatment from the respective
state or government that owned or controlled them may no longer receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experi-
ence bankruptcy due to such competition. In addition, the privatization of an
enterprise by its government may occur over a number of years, with the gov-
ernment continuing to hold a controlling position in the enterprise even after
the initial equity offering for the enterprise.
Currency Considerations. Because substantially all of the Portfolio's assets
will be invested in securities denominated in foreign currencies and a corre-
sponding portion of the Portfolio's revenues will be received in such curren-
cies, the dollar equivalent of the Portfolio's net assets and distributions
will be adversely affected by reductions in the value of certain foreign cur-
rencies relative to the U.S. dollar. Such changes will also affect the Portfo-
lio's income. The Portfolio, however, has the ability to protect itself
against adverse changes in the values of foreign currencies by engaging in
certain of the investment practices listed above. If the value of the foreign
currencies in which the Portfolio receives its income falls relative to the
U.S. dollar between receipt of the income and the making of Portfolio distri-
butions, the Portfolio may be required to liquidate securities in order to
make distributions if the Portfolio has insufficient cash in U.S. dollars to
meet distribution requirements. Similarly, if an exchange rate declines be-
tween the time the Portfolio incurs expenses in U.S. dollars and the time cash
expenses are paid, the amount of the currency required to be converted into
U.S. dollars in order to pay expenses in U.S. dollars could be greater than
the equivalent
27
<PAGE>
amount of such expenses in the currency at the time they were incurred. In
light of these risks, the Portfolio may engage in certain currency hedging
transactions, which themselves involve certain special risks. See "Other In-
vestment Policies and Techniques -- Hedging Techniques."
Risk of Foreign Investment. For a description of certain risks associated with
investing in foreign securities, see "Other Investing Policies and Tech-
niques -- Foreign Securities," below.
TECHNOLOGY PORTFOLIO
The Technology Portfolio is a diversified investment portfolio that emphasizes
growth of capital and invests for capital appreciation, and only incidentally
for current income. The Portfolio invests primarily in securities of companies
expected to benefit from technological advances and improvements (i.e., compa-
nies that use technology extensively in the development of new or improved
products or processes). The Portfolio will normally have at least 80% of its
assets invested in the securities of these companies. The Portfolio normally
has substantially all its assets invested in equity securities, but it also in-
vests in debt securities offering an opportunity for price appreciation. The
Portfolio invests in listed and unlisted securities and U.S. and foreign secu-
rities, but it will not purchase a foreign security if as a result 10% or more
of the Portfolio's total assets would be invested in foreign securities.
The Technology Portfolio's policy is to invest in any company and industry and
in any type of security with potential for capital appreciation. It invests in
well-known and established companies and in new and unseasoned companies.
The Portfolio may maintain up to 15% of its net assets in illiquid securities,
lend portfolio securities equal in value to not more than 30% of the Technology
Portfolio's total assets and invest up to 10% of its total assets in foreign
securities.
Options. In an effort to increase current income and to reduce fluctuations in
net asset value, the Technology Portfolio intends to write covered call options
and purchase put and call options on securities of the types in which it is
permitted to invest that are traded on U.S. and foreign securities exchanges. A
call option written by the Portfolio is "covered" if the Portfolio (i) owns the
underlying security covered by the call (ii) has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by the Fund's Custo-
dian) upon conversion or exchange of other portfolio securities, or (iii) holds
a call on the same security in the same principal amount as the call written
where the exercise price of the call held (i) is equal to or less than the ex-
ercise price of the call written or (ii) is greater than the exercise price of
the call written if the difference is maintained by the Portfolio in cash and
liquid high-grade debt securities in a segregated account with the Fund's Cus-
todian. The premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates.
The Technology Portfolio will not write uncovered call options and will not
write a call
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<PAGE>
option if the premium to be received by the Portfolio in doing so would not
produce an annualized return of at least 15% of the then current market value
of the securities subject to the option (without giving effect to commissions,
stock transfer taxes and other expenses that are deducted from premium re-
ceipts). The Portfolio will not write a call option if, as a result, the ag-
gregate of the Portfolio's securities subject to outstanding call options
(valued at the lower of the option price or market value of such securities)
would exceed 15% of the Portfolio's total assets or more than 10% of the Port-
folio's assets would be committed to call options that at the time of sale
have a remaining term of more than 100 days. The aggregate cost of all out-
standing options purchased and held by the Portfolio will at no time exceed
10% of the Portfolio's total assets.
The Technology Portfolio may purchase or write options on securities of the
types in which it is permitted to invest in privately negotiated transactions.
The Portfolio will effect such transactions only with investment dealers and
other financial institutions (such as commercial banks or savings and loan in-
stitutions) deemed creditworthy by the Adviser, and the Adviser has adopted
procedures for monitoring the creditworthiness of such entities. Options pur-
chased or written by a Portfolio in negotiated transactions are illiquid and
it may not be possible for the Portfolio to effect a closing transaction at a
time when the Adviser believes it would be advantageous to do so. See "Illiq-
uid Securities." See Appendix C in the Statement of Additional Information for
a further discussion of the use, risks and costs of option trading.
The Technology Portfolio may purchase and sell exchange-traded options on any
securities index composed of the types of securities in which it may invest.
An option on a securities index is similar to an option on a security except
that, rather than the right to take or make delivery of a security at a speci-
fied price, an option on a securities index gives the holder the right to re-
ceive, upon exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option.
Rights and Warrants. The Technology Portfolio may also invest up to 10% of its
total assets in rights and warrants. The Portfolio will invest in right and
warrants only if the underlying equity securities themselves are deemed appro-
priate by the Adviser for inclusion in the Portfolio. Rights and warrants en-
title the holder to buy equity securities at a specific price for a specific
period of time. Right are similar to warrants except that they have a substan-
tially shorter duration. Rights and warrants may be considered more specula-
tive than certain other types of investments in that they do not entitle a
holder to dividends or voting rights with respect to the underlying securities
nor do they represent any rights in the assets of the issuing company. The
value of a warrant does not necessarily change with the value of the under-
lying security, although the value of a right or warrant may decline because
of a decrease in the value of the underlying security, the passage of time or
a change in perception as to the potential of the underlying security, or any
combination thereof. If the market price of the underlying security is below
the exercise price set
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forth in the warrant on the expiration date, the warrant will expire worth-
less. Moreover, a right or warrant ceases to have value if it is not exercised
prior to the expiration date.
For a further description of the Technology Portfolio's investment policies
and techniques, see "Other Investment Policies and Techniques" below.
QUASAR PORTFOLIO
The Quasar Portfolio is a diversified investment company that seeks growth of
capital by pursuing aggressive investment policies. It invests for capital ap-
preciation and only incidentally for current income. The selection of securi-
ties based on the possibility of appreciation cannot prevent loss in value.
Moreover, because the Portfolio's investment policies are aggressive, an in-
vestment in the Portfolio is risky and investors who want assured income or
preservation of capital should not invest in the Portfolio.
The Portfolio invests in any company and industry and in any type of security
with potential for capital appreciation. It invests in well-known and estab-
lished companies and in new and unseasoned companies. When selecting securi-
ties, the Adviser considers economic and political outlook, the values of spe-
cific securities relative to other investments, trends in the determinants of
corporate profits and management capability and practices.
The Portfolio invests principally in equity securities, but it also invests to
a limited degree in non-convertible bonds and preferred stock. The Portfolio
invests in listed and unlisted U.S. and foreign securities. The Portfolio pe-
riodically invests in special situations, which occur when the securities of a
company are expected to appreciate due to a development particularly or
uniquely applicable to that company and regardless of general business condi-
tions or movements of the market as a whole.
The Portfolio may also: (i) invest up to 15% of its total assets in securities
for which there is no ready market; (ii) make short sales of securities
"against the box," but not more than 15% of its net assets may be deposited on
short sales; and (iii) write call options and purchase and sell put and call
options written by others. For additional information on the use, risks and
costs of the Policies and practices, see "Other Investment Policies and Tech-
niques," below.
The Portfolio's investment objective cannot be changed without approval by the
holders of a majority of the Portfolio's outstanding voting securities, as de-
fined in the Act. Except as otherwise indicated, the investment policies of
the Portfolio are not "fundamental policies" and may, therefore, be changed by
the Board of Directors without shareholder approval.
Options. The Portfolio may write call options and purchase and sell put and
call options written by others. An option gives the purchaser of the option,
upon payment of a premium, the right to deliver to (in the case of a put) or
receive from (in the case of a call) the writer a specified amount of a secu-
rity on or before a fixed date at a predetermined price. A call option written
by the Portfolio is "covered" if the Portfolio owns the underlying security,
has an absolute and immediate right to acquire that security upon conversion
or exchange of another security it holds, or holds a call option on the
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underlying security with an exercise price equal to or less than that of the
call option it has written. A put option written by the Portfolio is "covered"
if the Portfolio holds a put option on the underlying securities with an exer-
cise price equal to or greater than that of the put option it has written.
In purchasing an option, the Portfolio would be in a position to realize a
gain, if, during the option period, the price of the underlying security in-
creased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid; otherwise the Portfolio would experience
a loss equal to the premium paid for the option.
If an option written by the Portfolio were exercised, the Portfolio would be
obligated to purchase (in the case of a put) or sell (in the case of a call)
the underlying security at the exercise price. The risk involved in writing an
option is that, if the option were exercised, the underlying security would
then be purchased or sold by the Portfolio at a disadvantageous price. These
risks could be reduced by entering into a closing transaction (i.e., by dis-
posing of the option prior to its exercise). The Portfolio retains the premium
received from writing a call option whether or not the option is exercised.
The writing of covered call options could result in increases in the Portfo-
lio's portfolio turnover rate, especially during periods when market prices of
the underlying securities appreciate.
The Portfolio will not write a call option if, as a result, the aggregate of
the Portfolio's securities subject to outstanding call options (valued at the
lower of the option price or market value of such securities) would exceed 15%
of the Portfolio's total assets or more than 10% of the Portfolio's assets
would be committed to all options that at time of sale have a remaining term
of more than 100 days. The aggregate cost of all outstanding options purchased
and held by the Portfolio will at no time exceed 10% of the Portfolio's total
assets.
Short Sales. The Portfolio may only make short sales of securities "against
the box". A short sale is effected by selling a security that the Portfolio
does not own, or if the Portfolio does own such security, it is not to be de-
livered upon consummation of the sale. A short sale is "against the box" to
the extent that the Portfolio contemporaneously owns or has the right to ob-
tain securities identical to those sold short without payment. If the price of
the security sold short increases between the time of the short sale and the
time the Portfolio replaces the borrowed security, the Portfolio will incur a
loss; conversely, if the price declines, the Portfolio will realize a capital
gain. Certain special federal income tax considerations may apply to short
sales entered into by the Portfolio. See "Dividends, Distributions and Taxes"
in the Statement of Additional Information.
Foreign Securities. The Portfolio may invest in foreign securities. To the ex-
tent the Portfolio invests in foreign securities, consideration is given to
certain factors comprising both risk and opportunity. The values of foreign
securities investments are affected by changes in currency rates or exchange
control regulations, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic, taxation or mone-
tary policy (in the United States and abroad) or changed cir-
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cumstances in dealings between nations. Foreign securities markets may also 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 expropriation, con-
fiscatory taxation, lack of uniform accounting and auditing standards and po-
tential difficulties in enforcing contractual obligations and could be subject
to extended settlement periods.
REAL ESTATE INVESTMENT PORTFOLIO
The Real Estate Investment Portfolio's investment objective is to seek a total
return on its assets from long-term growth of capital and from income princi-
pally through investing in a portfolio of equity securities of issuers that
are primarily engaged in or related to the real estate industry.
Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in equity securities of real estate investment trusts ("REITs")
and other real estate industry companies. A "real estate industry company" is
a company that derives at least 50% of its gross revenues or net profits from
the ownership, development, construction, financing, management or sale of
commercial, industrial or residential real estate or interests therein. The
equity securities in which the Portfolio will invest for this purpose consist
of common stock, shares of beneficial interest of REITs and securities with
common stock characteristics, such as preferred stock or convertible securi-
ties ("Real Estate Equity Securities").
The Portfolio may invest up to 35% of its total assets in (a) securities that
directly or indirectly represent participations in, or are collateralized by
and payable from, mortgage loans secured by real property ("Mortgage-Backed
Securities"), such as mortgage pass-through certificates, real estate mortgage
investment conduit ("REMIC") certificates and collateralized mortgage obliga-
tions ("CMOs") and (b) short-term investments. These instruments are described
below. The risks associated with the Portfolio's transactions in REMICs, CMOs
and other types of mortgage-backed securities, which are considered to be de-
rivative securities, may include some or all of the following: market risk,
leverage and volatility risk, correlation risk, credit risk and liquidity and
valuation risk. See "Certain Risk Considerations --Mortgage-Backed Securities"
below for a description of these and other risks.
