<PAGE>
File Nos. 33-21677
811-5547
As filed with the Securities and Exchange Commission on May 29, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 18 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT /X/
COMPANY ACT OF 1940
Amendment No. 21 /X/
BARR ROSENBERG SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, OH 43219
(Address of principal executive offices)
510-254-6464
(Registrant's telephone number, including area code)
Barr M. Rosenberg with a copy to:
Rosenberg Institutional J.B. Kittredge, Jr.
Equity Management Ropes & Gray
Four Orinda Way One International Place
Building E Boston, Massachusetts 02110-2624
Orinda, CA 94563
(Name and address of agent for service)
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It is proposed that this filing will become effective:
Immediately upon filing pursuant to paragraph (b)
---
On _________________ pursuant to paragraph (b)
---
X 60 days after filing pursuant to paragraph (a)(1)
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On _______ pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
---
On _______ pursuant to paragraph (a)(2), of Rule 485
---
If appropriate, check the following box:
--- This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
NOTE: This Amendment relates solely to shares of beneficial interest in the
Barr Rosenberg Market Neutral Fund and the Barr Rosenberg Double Alpha Market
Fund. Information contained in the Registration Statement relating to the
other series of the Registrant is neither amended nor superseded hereby.
<PAGE>
BARR ROSENBERG SERIES TRUST
CROSS REFERENCE SHEET FOR
THE BARR ROSENBERG MARKET NEUTRAL FUND AND
THE BARR ROSENBERG DOUBLE ALPHA MARKET FUND ONLY
N-1A Item No. Location
- ------------ --------
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Fund Expenses
Item 3. Condensed Financial Financial Highlights
Information
Item 4. General Description of Description of the Trust
Registrant and Ownership of Shares;
Investment Objectives and
Policies; Cover Page;
and General Description
of Risks and Fund Investments
Item 5. Management of the Fund Management of the Trust;
Back Cover
Item 5A. Management's Discussion Not Applicable
of Fund Performance
Item 6. Capital Stock and Other Description of the Trust
Securities and Ownership of Shares;
Distributions; Multiple
Classes; Shareholder Inquiries;
Taxes; and Back Cover
Item 7. Purchase of Securities Being Purchase of Shares; Exchange of
Offered Fund Shares; Management of the
Trust; Multiple Classes;
Determination of Net Asset
Value; and Back Cover
Item 8. Redemption or Repurchase Redemption of Shares; Exchange
of Fund Shares; and
Determination of Net Asset
Value
Item 9. Legal Proceedings None
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and Description of the Trust
History and Ownership of Shares
Item 13. Investment Objectives Investment Objectives and
and Policies Policies; Miscellaneous
Investment Practices; and
Investment Restrictions
Item 14. Management of the Fund Management of the Trust
<PAGE>
Item 15. Control Persons and Principal Description of the Trust
Holders of Securities and Ownership of Shares
Item 16. Investment Advisory and Other Investment Advisory and
Services Other Services; Management of
the Trust
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices
Item 18. Capital Stock and Other Description of the Trust
Securities and Ownership of Shares
Item 19. Purchase, Redemption Determination of Net Asset
and Pricing of Securities Value; See in Part A, Purchase
Being Offered of Shares; Exchange of Fund
Shares; Redemption of Shares;
Determination of Net Asset Value
Item 20. Tax Status Income Dividends,
Distributions and Tax
Status
Item 21. Underwriters Investment Advisory and
Other Services
Item 22. Calculation of Performance Data Total Return Calculations
Item 23. Financial Statements Financial Statements
Part C
Information to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
<PAGE>
BARR ROSENBERG SERIES TRUST
BARR ROSENBERG MARKET NEUTRAL FUND
BARR ROSENBERG DOUBLE ALPHA MARKET FUND
3435 STELZER ROAD
COLUMBUS, OHIO 43219
1-800-447-3332 (INVESTOR SHARES)
1-800-527-6026 (INSTITUTIONAL SHARES)
JULY __, 1998
Barr Rosenberg Series Trust (the "Trust") is an open-end management
investment company offering five diversified portfolios with different
investment objectives and strategies including the Barr Rosenberg Market
Neutral Fund and Barr Rosenberg Double Alpha Market Fund. The other
portfolios of the Trust, which are offered under a separate prospectus, are
the U.S. Small Capitalization Series, Japan Series and International Small
Capitalization Series. The Barr Rosenberg Market Neutral Fund and Barr
Rosenberg Double Alpha Market Fund are referred to herein individually as a
"Series" or a "Fund" and collectively as the "Series" or the "Funds." Each
Fund's investment manager is Rosenberg Institutional Equity Management (the
"Manager").