As to any investment in Real Estate Equity Securities, the Adviser's analysis
will focus on determining the degree to which the company involved can achieve
sustainable growth in cash flow and dividend paying capability. The Adviser
believes that the primary determinant of this capability is the economic via-
bility of property markets in which the company operates and that the second-
ary determinant of this capability is the ability of management to add value
through strategic focus and operating expertise. The Portfolio will purchase
Real Estate Equity Securities when, in the judgment of the Adviser, their mar-
ket price does not adequately reflect this potential. In making this determi-
nation, the Adviser will take into account fundamental trends in underlying
property markets as determined by proprietary models, site visits conducted by
individuals knowledgeable in local real estate markets, price-earnings ratios
(as defined
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for real estate companies), cash flow growth and stability, the relationship
between asset value and market price of the securities, dividend payment his-
tory, and such other factors which the Adviser may determine from time to time
to be relevant. The Adviser will attempt to purchase for the Portfolio Real
Estate Equity Securities of companies whose underlying portfolios are diversi-
fied geographically and by property type.
The Portfolio may invest without limitation in shares of REITs. REITs are
pooled investment vehicles which invest primarily in income producing real es-
tate or real estate related loans or interests. REITs are generally classified
as equity REITs, mortgage REITs or a combination of equity and mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages
and derive income from the collection of interest payments. Similar to invest-
ment companies such as the Portfolio, REITs are not taxed on income distrib-
uted to shareholders provided they comply with several requirements of the In-
ternal Revenue Code of 1986, as amended ("the Code"). The Portfolio indirectly
bears its proportionate share of expenses incurred by REITs in which the Port-
folio invests in addition to the expenses incurred directly by the Portfolio.
Investment Process for Real Estate Equity Securities. The Portfolio's invest-
ment strategy with respect to Real Estate Equity Securities is based on the
premise that property market fundamentals are the primary determinant of
growth underlying the performance of Real Estate Equity Securities. Value
added management further distinguishes the most attractive Real Estate Equity
Securities. The Portfolio's research and investment process is designed to
identify those companies with strong property fundamentals and strong manage-
ment teams. This process is comprised of real estate market research, specific
property inspection and securities analysis. The Adviser believes that this
process will result in a portfolio that will consist of Real Estate Equity Se-
curities of companies that own assets in the most desirable markets across the
country, diversified geographically and by property type.
In implementing the Portfolio's research and investment process, the Adviser
will avail itself of the consulting services of CB Commercial Real Estate
Group, Inc. ("CBC"), a publicly held company and the largest real estate serv-
ices company in the United States, comprised of real estate brokerage, prop-
erty and facilities management, and real estate finance and investment advi-
sory activities (CBC in August of 1997 acquired Koll Management Services
("Koll"), which previously provided these consulting services to the Adviser).
In 1996, CBC (and Koll, on a combined basis) completed 25,000 sale and lease
transactions, managed over 4,100 client properties, created over $3.5 billion
in mortgage originations, and completed over 2,600 appraisal and consulting
assignments. In addition, they advised and managed for institutions over $4
billion in real estate investments. As consultant to the Adviser, CBC provides
access to a proprietary model, REIT . Score, that analyzes the approximately
12,000 properties owned by
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these 130 companies. Using proprietary databases and algorithms, CBC analyzes
local market rent, expense and occupancy trends, market specific transaction
pricing, demographic and economic trends, and leading indicators of real es-
tate supply such as building permits. Over 650 asset-type specific geographic
markets are analyzed and ranked on a relative scale by CBC in compiling its
REIT . Score database. The relative attractiveness of these real estate indus-
try companies is similarly ranked based on the composite rankings of the prop-
erties they own. See "Management of the Fund" for more information about CBC.
The universe of property-owning real estate industry firms consists of approx-
imately 130 companies of sufficient size and quality to merit consideration
for investment by the Portfolio. Once the universe of real estate industry
companies has been distilled through the market research process, CBC's local
market presence provides the capability to perform site specific inspections
of key properties. This analysis examines specific property location, condi-
tion, and sub-market trends. CBC's use of locally based real estate profes-
sionals provides the Adviser with a window on the operations of the portfolio
companies as information gathered can immediately be put in the context of lo-
cal market events. Only those companies whose specific property portfolios re-
flect the promise of their general markets will be considered for initial and
continued investment by the Portfolio.
The Adviser further screens the universe of real estate industry companies by
using rigorous financial models and by engaging in regular contact with man-
agement of targeted companies. Each management's strategic plan and ability to
execute the plan are determined and analyzed. The Adviser will make extensive
use of CBC's network of industry analysts in order to assess trends in tenant
industries. This information is then used to further interpret management's
strategic plans. Financial ratio analysis is used to isolate those companies
with the ability to make value-added acquisitions. This information is com-
bined with property market trends and used to project future earnings poten-
tial.
Mortgage-Backed Securities and Associated Risks. Mortgage-Backed Securities
include mortgage pass-through certificates and multiple-class pass-through se-
curities, such as REMIC pass-through certificates, CMOs and stripped mortgage-
backed securities ("SMBS"), and other types of Mortgage-Backed Securities that
may be available in the future.
Guaranteed Mortgage Pass-Through Securities. The Portfolio may invest in guar-
anteed mortgage pass-through securities which represent participation inter-
ests in pools of residential mortgage loans and are issued by U.S. governmen-
tal or private lenders and guaranteed by the U.S. Government or one of its
agencies or instrumentalities, including but not limited to the Government Na-
tional Mortgage Association ("Ginnie Mae"), the Federal National Mortgage As-
sociation ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"). Ginnie Mae certificates are guaranteed by the full faith and
credit of the United States Government for timely payment of principal and in-
terest on the certificates. Fannie Mae certificates are guaranteed by Fannie
Mae, a federally chartered and privately-owned corporation for full and
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timely payment of principal and interest on the certificates. Freddie Mac cer-
tificates are guaranteed by Freddie Mac, a corporate instrumentality of the
United States Government, for timely payment of interest and the ultimate col-
lection of all principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obliga-
tions. Mortgage-Backed Securities also include CMOs and REMIC pass-through or
participation certificates, which may be issued by, among others, U.S. Govern-
ment agencies and instrumentalities as well as private lenders. CMOs and REMIC
certificates are issued multiple classes and the principal of and interest on
the mortgage assets may be allocated among the several classes of CMOs or
REMIC certificates in various ways. Each class of CMOs or REMIC certificates,
often referred to as a "tranche," is issued at a specific adjustable or fixed
interest rate and must be fully retired no later than its final distribution
date. Generally, interest is paid or accrues on all classes of CMOs or REMIC
certificates on a monthly basis. The Portfolio will not invest in the lowest
tranche of CMOs and REMIC certificates.
Typically, CMOs are collateralized by Ginnie Mae or Freddie Mac certificates
but also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-through securities. Debt service on CMOs is provided
from payments of principal and interest on collateral of mortgaged assets and
any reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages primarily secured by interests in real property
and other permitted investments. Investors may purchase "regular" and "residu-
al" interest shares of beneficial interest in REMIC trusts although the Port-
folio does not intend to invest in residual interests.
Although the market for mortgage-related securities is becoming increasingly
liquid, those issued by certain private organizations may not be readily mar-
ketable. In particular, the secondary markets for CMOs may be more volatile
and less liquid than those for other mortgage-related securities, thereby po-
tentially limiting a Fund's ability to buy or sell those securities at any
particular time.
Risks. Investing in Mortgage-Backed Securities involves certain unique risks
in addition to those generally associated with investing in the real estate
industry in general. These unique risks include the failure of a counterparty
to meet its commitments, adverse interest rate changes and the effects of pre-
payments on mortgage cash flows. See "Certain Risk Considerations--Mortgage-
Backed Securities" below for a more complete description of the characteris-
tics of these and other risks.
Short-Term Investments. The short-term investments in which the Portfolio may
invest are: corporate commercial paper and other short-term commercial obliga-
tions, in each case rated or issued by companies with similar securities out-
standing that are rated Prime-1, Aa or better by Moody's, A-1, AA or better by
S&P, D-1, AA or better by Duff & Phelps or F1, AA or better by Fitch; obliga-
tions (including certificates of deposit, time deposits, demand deposits and
bankers' acceptances) of banks with securities
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outstanding that are rated Prime-1, Aa or better by Moody's, A-1, AA or better
by S&P, D-1, AA or better by Duff & Phelps or F1, AA or better by Fitch; and
obligations issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities with remaining maturities not exceeding 18 months.
The Portfolio may invest in debt securities rated BBB or higher by S&P or Baa
or higher by Moody's or, if not so rated, of equivalent credit quality as de-
termined by the Adviser. Securities rated BBB by S&P, Duff & Phelps or Fitch
or Baa by Moody's are considered to have speculative characteristics. Sus-
tained periods of deteriorating economic conditions or rising interest rates
are more likely to lead to a weakening in the issuer's capacity to pay inter-
est and repay principal than in the case of higher-rated securities. The Port-
folio expects that it will not retain a debt security which is downgraded be-
low BBB or Baa or, if unrated, determined by the Adviser to have undergone
similar credit quality deterioration, subsequent to purchase by the Portfolio.
The Portfolio may also engage in the following investment practices to the ex-
tent indicated: (i) invest up to 10% of its net assets in rights or warrants;
(ii) invest up to 15% of its net assets in the convertible securities of com-
panies whose common stocks are eligible for purchase by the Portfolio; (iii)
lend portfolio securities on a short or long term basis equal in value to not
more than 25% of total assets; (iv) enter into repurchase agreements of up to
seven days' duration; (v) enter into forward commitment transactions as long
as the Portfolio's aggregate commitments under such transactions are not more
than 30% of the Portfolio's total assets; (vi) enter into standby commitment
agreements; (vii) make short sales of securities or maintain a short position
but only if at all times when a short position is open not more than 25% of
the Portfolio's net assets (taken at market value) is held as collateral or
placed in a segregated account for such sales; and (viii) invest in illiquid
securities unless, as a result, more than 15% of its net assets would be so
invested.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
Convertible Securities. Prior to conversion, convertible securities have the
same general characteristics as non-convertible debt securities, which provide
a stable stream of income with generally higher yields than those of equity
securities of the same or similar issuers. The price of a convertible security
will normally vary with changes in the price of the underlying stock, although
the higher yield tends to make the convertible security less volatile than the
underlying common stock. As with debt securities, the market value of convert-
ible securities tends to decrease as interest rates rise and increase as in-
terest rates decline. While convertible securities generally offer lower in-
terest or dividend yields than non-convertible debt securities of similar
quality, they offer investors the potential to benefit from increases in the
market price of the underlying common stock. Convertible debt securities that
are rated Baa or lower by Moody's or BBB or lower by S&P, Duff & Phelps or
Fitch and comparable unrated securities as determined by the Adviser may share
some or all of the risks of non-convertible debt securities with those rat-
ings.
Rights and Warrants. The Portfolio will invest in rights or warrants only if
the under-
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lying equity securities are themselves deemed appropriate by the Adviser for
inclusion in the Portfolio's portfolio. Rights and warrants entitle the holder
to buy equity securities at a specific price for a specific period of time.
Rights are similar to warrants except that they have a substantially shorter
duration. Rights and warrants may be considered more speculative than certain
other types of investments in that they do not entitle a holder to dividends or
voting rights with respect to the underlying securities nor do they represent
any rights in the assets of the issuing company. The value of a right or war-
rant does not necessarily change with the value of the underlying security, al-
though the value of a right or warrant may decline because of a decrease in the
value of the underlying security, the passage of time or a change in perception
as to the potential of the underlying security, or any combination thereof. If
the market price of the underlying security is below the exercise price set
forth in the warrant on the expiration date, the warrant will expire worthless.
Moreover, a right or warrant ceases to have value if it is not exercised prior
to the expiration date.
Short Sales. A short sale is a transaction in which the Portfolio sells a secu-
rity it does not own but has borrowed in anticipation that the market price of
that security will decline. When the Portfolio makes a short sale of a security
that it does not own, it must borrow from a broker-dealer the security sold
short and deliver the security to the broker-dealer upon conclusion of the
short sale. The Portfolio may be required to pay a fee to borrow particular se-
curities and is often obligated to pay over any payments received on such bor-
rowed securities. The Portfolio's obligation to replace the borrowed security
will be secured by collateral deposited with a broker-dealer qualified as a
custodian and will consist of cash or securities. Depending on the arrangements
the Portfolio makes with the broker-dealer from which it borrowed the security
regarding remittance of any payments received by the Portfolio on such securi-
ty, the Portfolio may not receive any payments (including interest) on its col-
lateral deposited with the broker-dealer.
If the price of the security sold short increases between the time of the short
sale and the time the Portfolio replaces the borrowed security, the Portfolio
will incur a loss; conversely, if the price declines, the Portfolio will real-
ize a short-term capital gain. Any gain will be decreased, and any loss in-
creased, by the transaction costs described above. Although the Portfolio's
gain is limited to the price at which it sold the security short, its potential
loss is theoretically unlimited. In order to defer realization of gain or loss
for U.S. federal income tax purposes, the Portfolio may also make short sales
"against the box." In this type of short sale, at the time of the sale, the
Portfolio owns or has the immediate and unconditional right to acquire at no
additional cost the identical security.
The Portfolio may not make a short sale unless at all times when a short posi-
tion is open not more than 25% of the Portfolio's net assets (taken at market
value) is held as collateral for such sales at any one time.
CERTAIN RISK CONSIDERATIONS
Risk Factors Associated with the Real Estate Industry. Although the Portfolio
does not
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invest directly in real estate, it does invest primarily in Real Estate Equity
Securities and does have a policy of concentration of its investments in the
real estate industry. Therefore, an investment in the Portfolio is subject to
certain risks associated with the direct ownership of real estate and with the
real estate industry in general. These risks include, among others: possible
declines in the value of real estate; risks related to general and local eco-
nomic conditions; possible lack of availability of mortgage funds; overbuild-
ing; extended vacancies of properties; increases in competition, property taxes
and operating expenses; changes in zoning laws; costs resulting from the clean-
up of, and liability to third parties for damages resulting from, environmental
problems; casualty or condemnation losses; uninsured damages from floods,
earthquakes or other natural disasters; limitations on and variations in rents;
and changes in interest rates. To the extent that assets underlying the Portfo-
lio's investments are concentrated geographically, by property type or in cer-
tain other respects, the Portfolio may be subject to certain of the foregoing
risks to greater extent.
In addition, if the Portfolio receives rental income or income from the dispo-
sition of real property acquired as a result of a default on securities the
Portfolio owns, the receipt of such income may adversely affect the Portfolio's
ability to retain its tax status as a regulated investment company. See "Divi-
dends, Distributions and Taxes." Investments by the Portfolio in securities of
companies providing mortgage servicing will be subject to the risks associated
with refinancings and their impact on servicing rights.
REITS. Investing in REITs involves certain unique risks in addition to those
risks associated with investing in the real estate industry in general. Equity
REITs may be affected by changes in the value of the underlying property owned
by the REITs, while mortgage REITs may be affected by the quality of any credit
extended. REITs may be affected by the quality of any credit extended. REITs
are dependent upon management skills, are not diversified, are subject to heavy
cash flow dependency, default by borrowers and self-liquidation. REITs are also
subject to the possibilities of failing to qualify for tax free pass-through of
income under the Code and failing to maintain their exemptions from registra-
tion under the Act.
REITs (especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate obliga-
tions can be expected to rise. Conversely, when interest rates rise, the value
of a REIT's investment in fixed rate obligations can be expected to decline. In
contrast, as interest rates on adjustable rate mortgage loans are reset period-
ically, yields on a REIT's investments in such loans will gradually align them-
selves to reflect changes in market interest rates, causing the value of such
investments to fluctuate less dramatically in response to interest rate fluctu-
ations than would investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated with investing in
small capitalization companies. REITs may have limited financial resources, may
trade less frequently and in a limited volume and may be subject to more abrupt
or erratic price movements than larger company securities. Historically, small
capitalization stocks, such as
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REITs, have been more volatile in price than the larger capitalization stocks
included in the S&P Index of 500 Common Stocks.
Mortgage-Backed Securities. As discussed above, investing in Mortgage-Backed
Securities involves certain unique risks in addition to those risks associated
with investment in the real estate industry in general. These risks include the
failure of a counterparty to meet its commitments, adverse interest rate
changes and the effects of prepayments on mortgage cash flows. When interest
rates decline, the value of an investment in fixed rate obligations can be ex-
pected to rise. Conversely, when interest rates rise, the value of an invest-
ment in fixed rate obligations can be expected to decline. In contrast, as in-
terest rates on adjustable rate mortgage loans are reset periodically, yields
on investments in such loans will gradually align themselves to reflect changes
in market interest rates, causing the value of such investments to fluctuate
less dramatically in response to interest rate fluctuations than would invest-
ments in fixed rate obligations.
Further, the yield characteristics of Mortgage-Backed Securities, such as those
in which the Portfolio may invest, differ from those of traditional fixed in-
come securities. The major differences typically include more frequent interest
and principal payments (usually monthly), the adjustability of interest rates,
and the possibility that prepayments of principal may be made substantially
earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a va-
riety of economic, geographic, social and other factors, and cannot be pre-
dicted with certainty. Both adjustable rate mortgage loans and fixed rate mort-
gage loans may be subject to a greater rate of principal prepayments in a de-
clining interest rate environment and to a lesser rate of principal prepayments
in an increasing interest rate environment. Early payment associated with Mort-
gage-Backed Securities causes these securities to experience significantly
greater price and yield volatility than that experienced by traditional fixed-
income securities. Under certain interest rate and prepayment rate scenarios,
the Portfolio may fail to recoup fully its investment in Mortgage-Backed Secu-
rities notwithstanding any direct or indirect governmental or agency guarantee.
When the Portfolio reinvests amounts representing payments and unscheduled pre-
payments of principal, it may receive a rate of interest that is lower than the
rate on existing adjustable rate mortgage pass-through securities. Thus, Mort-
gage-Backed Securities, and adjustable rate mortgage pass-through securities in
particular, may be less effective than other types of U.S. Government securi-
ties as a means of "locking in" interest rates.
Securities Ratings. The ratings of securities by S&P, Moody's, Duff & Phelps
and Fitch are a generally accepted barometer of credit risk. They are, however,
subject to certain limitations from an investor's standpoint. The rating of an
issuer is heavily weighted by past developments and does not necessarily re-
flect probable future conditions. There is frequently a lag between the time a
rating is assigned and the time it is updated. In addition, there may be vary-
ing degrees of difference in credit risk of securities within each rating cate-
gory. See Appendix A.
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OTHER INVESTMENT POLICIES AND TECHNIQUES
Except as otherwise noted below, the following description of other investment
policies is applicable to all of the Fund's Portfolios:
REPURCHASE AGREEMENTS
Any Portfolio, except the Technology Portfolio and the Quasar Portfolio may
enter into agreements pertaining to U.S. Government Securities or, in the case
of the Growth Portfolio, pertaining to the types of securities in which it in-
vests, with member banks of the Federal Reserve System or "primary dealers"
(as designated by the Federal Reserve Bank of New York) and, in the case of
the Money Market Portfolio, with State Street Bank and Trust Company, the
Fund's Custodian, in such securities. The Real Estate Investment Portfolio may
enter into repurchase agreements pertaining to U.S. Government Securities with
member banks of the Federal Reserve System or primary dealers. There is no
percentage restriction on the ability of the Worldwide Privatization Portfolio
and the Real Estate Investment Portfolio to enter into repurchase agreements.
The Real Estate Investment Portfolio currently intends to enter into repur-
chase agreements only with the Fund's Custodian and such primary dealers.
A repurchase agreement arises when a buyer purchases a security and simultane-
ously agrees to resell it to the vendor at an agreed-upon future date, nor-
mally one day or a few days later. The resale price is greater than the pur-
chase price, reflecting an agreed-upon interest rate. Such agreements permit
the Portfolio to keep all of its assets at work while retaining "overnight"
flexibility in pursuit of investment of a longer-term nature. If a vendor de-
faults on its repurchase obligation, the Portfolio would suffer a loss to the
extent that the proceeds from the sale of the collateral were less than the
repurchase price. If a vendor goes bankrupt, the Portfolio might be delayed
in, or prevented from, selling the collateral for its benefit. The Fund's
Board of Directors has established procedures, which are periodically reviewed
by the Board, pursuant to which the Adviser monitors the creditworthiness of
the vendors with which the Portfolios enter into repurchase agreement transac-
tions.
WRITING COVERED CALL OPTIONS
The Premier Growth Portfolio, the Growth and Income Portfolio and the U.S.
Government/High Grade Securities Portfolio may each write covered call options
listed on one or more national securities exchanges. A call option gives the
purchaser of the option, upon payment of a premium to the writer of the op-
tion, the right to purchase from the writer of the option a specified number
of shares of a specified security on or before a fixed date, at a predeter-
mined price. A Portfolio permitted to write call options may not do so unless
the Portfolio at all times during the option period owns the optioned securi-
ties, or securities convertible or carrying rights to acquire the optioned se-
curities at no additional cost. None of the above listed Portfolios may write
covered call options in excess of 25% of such Portfolio's assets.
A Portfolio may terminate its obligation to the holder of an option written by
the Portfolio through a "closing purchase transaction." The Portfolio may not,
however, effect a closing purchase transaction with
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respect to such an option after it has been notified of the exercise of such
option. The Portfolio realizes a profit or loss from a closing purchase trans-
action if the cost of the transaction is more or less than the premium re-
ceived by the Portfolio from writing the option. Although the writing of cov-
ered call options only on national securities exchanges increases the likeli-
hood of a Portfolio being able to make closing purchase transactions, there is
no assurance that a Portfolio will be able to effect closing purchase transac-
tions at any particular time or at an acceptable price. The writing of covered
call options could result in increases in the portfolio turnover of a Portfo-
lio, especially during periods when market prices of the underlying securities
appreciate.
OPTIONS
In an effort to increase current income and to reduce fluctuations in net as-
set value, the Worldwide Privatization Portfolio intends to write covered put
and call options and purchase put and call options on securities of the types
in which it is permitted to invest that are traded on U.S. and foreign securi-
ties exchanges. The Portfolio also intends to write call options for cross-
hedging purposes. There are no specific limitations on the Portfolio's writing
and purchasing of options.
The purchaser of an option, upon payment of a premium, obtains, in the case of
a put option the right to deliver to the writer of the option, and in the case
of a call option, the right to call upon the writer to deliver, a specified
amount of a security on or before a fixed date at a predetermined price. A
call option written by the Portfolio is "covered" if the Portfolio (i) owns
the underlying security covered by the call (ii) has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by the Fund's Cus-
todian) upon conversion or exchange of other portfolio securities, or (iii)
holds a call on the same security in the same principal amount as the call
written where the exercise price of the call held (i) is equal to or less than
the exercise price of the call written or (ii) is greater than the exercise
price of the call written if the difference is maintained by the Portfolio in
cash and liquid high-grade debt securities in a segregated account with the
Fund's Custodian. A put option written by the Portfolio is "covered" if the
Portfolio maintains liquid assets with a value equal to the exercise price in
a segregated account with the Fund's Custodian, or else holds a put on the
same security in the same principal amount as the put written where the exer-
cise price of the put held is equal to or greater than the exercise price of
the put written. The premium paid by the purchaser of an option will reflect,
among other things, the relationship of the exercise price to the market price
and volatility of the underlying security, the remaining term of the option,
supply and demand and interest rates.
A call option is written for cross-hedging purposes if the Portfolio does not
own the underlying security, but seeks to provide a hedge against a decline in
value in another security which the Portfolio owns or has the right to ac-
quire. In such circumstances, the Portfolio collateralizes its obligation un-
der the option (which is not covered) by maintaining in a segregated account
with the Fund's Custodian liquid assets in an amount
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not less than the market value of the underlying security, marked to market
daily.
In purchasing a call option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security in-
creased by an amount in excess of the premium paid. It would realize a loss if
the price of the underlying security declined or remained the same or did not
increase during the period by more than the amount of the premium. In purchas-
ing a put option, the Portfolio would be in a position to realize a gain if,
during the option period, the price of the underlying security declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the underlying security increased or remained the same or did not decrease
during that period by more than the amount of the premium. If a put or call
option purchased by the Portfolio were permitted to expire without being sold
or exercised, its premium would be lost by the Portfolio.
The risk involved in writing a put option is that there could be a decrease in
the market value of the underlying security. If this occurred, the option
could be exercised and the underlying security would then be sold by the op-
tion holder to the Portfolio at a higher price than its current market value.
The risk involved in writing a call option is that there could be an increase
in the market value of the underlying security. If this occurred, the option
could be exercised and the underlying security would then be sold by the Port-
folio at a lower price than its current market value. These risks could be re-
duced by entering into a closing transaction. See Appendix C to the Statement
of Additional Information. The Portfolio retains the premium received from
writing a put or call option whether or not the option is exercised.
The Portfolio may purchase or write options on securities of the types in
which it is permitted to invest in privately negotiated transactions. The
Portfolio will effect such transactions only with investment dealers and other
financial institutions (such as commercial banks or savings and loan institu-
tions) deemed creditworthy by the Adviser, and the Adviser has adopted proce-
dures for monitoring the creditworthiness of such entities. Options purchased
or written by the Portfolio in negotiated transactions are illiquid and it may
not be possible for the Portfolio to effect a closing transaction at a time
when the Adviser believes it would be advantageous to do so. See "Illiquid Se-
curities." See Appendix C to the Statement of Additional Information for a
further discussion of the use, risks and costs of option trading.
The Worldwide Privatization Portfolio may purchase and sell exchange-traded
options on any securities index composed of the types of securities in which
it may invest. An option on a securities index is similar to an option on a
security except that, rather than the right to take or make delivery of a se-
curity at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the chosen index is greater than (in the case of a call) or
less than (in the case of a put) the exercise price of the option. There are
no specific limitations on the Portfolio's purchasing and selling of options
on securities indices.
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<PAGE>
LOANS OF PORTFOLIO SECURITIES
Each Portfolio of the Fund, except the Money Market Portfolio and the Quasar
Portfolio, may make secured loans of its portfolio securities to brokers,
dealers and financial institutions provided that cash, U.S. Government securi-
ties, other liquid high-quality debt securities or bank letters of credit
equal to at least 100% of the market value of the securities loaned is depos-
ited and maintained by the borrower with the Portfolio.