The BARR ROSENBERG MARKET NEUTRAL FUND seeks long-term capital
appreciation while maintaining minimal exposure to general equity market risk
by taking long positions in stocks principally traded in the markets of the
United States that the Manager has identified as undervalued and short
positions in such stocks that the Manager has identified as overvalued. For
a description of the risks of an investment in the Fund, see "Investment
Objectives and Policies -- Barr Rosenberg Market Neutral Fund" and "General
Description of Risks and Fund Investments". The Fund seeks a total return
greater than the return on 3-month U.S. Treasury Bills. For a description of
the differences between an investment in the Fund and in 3-month U.S.
Treasury Bills, see "Investment Objectives and Policies-- Barr Rosenberg
Market Neutral Fund."
The BARR ROSENBERG DOUBLE ALPHA MARKET FUND seeks a total return greater
than that of the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index") by investing in shares of the Barr Rosenberg Market Neutral Fund
while simultaneously utilizing S&P 500 Index Futures, options on S&P 500
Index Futures and equity swap contracts to gain exposure to the equity market
as measured by the S&P 500 Index. See "Investment Objectives and Policies --
Barr Rosenberg Double Alpha Market Fund" and "General Description of Risks
and Fund Investments."
The Funds offer two classes of shares: Institutional Shares and Investor
Shares. Whether an investor is eligible to purchase Institutional or
Investor Shares generally depends on the amount invested in a particular
Fund. Investor Shares bear a Shareholder Service Fee and Distribution Fee.
This Prospectus concisely describes the information that investors ought
to know before investing. Please read this Prospectus carefully and keep it
for future reference.
A Statement of Additional Information dated July __, 1998 (the
"Statement") is available free of charge by writing to Barr Rosenberg Funds
Distributor, Inc., the Funds' distributor (the "Distributor"), at 3435
Stelzer Road, Columbus, Ohio 43219 or by telephoning 1-800-447-3332 (for
Investor Share customers) and 1-800-527-6026 (for Institutional Share
customers). The Statement, which contains more detailed information about
the Funds, has been filed with the Securities and Exchange Commission (the
"Commission") and is incorporated by reference into this Prospectus. The
Commission maintains a World Wide Web site at http://www.sec.gov that
contains the Statement, material incorporated by reference and other
information regarding registrants that file electronically with the
Commission.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY, AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
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
ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
TABLE OF CONTENTS
PAGE
----
FUND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . 4
GENERAL DESCRIPTION OF RISKS AND FUND INVESTMENTS. . . . . . . . . . . . 6
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 10
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . 11
MULTIPLE CLASSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
IRA ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . 20
EXCHANGE OF FUND SHARES. . . . . . . . . . . . . . . . . . . . . . . . . 22
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . 23
DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES . . . . . . . . . . . . 24
SHAREHOLDER INQUIRIES. . . . . . . . . . . . . . . . . . . . . . . . . . 26
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<PAGE>
FUND EXPENSES
The estimated annual expenses of each of the Funds are set forth in the
following tables, the forms of which are prescribed by federal securities
laws and regulations.
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
OPERATING
OTHER EXPENSES
MANAGEMENT SHAREHOLDER EXPENSES (AFTER WAIVER
FEE (AFTER SERVICE DISTRIBUTION (AFTER REIM- AND/OR REIM-
WAIVER) FEE FEE BURSEMENT)* BURSEMENT)*
---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
INSTITUTIONAL SHARES
Market Neutral Fund 1.57% None None 0.43%** 2.00%
Double Alpha Market Fund 0.00% None None 2.35% 2.35%
INVESTOR SHARES
Market Neutral Fund 1.57% 0.25% 0.25% 0.43%** 2.50%
Double Alpha Market Fund 0.00% 0.25% 0.25% 2.35% 2.85%
</TABLE>
The Manager has undertaken to reduce its management fee and bear certain
expenses until further notice in order to limit the total annual operating
expenses (which do not include nonrecurring account fees and extraordinary
expenses) of each class to the percentage of a Fund's total annual operating
expenses attributable to that class listed under Total Fund Operating
Expenses above. Absent such undertaking by the Manager to waive its fee and
bear such expenses, the Barr Rosenberg Market Neutral Fund's management fees
would be 1.90% and estimated Total Fund Operating Expenses would be 2.33% for
Institutional Shares and 2.83% for Investor Shares, and the Barr Rosenberg
Double Alpha Market Fund's management fees would be 0.10%, estimated Other
Expenses (including indirect expenses) would be 2.88% and estimated Total
Fund Operating Expenses (including indirect expenses) would be 2.98% for
Institutional Shares and 3.48% for Investor Shares. See "Management of the
Trust."