The risk in lending portfolio securities, as with other extensions of credit,
consists of the possible loss of rights in the collateral should the borrower
fail financially. In determining whether to lend securities to a particular
borrower, the Adviser will consider all relevant facts and circumstances, in-
cluding the creditworthiness of the borrower. While securities are on loan,
the borrower will pay the Portfolio any income earned thereon and the Portfo-
lio may invest any cash collateral in portfolio securities, thereby earning
additional income, or receive an agreed upon amount of income from a borrower
who has delivered equivalent collateral. Each Portfolio will have the right to
regain record ownership of loaned securities to exercise beneficial rights
such as voting rights, subscription rights and rights to dividends, interest
or other distributions. Each Portfolio may pay reasonable finders', adminis-
trative and custodial fees in connection with a loan. No more than 30% of the
value of the assets (25% in the case of the Worldwide Privatization Portfolio
and the Real Estate Investment Portfolio) of each Portfolio may be loaned at
any time, nor will a Portfolio lend its portfolio securities to any officer,
director, employee or affiliate of either the Fund or the Adviser.
FOREIGN SECURITIES
For a description of the investment policies of the Worldwide Privatization
Portfolio and the Quasar Portfolio with respect to foreign securities, see
above. Each of the other Portfolios, except the U.S. Government/High Grade Se-
curities Portfolio and the Real Estate Investment Portfolio, may invest in
listed and unlisted foreign securities subject to the limitation that the In-
ternational Portfolio may invest only in the securities of foreign issuers or
U.S. companies having their principal activities and interests outside the
United States. The other Portfolios of the Fund may invest in foreign securi-
ties without limitation, although the Premier Growth Portfolio intends to in-
vest at least 85% of the value of its total assets in the equity securities of
American companies, the Growth and Income Portfolio intends to restrict its
investment in foreign securities to issues of high quality and the Money Mar-
ket Portfolio is limited to investing in those foreign securities described
above in "Investment Objectives and Policies -- Money Market Portfolio." The
Technology Portfolio will not purchase a foreign security if such purchase at
the time thereof would cause 10% or more of the value of that Portfolio's to-
tal assets to be invested in foreign securities. The Portfolios may convert
U.S. Dollars into foreign currency, but only to effect securities transactions
on a foreign securities exchange and not to hold such currency as an invest-
ment. Each Portfolio, except the Technology Portfolio and the U.S. Government/
High Grade Securities Portfolio, may enter into forward foreign currency ex-
change con-
43
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tracts in order to protect against uncertainty in the level of future foreign
exchange rates.
To the extent the Worldwide Privatization Portfolio invests in foreign securi-
ties, consideration is given to certain factors comprising both risk and op-
portunity. The values of foreign securities investments are affected by
changes in currency rates or exchange control regulations, application of for-
eign tax laws, including withholding taxes, changes in governmental adminis-
tration or economic, taxation or monetary policy (in the United States and
abroad) or changed circumstances in dealings between nations. Currency ex-
change rate movements will increase or reduce the U.S. Dollar value of the
Portfolio's net assets and income attributable to foreign securities. Costs
are incurred in connection with conversions between various currencies held by
the Portfolio. In addition, there may be substantially less publicly available
information about foreign issuers than about domestic issuers, and foreign is-
suers may not be subject to accounting, auditing and financial reporting stan-
dards and requirements comparable to those of domestic issuers. Foreign is-
suers are subject to accounting, auditing and financial standards and require-
ments that differ, in some cases significantly, from those applicable to U.S.
issuers. In particular, the assets and profits appearing on the financial
statements of a foreign issuer may not reflect its financial position or re-
sults of operations in the way they would be reflected had the financial
statements been prepared in accordance with U.S. generally accepted accounting
principles. In addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules in some of the countries in which the
Portfolio will invest require, for both tax and accounting purposes, that cer-
tain assets and liabilities be restated on the issuer's balance sheet in order
to express items in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits. Consequently, financial
data may be materially affected by restatements for inflation and may not ac-
curately reflect the real condition of those issuers and securities markets.
Securities of some foreign issuers are less liquid and more volatile than se-
curities of comparable domestic issuers, and foreign brokerage commissions are
generally higher than in the United States. Foreign securities markets may
also be less liquid, more volatile, and less subject to governmental supervi-
sion than in the United States. Investments in foreign countries could be af-
fected by other factors not present in the United States, including expropria-
tion, confiscatory taxation, lack of uniform accounting and auditing standards
and potential difficulties in enforcing contractual obligations and could be
subject to extended settlement periods.
Investment in Japanese Issuers. Investment in securities of Japanese issuers
involves certain considerations not present with investment in securities of
U.S. issuers. As with any investment not denominated in the U.S. Dollar, the
U.S. Dollar value of each Portfolio's investments denominated in the Japanese
Yen will fluctuate with Yen-Dollar exchange rate movements. Between 1985 and
1995, the Japanese Yen generally appreciated against the U.S. Dollar but has
since fallen from its post-World War II high (in 1995). Since its peak of
April 19, 1995, the Japanese Yen has decreased in value against the
44
<PAGE>
U.S. Dollar. On December 31, 1997, the exchange rate was 130.57 Yen per Dollar.
Japan's largest stock exchange is the Tokyo Stock Exchange, the First Section
of which is reserved for larger, established companies. As measured by the
TOPIX, a capitalization-weighted composite index of all common stocks listed in
the First Section, the performance of the First Section reached a peak in 1989.
Thereafter, the TOPIX declined approximately 50% through the end of 1993. In
1994, the TOPIX closed at 1,559.09, up approximately 8% from the end of 1993;
in 1995, the TOPIX closed at 1,577.70, up approximately 1% from the end of
1994; and in 1996, the TOPIX closed at 1,470.94, down approximately 7% from the
end of 1995. On December 31, 1997, the TOPIX closed at 1,175.03, down approxi-
mately 20% from the end of 1996. Certain valuation measures, such as price-to-
book value and price-to-cash flow ratios, indicate that the Japanese stock mar-
ket is near its lowest level in the last twenty years relative to other world
markets.
In recent years, Japan has consistently recorded large current account trade
surpluses with the U.S. that have caused difficulties in the relations between
the two countries. On October 1, 1994, the U.S. and Japan reached an agreement
that may lead to more open Japanese markets with respect to trade in certain
goods and services. In June, 1995, the two countries agreed in principle to in-
crease Japanese imports of American automobiles and automotive parts. Neverthe-
less, it is expected that the continuing friction between the U.S. and Japan
with respect to trade issues will thus continue for the foreseeable future.
Each Portfolio's investments in Japanese issuers also will be subject to uncer-
tainty resulting from the instability of recent Japanese ruling coalitions.
From 1955 to 1993, Japan's government was controlled by a single political par-
ty. Between August 1993, and October 1996 Japan was ruled by a series of four
coalition governments. As a result of a general election on October 20, 1996,
however, Japan returned to a single party government led by Prime Minister
Ryutaro Hashimoto. While Mr. Hashimoto's party does not control a majority of
the seats in the parliament, it is only three seats short of the 251 seats re-
quired to attain a majority in the House of Representatives (down from a 12-
seat shortfall just after the October 1996 election). For the past several
years, Japan's banking industry has been weakened by a significant amount of
problem loans. Japan's banks also have significant exposure to the current fi-
nancial turmoil in other Asian markets. On December 17, 1997 the Japanese gov-
ernment proposed to strengthen Japan's banks by means of an infusion of public
funds and other measures. It is unclear whether these proposals, which are un-
der consideration by Japan's parliament, would, if implemented, achieve their
intended effect. For further information regarding Japan, see the Fund's State-
ment of Additional Information.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Forward commitments for the purchase or sale of securities may include pur-
chases on a "when-issued" basis or purchases or sales on a "delayed delivery"
basis. In some cases, a forward commitment may be conditioned upon the occur-
rence of a subsequent event, such as approval and consum-
45
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mation of a debt restructuring (i.e., a "when, as and if issued" trade).
When forward commitment transactions are negotiated, the price, which generally
is expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally
within two months after the transaction, delayed settlements beyond two months
may be negotiated. Securities purchased or sold under a forward commitment are
subject to market fluctuation, and no interest accrues to the purchaser prior
to the settlement date. At the time a Portfolio enters into a forward commit-
ment, it will record the transaction and thereafter reflect the value of the
security purchased or, if a sale, the proceeds to be received, in determining
its net asset value. Any unrealized appreciation or depreciation reflected in
such valuation of a "when, as and if issued" security would be cancelled in the
event that the required condition did not occur and the trade was cancelled.
The use of forward commitments enables a Portfolio to protect against antici-
pated changes in interest rates and prices. However, if the Adviser were to
forecast incorrectly the direction of interest rate movements, the Portfolio
might be required to complete such when-issued or forward transactions at
prices less favorable than current market values. No forward commitments will
be made by the U.S. Government/High Grade Securities Portfolio, the Worldwide
Privatization Portfolio and the Real Estate Investment Portfolio if, as a re-
sult, such Portfolio's aggregate commitments under such transactions would be
more than 30% of the then current value of the Portfolio's total assets.
A Portfolio's right to receive or deliver a security under a forward commitment
may be sold prior to the settlement date, but the Portfolio will enter into
forward commitments only with the intention of actually receiving or delivering
the securities, as the case may be. If the Portfolio, however, chooses to dis-
pose of the right to receive or deliver a security subject to a forward commit-
ment prior to the settlement date of the transaction, it may incur a gain or
loss. In the event the other party to a forward commitment transaction were to
default, the Portfolio might lose the opportunity to invest money at favorable
rates or to dispose of securities at favorable prices.
STANDBY COMMITMENT AGREEMENTS
The Worldwide Privatization Portfolio and the Real Estate Investment Portfolio
may from time to time enter into standby commitment agreements. Such agreements
commit a Portfolio, for a stated period of time, to purchase a stated amount of
a security which may be issued and sold to the Portfolio at the option of the
issuer. The price and coupon of the security are fixed at the time of the com-
mitment. At the time of entering into the agreement the Portfolio is paid a
commitment fee, regardless of whether or not the security ultimately is issued,
which is typically approximately 0.5% of the aggregate purchase price of the
security which the Portfolio has committed to purchase. Each Portfolio will en-
ter into such agreements only for the purpose of investing in the security un-
derlying the commitment at a yield and price which are considered advantageous
to the Portfolio and which are unavailable on a firm commitment basis. The
Worldwide Privatization Portfolio will not enter into a standby com-
46
<PAGE>
mitment with a remaining term in excess of 45 days. Each Portfolio limits its
investment in such commitments so that the aggregate purchase price of the se-
curities subject to the commitments will not exceed 50%, in the case of the
Worldwide Privatization Portfolio, and 25% in the case of the Real Estate In-
vestment Portfolio, of their respective assets taken at the time of acquisition
of such commitment. The Portfolios at all times maintain a segregated account
with the Fund's custodian of liquid assets in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, a Portfolio will bear
the risk of capital loss in the event the value of the security declines and
may not benefit from an appreciation in the value of the security during the
commitment period if the issuer decides not to issue and sell the security to
the Portfolio.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued and the value of the security will thereaf-
ter be reflected in the calculation of the Portfolio's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be re-
corded as income on the expiration date of the standby commitment.
HEDGING TECHNIQUES
The following hedging techniques are utilized by the Worldwide Privatization
Portfolio.
Cross Hedges. The attractive returns currently available from foreign currency
denominated debt instruments can be adversely affected by changes in exchange
rates. The Adviser believes that the use of foreign currency hedging tech-
niques, including "cross-hedges" (see "Forward Foreign Currency Exchange Con-
tracts," below), can help protect against declines in the U.S. Dollar value of
income available for distribution to shareholders and declines in the net asset
value of the Portfolio's shares resulting from adverse changes in currency ex-
change rates. For example, the return available from securities denominated in
a particular foreign currency would diminish in the event the value of the U.S.
Dollar increased against such currency. Such a decline could be partially or
completely offset by an increase in value of a cross-hedge involving a forward
exchange contract to sell a different foreign currency, where such contract is
available on terms more advantageous to the Portfolio than a contract to sell
the currency in which the position being hedged is denominated. It is the Ad-
viser's belief that cross-hedges can therefore provide significant protection
of net asset value in the event of a general rise in the U.S. Dollar against
foreign currencies. However, a cross-hedge cannot protect against exchange rate
risks perfectly, and if the Adviser is incorrect in its judgment of future ex-
change rate relationships, a Portfolio could be in a less advantageous position
than if such a hedge had not been established.
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<PAGE>
Indexed Debt Securities. The Portfolio may invest without limitation in debt
instruments that are indexed to certain specific foreign currency exchange
rates. The terms of such securities provide that their principal amount is ad-
justed upwards or downwards (but not below zero) at maturity to reflect
changes in the exchange rate between two currencies while the obligation is
outstanding. The Portfolio purchases such debt instruments with the currency
in which they are denominated and, at maturity, receives interest and princi-
pal payments thereon in that currency, but the amount of principal payable by
the issuer at maturity will change in proportion to the change (if any) in the
exchange rate between the two specified currencies between the date the in-
strument is issued and the date the instrument matures. While such securities
entail the risk of loss of principal, the potential for realizing gains as a
result of changes in foreign currency exchange rates enables the Portfolio to
hedge (or cross-hedge) against a decline in the U.S. Dollar value of invest-
ments denominated in foreign currencies while providing an attractive money
market rate of return. The Portfolio purchases such debt instruments for hedg-
ing purposes only, not for speculation. The staff of the Securities and Ex-
change Commission (the "Commission") is currently considering whether the
Portfolio's purchase of this type of security would result in the issuance of
a "senior security" within the meaning of the Act. The Portfolio believes that
such investments do not involve the creation of such a senior security, but
nevertheless the Portfolio has undertaken, pending the resolution of this is-
sue by the staff, to establish a segregated account with respect to its in-
vestments in this type of security and to maintain in such account cash not
available for investment or U.S. Government Securities or other liquid high
quality debt securities having a value equal to the aggregate principal amount
of outstanding commercial paper of this type.
Futures Contracts and Options on Futures Contracts. The Portfolio may enter
into contracts for the purchase or sale for future delivery of fixed-income
securities or foreign currencies, or contracts based on financial indices in-
cluding any index of U.S. Government Securities, foreign government securities
or corporate debt securities and may purchase and write put and call options
to buy or sell futures contracts ("options on futures contracts"). A "sale" of
a futures contract means the acquisition of a contractual obligation by the
Portfolio to deliver the securities or foreign currencies called for by the
contract at a specified price on a specified date. A "purchase" of a futures
contract means the incurring of a contractual obligation to acquire the secu-
rities or foreign currencies called for by the contract at a specified price
on a specified date. The specific securities delivered or taken, respectively,
at settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt of
securities, in most instances the contracts are closed out before the settle-
ment date without the making or taking of delivery of the securities. Closing
out of a futures contract is effected by entering into an offsetting purchase
or sale transaction.
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The purchaser of a futures contract on an index agrees to take or make deliv-
ery of an amount of cash equal to the difference between a specified dollar
multiple of the value of the index on the expiration date of the contract and
the price at which the contract was originally struck.
Unlike a futures contract, which requires the parties to buy and sell a secu-
rity on a set date, an option on a futures contract entitles its holder to de-
cide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is lost. Since the value of the option is fixed at the point of sale, there
are no daily payments of cash in the nature of "variation" or "maintenance"
margin payments to reflect the change in the value of the underlying contract
as there are by a purchaser or seller of a futures contract. The value of the
option does not change and is reflected in the net asset value of the
Portfolio.
The ability to establish and close out positions in options on futures will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or be maintained.
Options on futures contracts to be written or purchased by the Portfolio will
be traded on U.S. or foreign exchanges or over-the-counter.
These investment techniques will be used only to hedge against anticipated fu-
ture changes in market conditions and interest or exchange rates which other-
wise might either adversely affect the value of the Portfolio's securities or
adversely affect the prices of securities which the Portfolio intends to pur-
chase at a later date. See Appendix B to the Fund's Statement of Additional
Information for further discussion of the use, risks and costs of futures con-
tracts and options on futures contracts.
The Portfolio will not (i) enter into any futures contracts or options on
futures contracts if immediately thereafter the aggregate of margin deposits
on all the outstanding futures contracts of the Portfolio and premiums paid on
outstanding options on futures contracts would exceed 5% of the market value
of the total assets of the Portfolio or (ii) enter into any futures contracts
or options on futures contracts if the aggregate of the market value of the
outstanding futures contracts of the Portfolio and the market value of the
currencies and futures contracts subject to outstanding options written by the
Portfolio would exceed 50% of the market value of the total assets of the
Portfolio.
Options on Foreign Currencies. The Portfolio may purchase and write put and
call options on foreign currencies for the purpose of protecting against de-
clines in the U.S. Dollar value of foreign currency-denominated portfolio se-
curities and against increases in the U.S. Dollar cost of such securities to
be acquired. As in the case of other kinds of options, however, the writing of
an option on a foreign currency constitutes only a partial hedge, up to the
amount of the premium received, and a Portfolio could be required to purchase
or sell foreign currencies at disadvantageous exchange rates, thereby incur-
ring losses. The purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the event
of rate movements
49
<PAGE>
adverse to the Portfolio's position, it may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by the Portfolio are traded on U.S. and foreign exchanges
or over-the-counter. There is no specific percentage limitation on the Portfo-
lio's investments in options or on foreign currencies. See the Fund's State-
ment of Additional Information for further discussion of the use, risks and
costs of options on foreign currencies.
Forward Foreign Currency Exchange Contracts. The Portfolio may purchase or
sell forward foreign currency exchange contracts ("forward contracts") to at-
tempt to minimize the risk to the Portfolio from adverse changes in the rela-
tionship between the U.S. Dollar and foreign currencies. A forward contract is
an obligation to purchase or sell a specific currency for an agreed price at a
future date which is individually negotiated and privately traded by currency
traders and their customers. Forward contracts reduce the potential gain from
a positive change in the relationship between the U.S. Dollar and other cur-
rencies. Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
The Fund's Custodian will place liquid assets in a segregated account having a
value equal to the aggregate amount of each Portfolio's commitments under for-
ward contracts entered into with respect to position hedges and cross-hedges.
Interest Rate Transactions. In order to attempt to protect the value of the
Portfolio's investments from interest rate or currency cross-rate fluctua-
tions, the Portfolio may enter into various hedging transactions, such as in-
terest rate swaps and may purchase or sell (i.e. write) interest rate caps and
floors. The Portfolio expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its port-
folio. The Portfolio may also enter into these transactions to protect against
any increase in the price of securities the Portfolio anticipates purchasing
at a later date. The Portfolio does not intend to use these transactions in a
speculative manner. Interest rate swaps involve the exchange by the Portfolio
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments. Interest
rate swaps are entered into on a net basis, i.e., the two payment streams are
netted out, with the Portfolio receiving or paying, as the case may be, only
the net amount of the two payments. The purchase of an interest rate cap enti-
tles the purchaser, to the extent that a specified index exceeds a predeter-
mined interest rate, to receive payments on a contractually-based principal
amount from the party selling such interest rate cap. The purchase of an in-
terest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate to receive payments on a contractu-
ally-based principal amount from the party selling such interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether the Portfolio is
hedging its assets or its liabilities. The net amount of the excess, if any,
of the Portfolio's obligations over its entitlements with respect to each in-
terest rate swap will be accrued on a daily basis and an amount of liquid as-
sets having an
50
<PAGE>
aggregate net asset value at least equal to the accrued excess will be main-
tained in a segregated account by the Fund's Custodian. If the Portfolio en-
ters into an interest rate swap on other than a net basis, the Portfolio will
maintain a segregated account with the Fund's Custodian in the full amount ac-
crued on a daily basis of the Portfolio's obligations with respect to the
swap. The Portfolio will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims-paying ability of
the other party thereto is rated in the highest rating category of at least
one nationally recognized statistical rating organization at the time of en-
tering into the transaction. The Adviser monitors the creditworthiness of
counter parties to its interest rate swap, cap and floor transactions on an
ongoing basis. If there is a default by the other party to such a transaction,
the Portfolio has contractual remedies. The swap market has grown substan-
tially in recent years with a large number of banks and investment banking
firms acting both as principals and agents utilizing standardized swap docu-
mentation. The Adviser has determined that, as a result, the swap market has
become relatively liquid. Caps and floors are more recent innovations for
which standardized documentation has not yet been developed and, accordingly,
they are less liquid than swaps. To the extent that the Portfolio sells (i.e.,
writes) caps and floors, it will maintain in a segregated account with the
Fund's Custodian liquid assets having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Portfolio's obliga-
tions with respect to the caps or floors.
General. The successful use of the foregoing investment practices draws upon
the Adviser's special skills and experience with respect to such instruments
and usually depends on the Adviser's ability to forecast interest rate and
currency exchange rate movements correctly. Should interest or exchange rates
move in an unexpected manner, the Portfolio may not achieve the anticipated
benefits of futures contracts, options, interest rate transactions or forward
contracts or may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded futures contracts
and options on futures contracts, there are no daily price fluctuation limits
with respect to options on currencies and forward contracts, and adverse mar-
ket movements could therefore continue to an unlimited extent over a period of
time. In addition, the correlation between movements in the price of the secu-
rities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.
The Portfolio's ability to dispose of its positions in futures contracts, op-
tions, interest rate transactions and forward contracts will depend on the
availability of liquid markets in such instruments. Markets in options and
futures with respect to a number of fixed-income securities and currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of futures contracts, options
and forward contracts. If a secondary market does not exist with respect to an
option purchased or written by the Portfolio over-the-counter, it might not be
possible to effect a closing transaction in the option (i.e., dispose of the
option) with the result that (i) an option purchased by the Portfolio would
have to be exercised in
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<PAGE>
order for the Portfolio to realize any profit and (ii) the Portfolio may not be
able to sell currencies or portfolio securities covering an option written by
the Portfolio until the option expires or it delivers the underlying futures
contract or currency upon exercise. Therefore, no assurance can be given that
the Portfolio will be able to utilize these instruments effectively for the
purposes set forth above.
ILLIQUID SECURITIES
Subject to any more restrictive applicable investment policies, none of the
Portfolios maintains more than 15% of its net assets in illiquid securities.
For purposes of each Portfolio's investment objectives and policies and invest-
ment restrictions, illiquid securities include, among others, (a) direct place-
ments or other securities which are subject to legal or contractual restric-
tions on resale or for which there is no readily available market (e.g., trad-
ing in the security is suspended or, in the case of unlisted securities, market
makers do not exist or will not entertain bids or offers), (b) options pur-
chased by the Portfolio over-the-counter and the cover for options written by
the Portfolio over-the-counter, and (c) repurchase agreements not terminable
within seven days. Securities eligible for resale under Rule 144A under the Se-
curities Act of 1933, as amended, that have legal or contractual restrictions
on resale but have a readily available market are not deemed illiquid for pur-
poses of this limitation. The Adviser monitors the liquidity of such securities
under the supervision of the Board of Directors. See "Certain Fundamental In-
vestment Policies." See the Statement of Additional Information for further
discussion of illiquid securities.
FIXED-INCOME SECURITIES
The value of the shares of each Portfolio that invests in fixed-income securi-
ties will fluctuate with the value of such investments. The value of each Port-
folio's investments will change as the general level of interest rates fluctu-
ates. During periods of falling interest rates, the values of a Portfolio's se-
curities generally rise. Conversely, during periods of rising interest rates,
the values of a Portfolio's securities generally decline.
In seeking to achieve a Portfolio's investment objective, there will be times,
such as during periods of rising interest rates, when depreciation and realiza-
tion of capital losses on securities in a Portfolio's portfolio will be un-
avoidable. Moreover, medium- and lower-rated securities and non-rated securi-
ties of comparable quality may be subject to wider fluctuations in yield and
market values than higher-rated securities under certain market conditions.
Such fluctuations after a security is acquired do not affect the cash income
received from that security but are reflected in the net asset value of a
Portfolio.
SECURITIES RATINGS
The ratings of fixed-income securities by S&P, Moody's, Duff & Phelps and Fitch
are a generally accepted barometer of credit risk. They are, however, subject
to certain limitations from an investor's standpoint. The rating of an issuer
is heavily weighted by past developments and does not necessarily reflect prob-
able future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. In addition, there may be varying degrees
of difference in credit risk of securities within each rating category.
52
<PAGE>
INVESTMENT IN FIXED-INCOME SECURITIES RATED Baa AND BBB
Securities rated Baa or BBB are considered to have speculative characteristics
and share some of the same characteristics as lower-rated securities, as de-
scribed below. Sustained periods of deteriorating economic conditions or of
rising interest rates are more likely to lead to a weakening in the issuer's
capacity to pay interest and repay principal than in the case of higher-rated
securities.
INVESTMENT IN LOWER-RATED FIXED-INCOME SECURITIES
Lower-rated securities are subject to greater risk of loss of principal and in-
terest than higher-rated securities. They are also generally considered to be
subject to greater market risk than higher-rated securities, and the capacity
of issuers of lower-rated securities to pay interest and repay principal is
more likely to weaken than is that of issuers of higher-rated securities in
times of deteriorating economic conditions or rising interest rates. In addi-
tion, lower-rated securities may be more susceptible to real or perceived ad-
verse economic conditions than investment grade securities, although the market
values of securities rated below investment grade and comparable unrated secu-
rities tend to react less to fluctuations in interest rate levels than do those
of higher-rated securities. Securities rated Ba or BB are judged to have specu-
lative elements or to be predominantly speculative with respect to the issuer's
ability to pay interest and repay principal. Securities rated B are judged to
have highly speculative elements or to be predominantly speculative. Such secu-
rities may have small assurance of interest and principal payments. Securities
rated Baa by Moody's are also judged to have speculative characteristics.
The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can adversely affect the prices at which
these securities can be sold. To the extent that there is no established sec-
ondary market for lower-rated securities, a Portfolio's may experience diffi-
culty in valuing such securities and, in turn, the Portfolio's assets.
The Adviser will try to reduce the risk inherent in investment in lower-rated
securities through credit analysis, diversification and attention to current
developments and trends in interest rates and economic and political condi-
tions. However, there can be no assurance that losses will not occur. Since the
risk of default is higher for lower-rated securities, the Adviser's research
and credit analysis are a correspondingly more important aspect of its program
for managing a Portfolio's securities than would be the case if a Portfolio did
not invest in lower-rated securities. In considering investments for the Port-
folio, the Adviser will attempt to identify those high-yielding securities
whose financial condition is adequate to meet future obligations, has improved,
or is expected to improve in the future. The Adviser's analysis focuses on rel-
ative values based on such factors as interest or dividend coverage, asset cov-
erage, earnings prospects, and the experience and managerial strength of the
issuer.
Certain lower-rated securities in which the Growth Portfolio may invest, con-
tain call or buy-back features which permit the issuer of the security to call
or repurchase it. Such se-
53
<PAGE>
curities may present risks based on payment expectations. If an issuer exer-
cises such a provision and redeems the security, the Portfolio may have to re-
place the called security with a lower yielding security, resulting in a de-
creased rate of return for the Portfolio.
NON-DIVERSIFIED STATUS
The Worldwide Privatization Portfolio is "non-diversified," which means the
Portfolio is not limited in the proportion of its assets that may be invested
in the securities of a single issuer. However, because the Portfolio may in-
vest in a smaller number of individual issuers than a diversified portfolio,
an investment in this Portfolio may, under certain circumstances, present
greater risk to an investor than an investment in a diversified portfolio. The
Portfolio intends to conduct its operations so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code. To so qualify,
among other requirements, the Portfolio will limit its investments so that, at
the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Portfolio's total assets will be invested in the securi-
ties of a single issuer, and (ii) with respect to 50% of the market value of
its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer and the Portfolio will
not own more than 10% of the outstanding voting securities of a single issuer.
The Portfolio's investments in U.S. Government Securities are not subject to
these limitations.
DEFENSIVE POSITION
When business or financial conditions warrant, the Premier Growth Portfolio
and the Growth and Income Portfolio may assume a temporary defensive position
and invest without limit in high grade fixed income securities or hold their
assets in cash equivalents, including (i) short-term obligations of the U.S.
Government and its agencies or instrumentalities, (ii) certificates of depos-
it, bankers' acceptances and interest-bearing savings deposits of banks having
total assets of more than $1 billion and which are members of the Federal De-
posit Insurance Corporation, and (iii) commercial paper of prime quality rated
A-1 or higher by S&P, D-1 or higher by Duff & Phelps, F1 or higher by Fitch or
Prime-1 by Moody's or, if not rated, issued by companies which have an out-
standing debt issue rated AA or higher by S&P, Duff & Phelps or Fitch or Aa or
higher by Moody's.
For temporary defensive purposes the Growth Portfolio may invest in money mar-
ket instruments. The Growth Portfolio may also invest in repurchase agree-
ments.
For temporary defensive purposes, the Worldwide Privatization Portfolio may
vary from its fundamental investment policy during periods in which conditions
in securities markets or other economic or political conditions warrant. The
Portfolio may reduce its position in equity securities and increase without
limit its position in short-term, liquid, high-grade debt securities, which
may include securities issued by the U.S. government, its agencies and instru-
mentalities ("U.S. Government Securities"), bank deposits, money market in-
struments, short-term (for this purpose, securities with a remaining maturity
of one year or less) debt securities, including notes and bonds, and short-
term foreign currency denominated debt securities rated A or higher by S&P,
54
<PAGE>
Duff & Phelps, Fitch or Moody's or, if not so rated, of equivalent investment
quality as determined by the Adviser. For this purpose the Portfolio will
limit its investments in foreign currency denominated debt securities to secu-
rities that are denominated in currencies in which the Portfolio anticipates
its subsequent investments will be denominated.
Subject to its policy of investing at least 65% of its total assets in equity
securities of enterprises undergoing privatization, the Portfolio may also at
any time temporarily invest funds awaiting reinvestment or held as reserves
for dividends and other distributions to shareholders in money market instru-
ments referred to above.
For temporary defensive purposes, the Real Estate Investment Portfolio may in-
crease without limit its position in short-term, liquid, high-grade debt secu-
rities, which may include securities issued or guaranteed by the U.S. Govern-
ment, its agencies or instrumentalities ("U.S. Government securities"), bank
deposits, money market instruments, short-term debt securities, including
notes and bonds. For a description of the types of securities in which the
Portfolio may invest while in a temporary defensive position, see the State-
ment of Additional Information.
PORTFOLIO TURNOVER
Portfolio turnover rates are set forth under "Financial Highlights." These
portfolio turnover rates are greater than those of most other investment com-
panies. A high rate of portfolio turnover involves correspondingly greater
brokerage and other expenses than a lower rate, which must be borne by a Port-
folio and its shareholders. High portfolio turnover also may result in the re-
alization of substantial net short-term capital gains.
YEAR 2000
Many computer software systems in use today cannot properly process date-re-
lated information from and after January 1, 2000. Should any of the computer
systems employed by the Fund's major service providers fail to process this
type of information properly, that could have a negative impact on the Fund's
operations and the services that are provided to the Fund's shareholders. The
Adviser, as well as Alliance Fund Distributors, Inc., the principal under-
writer of the Fund's shares, and Alliance Fund Services, Inc., the Fund's reg-
istrar, dividend disbursing agent, and transfer agent, have advised the Fund
that they are reviewing all of their computer systems with the goal of modify-
ing or replacing such systems prior to January 1, 2000, to the extent neces-
sary to foreclose any such negative impact. In addition, the Adviser has been
advised by the Fund's custodian that it is also in the process of reviewing
its systems with the same goal. As of the date of this Prospectus, the Fund
and the Adviser have no reason to believe that these goals will not be
achieved. Similarly, the values of certain of the portfolio securities held by
the Fund may be adversely affected by the inability of the securities' issuers
or of third parties to process this type of information properly.
CERTAIN FUNDAMENTAL INVESTMENT POLICIES
The Fund has adopted certain fundamental investment policies applicable to the
Portfolios which may not be changed with respect to a Portfolio without the
approval of the shareholders of a Portfolio. Certain of those
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<PAGE>
fundamental investment policies are set forth below. For a complete listing of
such fundamental investment policies, see the Statement of Additional Informa-
tion.
Briefly, with respect to the Money Market Portfolio, the Premier Growth Portfo-
lio, the Growth and Income Portfolio, the U.S. Government/High Grade Securities
Portfolio and the International Portfolio these fundamental investment policies
provide that a Portfolio may not: (i) invest in securities of any one issuer
(including repurchase agreements with any one entity) other than securities is-
sued or guaranteed by the United States Government, if immediately after such
purchases more than 5% of the value of its total assets would be invested in
such issuer, except that 25% of the value of the total assets of a Portfolio
may be invested without regard to such 5% limitation; (ii) acquire more than
10% of any class of the outstanding securities of any issuer (for this purpose,
all preferred stock of an issuer shall be deemed a single class, and all in-
debtedness of an issuer shall be deemed a single class); (iii) invest more than
25% of the value of its total assets at the time an investment is made in the
securities of issuers conducting their principal business activities in any one
industry, except that there is no such limitation with respect to U.S. Govern-
ment securities or certificates of deposit, bankers' acceptances and interest-
bearing deposits (for purposes of this investment restriction, the electric,
gas, telephone and water business shall each be considered as a separate indus-
try); (iv) borrow money, except that a Portfolio may borrow money only for ex-
traordinary or emergency purposes and then only in amounts not exceeding 15% of
its total assets at the time of borrowing; (v) mortgage, pledge or hypothecate
any of its assets, except as may be necessary in connection with permissible
borrowings described in paragraph (iv) above (in an aggregate amount not to
exceed 15% of total assets of a Portfolio), or as permitted in connection with
short sales of securities "against the box" by the Growth Portfolio, as de-
scribed above; (vi) invest in illiquid securities if immediately after such in-
vestment more than 10% of the Portfolio's total assets (taken at market value)
would be invested in such securities or (vii) invest more than 10% of the value
of its total assets in repurchase agreements not terminable within seven days.
With respect to the Growth Portfolio, these fundamental investment policies
provide that the Portfolio may not: (i) invest more than 5% of its total assets
in the securities of any one issuer (other than U.S. Government securities and
repurchase agreements relating thereto), although up to 25% of the Portfolio's
total assets may be invested without regard to this restriction; or (ii) invest
25% or more of its total assets in the securities of any one industry. (Obliga-
tions of a foreign government and its agencies or instrumentalities constitute
a separate "industry" from those of another foreign government.)
With respect to the Worldwide Privatization Portfolio, these fundamental poli-
cies provide that the Portfolio may not: (i) invest 25% or more of its total
assets in securities of issuers conducting their principal business activities
in the same industry, except that this restriction does not apply to (a) U.S.
Government Securities; or (b) the purchase of securities of issuers whose pri-
mary
56
<PAGE>
business activity is in the national commercial banking industry, so long as
the Fund's Board of Directors determines, on the basis of factors such as li-
quidity, availability of investments and anticipated returns, that the Portfo-
lio's ability to achieve its investment objective would be adversely affected
if the Portfolio were not permitted to invest more than 25% of its total as-
sets in those securities, and so long as the Portfolio notifies its sharehold-
ers of any decision by the Board of Directors to permit or cease to permit the
Portfolio to invest more than 25% of its total assets in those securities,
such notice to include a discussion of any increased investment risks to which
the Portfolio may be subjected as a result of the Board's determination; (ii)
borrow money except from banks for temporary or emergency purposes, including
the meeting of redemption requests which might require the untimely disposi-
tion of securities; borrowing in the aggregate may not exceed 15%, and borrow-
ing for purposes other than meeting redemptions may not exceed 5% of the value
of the Portfolio's total assets (including the amount borrowed) less liabili-
ties (not including the amount borrowed) at the time the borrowing is made;
outstanding borrowings in excess of 5% of the value of the Portfolio's total
assets will be repaid before any investments are made; or (iii) pledge, hy-
pothecate, mortgage or otherwise encumber its assets, except to secure permit-
ted borrowings.
With respect to the Technology Portfolio, these fundamental policies provide
that the Portfolio may not: (i) with respect to 75% of its total assets, have
such assets represented by other than: (a) cash and cash items, (b) U.S. Gov-
ernment securities, or (c) securities of any one issuer (other than the U.S.
Government and its agencies or instrumentalities) not greater in value than 5%
of the Technology Portfolio's total assets, and not more than 10% of the out-
standing voting securities of such issuer; (ii) purchase the securities of any
one issuer, other than the U.S. Government and its agencies or instrumentali-
ties, if as a result (a) the value of the holdings of the Technology Portfolio
in the securities of such issuer exceeds 25% of its total assets, or (b) the
Technology Portfolio owns more than 25% of the outstanding securities of any
one class of securities of such issuer; (iii) concentrate its investments in
any one industry, but the Technology Portfolio has reserved the right to in-
vest up to 25% of its total assets in a particular industry; and (iv) invest
in the securities of any issuer which has a record of less than three years of
continuous operation (including the operation of any predecessor) if such pur-
chase would cause 10% or more of its total assets to be invested in the secu-
rities of such issuers.
With respect to the Quasar Portfolio these fundamental policies provide that
the Portfolio may not: (i) purchase the securities of any one issuer, other
than the U.S. Government or any of its agencies or instrumentalities, if as a
result more than 5% of its total assets would be invested in such issuer or
the Portfolio would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of its total asset may be invested without
regard to these 5% and 10% limitations; (ii) invest more than 25% of its total
assets in any particular industry; and (iii) borrow money except for temporary
or emergency purposes in an amount not exceeding 5% of its total assets at the
time the borrowing is made.
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<PAGE>
With respect to the Real Estate Investment Portfolio these fundamental poli-
cies provide that the Portfolio may not: (i) with respect to 75% of its total
assets, have such assets represented by other than: (a) cash and cash items,
(b) U.S. Government securities, or (c) securities of any one issuer (other
than the U.S. Government and its agencies or instrumentalities) not greater in
value than 5% of the Portfolio's total assets, and not more than 10% of the
outstanding voting securities of such issuer; (ii) purchase the securities of
any one issuer, other than the U.S. Government and its agencies or instrumen-
talities, if as a result (a) the value of the holdings of the Portfolio in the
securities of such issuer exceeds 25% of its total assets, or (b) the Portfo-
lio owns more than 25% of the outstanding securities of any one class of secu-
rities of such issuer; (iii) invest 25% or more of its total assets in the se-
curities of issuers conducting their principal business activities in any one
industry, other than the real estate industry, in which the Portfolio will in-
vest at least 25% or more of its total assets, except that this restriction
does not apply to U.S. Government securities; (iv) purchase or sell real es-
tate, except that it may purchase and sell securities of companies which deal
in real estate or interests therein, including Real Estate Equity Securities;
or (v) borrow money except for temporary or emergency purposes or to meet
redemption requests, in an amount not exceeding 5% of the value of its total
assets at the time the borrowing is made.
In addition, the Fund has adopted an investment policy, which is not desig-
nated a "fundamental policy" within the meaning of the Act, of intending to
have each Portfolio comply at all times with the diversification requirements
prescribed in Section 817(h) of the Internal Revenue Code or any successor
thereto and the applicable Treasury Regulations thereunder. This policy may be
changed upon notice to shareholders of the Fund, but without their approval.
- -------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
DIRECTORS
John D. Carifa, Chairman and President, is President and Chief Operating Offi-
cer and a Director of Alliance Capital Management Corporation ("ACMC"), the
sole general partner of the Adviser, with which he has been associated since
prior to 1993.
Ruth Block was formerly an Executive Vice President and the Chief Insurance
Officer of The Equitable Life Assurance Society of the United States since
prior to 1993. She is a Director of Ecolab Incorporated (specialty chemicals)
and Amoco Corporation (oil and gas).
David H. Dievler was formerly a Senior Vice President of ACMC, with which he
had been associated since prior to 1993. He is currently an independent con-
sultant.
John H. Dobkin has been the President of Historic Hudson Valley (historic
preservation) since prior to 1993. Previously, he was Director of the National
Academy of Design.
William H. Foulk, Jr. is an investment advisor and an independent consultant.
He was formerly Senior Manager of Barrett Associates, Inc., a registered in-
vestment adviser,
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<PAGE>
with which he had been associated since prior to 1993.
Dr. James M. Hester is President of the Harry Frank Guggenheim Foundation. He
was formerly President of New York University, The New York Botanical Garden
and Rector of the United Nations University.
Clifford L. Michel is a partner in the law firm of Cahill Gordon & Reindel,
with which he has been associated since prior to 1993. He is President, Chief
Executive Officer and a Director of Wenonah Development Company (investments)
and a Director of Placer Dome, Inc. (mining).
Donald J. Robinson was formerly a senior partner and a member of the Executive
Committee in the law firm of Orrick, Herrington & Sutcliffe and is currently
Senior Counsel to that firm.
ADVISER
Alliance Capital Management L.P. (the "Adviser"), a Delaware limited partner-
ship with principal offices at 1345 Avenue of the Americas, New York, New York
10105 has been retained under an investment advisory agreement (the "Invest-
ment Advisory Agreement") to provide investment advice and, in general, to
conduct the management and investment program of each of the Fund's Portfolios
subject to the general supervision and control of the Board of Directors of
the Fund.
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<PAGE>
The following table lists the person or persons who are primarily responsible
for the day-to-day management of each Portfolio's investment portfolio, the
length of time that each person has been primarily responsible, and each per-
son's principal occupation during the past five years.
<TABLE>
<CAPTION>
FUND PRINCIPAL OCCUPATION
---- EMPLOYEE; YEAR; TITLE DURING THE PAST FIVE YEARS
--------------------- --------------------------
<S> <C> <C>
Money Market Portfolio Raymond J. Papera since 1997- Associated with the Adviser
Vice President of Alliance since prior to 1993
Capital Management
Corporation (ACMC)*
Premier Growth Portfolio Alfred Harrison since Associated with the Adviser
inception- since prior to 1993
Vice Chairman of ACMC
Growth and Income Paul C. Rissman since Associated with the Adviser
Portfolio inception- since prior to 1993
Senior Vice President of ACMC
U.S. Government/High Paul J. DeNoon since Associated with the Adviser
Grade Securities inception- since prior to 1993
Portfolio Vice President of ACMC
International Portfolio Steven Beinhacker since 1996- Associated with the Adviser
Vice President of ACMC since prior to 1993
Growth Portfolio Tyler J. Smith since Associated with the Adviser
inception- since July, 1993; prior thereto,
Senior Vice President of ACMC associated with Equitable
Capital Management Corporation**
Worldwide Privatization Mark H. Breedon since Associated with the Adviser
Portfolio inception- since prior to 1993
Senior Vice President of ACMC
and Director and
Vice President of Alliance
Capital Limited***
Technology Portfolio Peter Anastos since 1992- Associated with the Adviser
Senior Vice President of ACMC since prior to 1993
Gerald T. Malone since 1992- Associated with the Adviser
Senior Vice President of ACMC since prior to 1993
Quasar Portfolio Alden M. Stewart since Associated with the Adviser
inception-Executive Vice since prior to July, 1993**
President of ACMC
Randall E. Hasse since Associated with the Adviser
inception- since prior to 1993
Senior Vice President of ACMC
Real Estate Investment Daniel G. Pine since Associated with the Adviser
Portfolio inception- since May, 1996; prior thereto
Senior Vice President of ACMC associated with Desai Capital
Management since prior to 1993
</TABLE>
* The sole general partner of the Adviser.
** Prior to July 22, 1993, with Equitable Capital Management Corporation (Eq-
uitable Capital). On that date, the Adviser acquired the business and sub-
stantially all of the assets of Equitable Capital.
*** An indirect wholly-owned subsidiary of the Adviser.
60
<PAGE>
In providing advisory services to the Real Estate Investment Portfolio and
other clients investing in real estate securities, the Adviser has retained as
a consultant CB Commercial Real Estate Group, Inc. ("CBC"), a publicly held
company and the largest real estate services company in the United States,
comprised of real estate brokerage, property and facilities management, and
real estate finance and investment advisory activities (CBC in August of 1997
acquired Koll, which previously provided these consulting services to Alli-
ance). In 1996, CBC (and Koll, on a combined basis) completed 25,000 sale and
lease transactions, managed over 4,100 client properties, created over $3.5
billion in mortgage originations, and completed over 2,600 appraisal and con-
sulting assignments. In addition, they advised and managed for institutions
over $4 billion in real estate investments. CBC will make available to Alli-
ance the CBC National Real Estate Index, which gathers, analyzes and publishes
targeted research data for the 65 largest U.S. markets, based on a variety of
public-sector and private-sector sources as well as CBC's proprietary database
of approximately 60,000 property transactions representing over $400 billion
of investment property. This information provides a substantial component of
the research and data used to create the REIT . Score model. As a consultant,
CBC provides to the Adviser, at the Adviser's expense, such in-depth informa-
tion regarding the real-estate market, the factors influencing regional valua-
tions and analysis of recent transactions in office, retail, industrial and
multi-family properties as the Adviser shall from time to time request. CBC
will not furnish investment advice or make recommendations regarding the pur-
chase or sale of securities by the Portfolio nor will it be responsible for
making investment decisions involving Portfolio assets.
CBC is one of the three largest fee-based property management firms in the
United States, the largest commercial real estate lease brokerage firm in the
country, the largest investment property brokerage firm in the country, as
well as one of the largest publishers of real estate research, with approxi-
mately 6,000 employees nationwide. CBC will provide the Adviser with exclusive
access to its REIT . Score model which ranks approximately 130 REITs based on
the relative attractiveness of the property markets in which they own real es-
tate. This model scores the approximately 12,000 individual properties owned
by these companies. REIT . Score is in turn based on CBC's National Real Es-
tate Index which gathers, analyzes and publishes targeted research data for
the 65 largest U.S. real estate markets based on a variety of public- and pri-
vate-sector sources as well as CBC's proprietary database of 60,000 commercial
property transactions representing over $400 billion of investment property
and over 3,000 tracked properties which report rent and expense data quarter-
ly. CBC has previously provided access to its REIT . Score model results pri-
marily to the institutional market through subscriptions. The model is no
longer provided to any research publications, and the Portfolio and another
mutual fund managed by the Adviser are currently the only mutual funds avail-
able to retail investors that have access to CBC's REIT . Score model.
The Adviser is a leading international investment manager supervising client
accounts with assets as of December 31, 1997 totaling
61
<PAGE>
more than $218 billion (of which approximately $85 billion represented the as-
sets of investment companies). The Adviser's clients are primarily major cor-
porate employee benefit funds, public employee retirement systems, investment
companies, foundations and endowment funds. The 58 registered investment com-
panies managed by the Adviser comprising 122 separate investment portfolios
currently have over three million shareholder accounts. As of December 31,
1997, the Adviser was retained as an investment manager for employee benefit
plan assets of 31 of the Fortune 100 companies.
ACMC, the sole general partner of, and the owner of a 1% general partnership
interest in, the Adviser, is an indirect wholly-owned subsidiary of The Equi-
table Life Assurance Society of the United States ("Equitable"), one of the
largest life insurance companies in the United States and a wholly owned sub-
sidiary of the Equitable Companies Incorporated, a holding company which is
controlled by AXA-UAP, a French insurance holding company. Certain information
concerning the ownership and control of Equitable by AXA-UAP is set forth in
the Statement of Additional Information under "Management of the Fund."
The Adviser provides investment advisory services and order placement facili-
ties for each of the Fund's Portfolios and pays all compensation of Directors
and officers of the Fund who are affiliated persons of the Adviser. The Ad-
viser or its affiliates also furnish the Fund, without charge, management su-
pervision and assistance and office facilities and provide persons satisfac-
tory to the Fund's Board of Directors to serve as the Fund's officers.
EXPENSES OF THE FUND
In addition to the payments to the Adviser under the Investment Advisory
Agreement described above, the Fund pays certain other costs including (a)
custody, transfer and dividend disbursing expenses, (b) fees of Directors who
are not affiliated with the Adviser, (c) legal and auditing expenses, (d)
clerical, accounting and other office costs, (e) costs of printing the Fund's
prospectuses and shareholder reports, (f) cost of maintaining the Fund's ex-
istence, (g) interest charges, taxes, brokerage fees and commissions, (h)
costs of stationery and supplies, (i) expenses and fees related to registra-
tion and filing with the Commission and with state regulatory authorities, and
(j) cost of certain personnel of the Adviser or its affiliates rendering cler-
ical, accounting and other services to the Fund.
As to the obtaining of clerical and accounting services not required to be
provided to the Fund by the Adviser under the Investment Advisory Agreement,
the Fund may employ its own personnel. For such services, it may also utilize
personnel employed by the Adviser or by its affiliates; in such event, the
services are provided to the Fund at cost and the payments specifically ap-
proved in advance by the Fund's Board of Directors.
62
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
PURCHASE OF SHARES
Shares of each Portfolio of the Fund are offered on a continuous basis di-
rectly by the Fund and by Alliance Fund Distributors, Inc., the Fund's Princi-
pal Underwriter, to the separate accounts of certain life insurance companies
without any sales or other charge, at each Portfolio's net asset value, as de-
scribed below. The separate accounts of insurance companies place orders to
purchase shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrendered and transfer requests to be
effected on that day pursuant to variable annuity contracts and variable life
insurance policies which are funded by shares of the Portfolios. The Fund re-
serves the right to suspend the sale of the Fund's shares in response to con-
ditions in the securities markets or for other reasons. Individuals may not
place orders directly with the Fund. See the Prospectus of the separate ac-
count of the participating insurance company for more information on the pur-
chase of Portfolio shares.
The public offering price of each Portfolio's shares is their net asset value.
The per share net asset value of each Portfolio is computed in accordance with
the Fund's Articles of Incorporation and By-Laws, at the next close of regular
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.
Eastern time), following receipt of a purchase or redemption order by the
Fund, on each Fund business day on which such an order is received and trading
in the types of securities in which the Fund invests might materially affect
the value of Fund shares. The Fund's per share net asset value is computed by
dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any week-
day exclusive of days on which the Exchange is closed (most national holidays
and Good Friday). For purposes of this computation, the securities in each
Portfolio are valued at their current market value (in the case of the Money
Market Portfolio, amortized cost value is used) determined on the basis of
market quotations or, if such quotations are not readily available, such other
methods as the Directors believe would accurately reflect fair market value.
Portfolio securities may also be valued on the basis of prices provided by a
pricing service when such prices are believed by the Adviser to reflect the
fair market value of such securities. In the case of the Money Market Portfo-
lio, per share net asset value is expected to be constant at $1.00 per share,
although this price is not guaranteed.
REDEMPTION OF SHARES
An insurance company separate account may redeem all or any portion of the
shares of any Portfolio in its account at any time at the net asset value per
share of that Portfolio next determined after a redemption request in proper
form is furnished to the Fund or the Principal Underwriter. Any certificates
representing shares being redeemed must be submitted with the redemption re-
quest. Shares redeemed are entitled to earn dividends, if any, up to and in-
cluding the day redemption is effected. There is no redemption charge. Payment
of the re-
63
<PAGE>
demption price will normally be made within seven days after receipt of such
tender for redemption.
The right of redemption may be suspended or the date of payment may be post-
poned for any period during which the Exchange is closed (other than customary
weekend and holiday closings) or during which the Commission determines that
trading thereon is restricted, or for any period during which an emergency (as
determined by the Commission) exists as a result of which disposal by the Fund
of securities owned by a Portfolio is not reasonably practicable or as a result
of which it is not reasonably practicable for the Fund fairly to determine the
value of a Portfolio's net assets, or for such other periods as the Commission
may by order permit for the protection of security holders of the Fund. For in-
formation regarding how to redeem shares in the Fund please see your insurance
company separate account prospectus.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Money Market Portfolio declares income dividends each business day at 4:00
p.m. Eastern time and such dividends are paid monthly via automatic investment
in additional full and fractional shares in each shareholders' account. As such
additional shares are entitled to dividends, a compounding growth of income oc-
curs. Net income consists of all accrued interest income on Portfolio assets
less the Portfolio's expenses (including accrued expenses and fees payable to
the Adviser) applicable to that dividend period. Realized gains and losses are
reflected in net asset value and are not included in net income.
Each of the other Portfolios will declare and distribute dividends from net in-
vestment income and will distribute its net capital gains, if any, at least an-
nually. Such income and capital gains distributions will be made in shares of
such Portfolios.
The Fund will distribute the return of capital it receives from the REITs in
which the Fund invests. The REITs pay distributions based on cash flow, without
regard to depreciation and amortization. As a result, a portion of the distri-
butions paid to the Fund and subsequently distributed to shareholders may be a
nontaxable return of capital. The final determination of the amount of the
Fund's return of capital distributions for the period will be made after the
end of each calendar year.
Each Portfolio of the Fund qualified and intends to continue to qualify to be
taxed as a regulated investment company under Subchapter M of the Internal Rev-
enue Code (the "Code"). If so qualified, each Portfolio will not be subject to
Federal income or excise taxes on its investment company taxable income and net
capital gains to the extent such investment company taxable income and net cap-
ital gains are distributed to the separate accounts of insurance companies
which hold its shares. Under current tax law, capital gains or dividends from
any Portfolio are not currently taxable when left to accumulate within a vari-
able annuity (other than an annuity interest owned by a person who is not a
natural person) or variable life insurance contract. Distributions of
64
<PAGE>
net investment income and net short-term capital gain will be treated as ordi-
nary income and distributions of net long-term capital gain will be treated as
long-term capital gain in the hands of the insurance companies.
Investment income received by a Portfolio from sources within foreign coun-
tries may be subject to foreign income taxes withheld at the source. Provided
that certain Code requirements are met, a Portfolio may "pass through" to its
shareholders credits or deductions for foreign income taxes paid.
Section 817(h) of the Code requires that the investments of a segregated asset
ac-count of an insurance company be "adequately diversified," in accordance
with Treasury Regulations promulgated thereunder, in order for the holders of
the variable annuity contracts or variable life insurance policies underlying
the account to receive the tax-deferred or tax-free treatment generally af-
forded holders of annuities or life insurance policies under the Code. The De-
partment of the Treasury has issued Regulations under section 817(h) which,
among other things, provide the manner in which a segregated asset account
will treat investments in a regulated investment company for purposes of the
applicable diversification requirements. Under the Regulations, if a regulated
investment company satisfies certain conditions, a segregated asset account
owning shares of the regulated investment company will not be treated as a
single investment for these purposes, but rather the account will be treated
as owning its proportionate share of each of the assets of the regulated in-
vestment company. Each Portfolio plans to satisfy these conditions at all
times so that the shares of each Portfolio owned by a segregated asset account
of a life insurance company will be subject to this treatment under the Code.
For information concerning federal income tax consequences for the holders of
variable annuity contracts and variable rate insurance policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
- -------------------------------------------------------------------------------
GENERAL INFORMATION
- -------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors of the Fund, the
Adviser is responsible for the investment decisions and the placing of the or-
ders for portfolio transactions for the Fund. Portfolio transactions for the
Money Market Portfolio and the U.S. Government/High Grade Securities Portfolio
occur primarily with issuers, underwriters or major dealers acting as princi-
pals, while transactions for the Premier Growth Portfolio, the Growth and In-
come Portfolio, the International Portfolio, the Growth Portfolio, the World-
wide Privatization Portfolio, the Technology Portfolio and the Quasar Portfo-
lio are normally effected by brokers, and transactions for the Real Estate In-
vestment Portfolio are normally effected through any one or more of the fore-
going entities.
The Fund has no obligation to enter into transactions in portfolio securities
with any broker, dealer, issuer, underwriter or other
65
<PAGE>
entity. In placing orders, it is the policy of the Fund to obtain the best
price and execution for its transactions. Consistent with the objective of ob-
taining best execution, the Fund may use brokers and dealers who provide re-
search, statistical and other information to the Adviser.
There may be occasions where the transaction cost charged by a broker may be
greater than that which another broker may charge if the Fund determines in
good faith that the amount of such transaction cost is reasonable in relation
to the value of the brokerage and research and statistical services provided by
the executing broker. Consistent with the Conduct Rules of the National Associ-
ation of Securities Dealers, Inc., and subject to seeking best price and execu-
tion, the Fund may consider sales of shares of the Fund as a factor in the se-
lection of brokers and dealers to enter into portfolio transactions with the
Fund.
The Fund may from time to time place orders for the purchase or sale of securi-
ties on an agency basis with Donaldson, Lufkin & Jenrette Securities Corpora-
tion, an affiliate of the Adviser, and with brokers which may have their trans-
actions cleared or settled, or both, by the Pershing Division of Donaldson,
Lufkin and Jenrette Securities Corporation, for which Donaldson, Lufkin and
Jenrette Securities Corporation may receive a portion of the brokerage commis-
sion. In such instances, the placement of orders with such brokers would be
consistent with the Fund's objective of obtaining best execution and would not
be dependent upon the fact that Donaldson, Lufkin & Jenrette Securities Corpo-
ration is an affiliate of the Adviser.
ORGANIZATION
The Fund is a Maryland corporation organized on November 17, 1987. The autho-
rized capital stock of the Fund consists solely of 10,000,000,000 shares of
Common Stock having a par value of $.001 per share, which may, without share-
holder approval, be divided into an unlimited number of series. Such shares are
currently divided into 19 series, one underlying each Portfolio. Shares of each
Portfolio are normally entitled to one vote for all purposes. Generally, shares
of all Portfolios vote as a single series on matters, such as the election of
Directors, that affect all Portfolios in substantially the same manner. Mary-
land law does not require a registered investment company to hold annual meet-
ings of shareholders and it is anticipated that shareholder meetings will be
held only when specifically required by federal or state law. Shareholders have
available certain procedures for the removal of Directors. Shares of each Port-
folio are freely transferable, are entitled to dividends as determined by the
Board of Directors and, in liquidation of the Fund, are entitled to receive the
net assets of that Portfolio. Shareholders have no preference, pre-emptive or
conversion rights. In accordance with current law, it is anticipated that an
insurance company issuing a variable annuity contract or variable life insur-
ance policy that participates in the Fund will request voting instructions from
contract or policyholders and will vote shares in the separate account in ac-
cordance with the voting instructions received.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., 1345 Avenue of the Americas, New York, New
York 10105, an indirect wholly-owned subsidiary
66
<PAGE>
of the Adviser, is the Principal Underwriter of shares of the Fund.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachu-
setts 02110, acts as Custodian for the securities and cash of the Fund and as
its dividend disbursing agent, but plays no part in deciding on the purchase
or sale of portfolio securities.
REGISTRAR, DIVIDEND-DISBURSING AGENT AND TRANSFER AGENT
Alliance Fund Services, Inc., an indirect wholly-owned subsidiary of the Ad-
viser, located at 500 Plaza Drive, Secaucus, New Jersey, 07094, acts as the
Fund's registrar, dividend-disbursing agent and transfer agent.
PERFORMANCE INFORMATION
From time to time the Fund advertises its "total return." The Fund's "total
return" is its average annual compounded total return for its most recently
completed one, five, and ten-year periods (or the period since the Fund's in-
ception). The Fund's total return for such a period is computed by finding,
through the use of a formula prescribed by the Commission, the average annual
compounded rate of return over the period that would equate an assumed initial
amount invested to the value of such investment at the end of the period. For
purposes of computing total return, income dividends and capital gains distri-
butions paid on shares of the Fund are assumed to have been reinvested when
paid and the maximum sales charge applicable to purchases of Fund shares is
assumed to have been paid.
The Fund's total return is not fixed and will fluctuate in response to pre-
vailing market conditions or as a function of the type and quality of the se-
curities in the Fund's portfolio and the Fund's expenses. Total return infor-
mation is useful in reviewing the Fund's performance but such information may
not provide a basis for comparison with bank deposits or other investments
which pay a fixed yield for a stated period of time. An investor's principal
invested in the Fund is not fixed and will fluctuate in response to prevailing
market conditions.
Advertisements quoting performance rankings of the Fund as measured by finan-
cial publications or by independent organizations such as Lipper Analytical
Services, Inc. and Morningstar, Inc., and advertisements presenting the his-
torical record of payments of income dividends by the Fund may also from time
to time be sent to investors or placed in newspapers, magazines such as the
Wall Street Journal, The New York Times, Barrons, Investor's Daily, Money Mag-
azine, Changing Times, Business Week and Forbes or other media on behalf of
the Fund.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to Alliance Fund Services, Inc. at
the address or telephone number shown on the front cover of this Prospectus.
This Prospectus and the Statement of Additional Information which has been in-
corporated by reference herein, does not contain all the information set forth
in the Registration Statement filed by the Fund with the Com-
67
<PAGE>
mission under the Securities Act of 1933, as amended. Copies of the Registra-
tion Statement may be obtained at a reasonable charge from the Commission or
may be examined, without charge, at the offices of the Commission in Washing-
ton, D.C.
This Prospectus does not constitute an offering in any state in which such of-
fering may not lawfully be made.
68
<PAGE>
APPENDIX A
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
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 by an 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 stan-
dards. 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 protec-
tive elements may be of greater amplitude or there may be other elements pres-
ent which make the long-term risks appear somewhat larger than the Aaa securi-
ties.
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 some time 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 payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length 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 both good and bad times over the future. Uncertainty of position charac-
terizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of 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 or
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 shortcom-
ings.
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.
A-1
<PAGE>
ABSENCE OF RATING: When no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The modi-
fier 1 indicates that the security ranks in the higher end of its generic rat-
ing category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay prin-
cipal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal al-
though it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB normally exhibits adequate protection parameters. Howev-
er, 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 rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC or C is regarded as having sig-
nificant speculative characteristics. BB indicates the lowest degree of specu-
lation and C the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or ma-
jor exposures to adverse conditions.
A-2
<PAGE>
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
debt. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to an inadequate
capacity to pay interest and repay principal.
B: Debt rated B is more vulnerable to nonpayment than debt rated BB, but
there is capacity to pay interest and repay principal. Adverse business, finan-
cial or economic conditions will likely impair the capacity or willingness to
pay principal or repay interest.
CCC: Debt rated CCC is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial and economic conditions to pay interest and
repay principal. In the event of adverse business, financial or economic condi-
tions, there is not likely to be capacity to pay interest or repay principal.
CC: Debt rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments are being contin-
ued.
D: The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the ad-
dition of a plus or minus sign to show relative standing within the major rat-
ing categories.
NR: Not rated.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. Risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest, but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered suffi-
cient for prudent investment. Considerable variability in risk during economic
cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate accord-
ing to industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
A-3
<PAGE>
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely ac-
cording to economic cycles, industry conditions and/or company fortunes. Po-
tential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
FITCH IBCA, INC.
AAA: Bonds considered to be investment grade and of the highest credit qual-
ity. The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong, al-
though not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future de-
velopments, short-term debt of these issuers is generally rated F- 1+.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is consid-
ered to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will
fall below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could as-
sist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity through-
out the life of the issue.
A-4
<PAGE>
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default.
The ability to meet obligations requires an advantageous business and eco-
nomic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their ul-
timate recovery value in liquidation or reorganization of the obligor. DDD rep-
resents the highest potential for recovery on these bonds, and D represents the
lowest potential for recovery.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to in-
dicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA, DDD, DD or D categories.
NR: Indicates that Fitch does not rate the specific issue.
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries;
High rates of return on funds employed;
Conservative capitalization structure with moderate reliance on debt
and ample asset protection;
Broad margins in earnings coverage of fixed financial changes and high
internal cash generation; and
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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, may be more subject to varia-
tion. Capitalization characteristics, while still appropriate, may be more af-
fected by external conditions. Ample alternate liquidity is maintained.
A-5
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PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an accept-
able ability for repayment of senior short-term obligations. The effect of in-
dustry characteristics and market compositions may be more pronounced. Vari-
ability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial lever-
age. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S CORPORATION
A-1+, A-1: Commercial paper rated A-1 is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligations
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial com-
mitment on these obligations is extremely strong.
A-2: Commercial paper rated A-2 is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligations is satisfactory.
A-3: Commercial paper rated A-3 exhibits adequate protections parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B: Commercial paper rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: Commercial paper rated C is currently vulnerable to nonpayment and is de-
pendent upon favorable business, financial and economic conditions for the ob-
ligor to meet its financial commitment on the obligation.
D: Commercial paper rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments
on an obligation are jeopardized.
DUFF & PHELPS CREDIT RATING CO.
High Grade
D-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 obli-
gations.
A-6
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D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Good Grade
D-2: Good certainty of timely payment. Liquidity factors and company funda-
mentals are sound. Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors are small.
Satisfactory Grade
D-3: Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
Default
D-5: Issuer failed to meet scheduled principal and/or interest payments.
FITCH IBCA, INC.
F1: HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely pay-
ment of financial commitments; may have an added "+" to denote any exception-
ally strong credit feature.
F2: GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of fi-
nancial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
F3: FAIR CREDIT QUALITY. The capacity for timely payment of financial com-
mitments is adequate; however, near-term adverse changes could result in a re-
duction to non-investment grade.
B: SPECULATIVE. Minimal capacity for timely payment of financial commit-
ments, plus vulnerability to near-term adverse changes in financial and eco-
nomic conditions.
C: HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is sole reliant upon a sustained, favorable business and
economic environment.
D: DEFAULT. Denotes actual or imminent payment default.
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