__________
* Includes, in the case of the Barr Rosenberg Double Alpha Market Fund,
indirect expenses borne through ownership of Institutional Shares of the
Barr Rosenberg Market Neutral Fund.
** Estimated Other Expenses without reimbursement of expenses by the Manager.
EXAMPLE:
<TABLE>
<CAPTION>
YOU WOULD PAY THE
FOLLOWING EXPENSES ON A
$1,000 INVESTMENT
ASSUMING A 5% ANNUAL
RETURN (WITH OR WITHOUT
A REDEMPTION AT THE END
OF EACH TIME PERIOD):
------------------------
<S> <C> <C>
1 YEAR 3 YEARS
------ -------
INSTITUTIONAL SHARES
Market Neutral Fund $20 $63
Double Alpha Market Fund $24 $73
INVESTOR SHARES
Market Neutral Fund $25 $78
Double Alpha Market Fund $29 $88
</TABLE>
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<PAGE>
THE PURPOSE OF THIS TABLE IS TO ASSIST YOU IN UNDERSTANDING THE VARIOUS
COSTS AND EXPENSES OF THE FUNDS THAT ARE BORNE DIRECTLY OR INDIRECTLY BY
HOLDERS OF SHARES OF THE FUNDS. THE EXPENSES USED IN THE EXAMPLE AND THE
FIVE PERCENT ANNUAL RETURN (WHICH IS MANDATED BY THE SECURITIES AND EXCHANGE
COMMISSION) ARE NOT REPRESENTATIONS OF PAST OR FUTURE EXPENSES OR
PERFORMANCE; ACTUAL EXPENSES AND/OR PERFORMANCE MAY BE MORE OR LESS THAN
THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following tables present per share financial information for the
period listed for the Barr Rosenberg Market Neutral Fund. The Financial
Highlights have been audited by Price Waterhouse LLP, independent
accountants, whose report on the financial statements of the Barr Rosenberg
Market Neutral Fund appears in such Fund's Annual Report for the fiscal year
ended March 31, 1998 (the "Annual Report"). These statements should be read
in conjunction with the "Report of Independent Accountants," the other
audited financial statements and related notes which are contained in the
Annual Report and are incorporated by reference into this Prospectus and the
Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED
MARCH 31,
1998(a)
--------------
<S> <C>
INSTITUTIONAL SHARES
Net asset value, beginning of period $ 10.00
--------
Income from investment operations:
Net investment income/(loss) 0.10**
Net realized and unrealized gain/(loss) on investments (0.13)
Total from investment operations (0.03)
--------
Distributions to shareholders from:
Net investment income ---
Net realized gain on investments ---
Total distributions to shareholders ---
--------
Net asset value, end of period $ 9.97
--------
--------
Total return (0.30%)
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $168,080
Net investment income/(loss) before waivers/reimbursements 2.72%*
Net investment income/(loss) net of waivers/reimbursements 3.31%*
Expenses before waivers/reimbursements and dividend expenses 3.33%*
Expenses before waivers/reimbursements 2.59%*
Expenses net of waivers/reimbursements and dividend expenses 2.00%*
Portfolio Turnover Rate 232.93%
Average commission rate $0.0294
</TABLE>
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* Annualized.
** Calculated based on the average shares outstanding during the period.
(a) From commencement of operations on December 16, 1997 to March 31, 1998.
-5-
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED
MARCH 31,
1998(a)
--------------
<S> <C>
INVESTOR SHARES
Net asset value, beginning of period $10.00
--------
Income from investment operations:
Net investment income/(loss) 0.08**
Net realized and unrealized gain/(loss) on investments (0.12)
--------
Total from investment operations (0.04)
--------
Distributions to shareholders from:
Net investment income ---
Net realized gain on investments ---
--------
Total distributions to shareholders ---
--------
Net asset value, end of period $ 9.96
--------
--------
Total return (0.40%)
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $35,223
Net investment income/(loss) before waivers/reimbursements 2.28%*
Net investment income/(loss) net of waivers/reimbursements 2.82%*
Expenses before waivers/reimbursements and dividend expenses 3.87%*
Expenses before waivers/reimbursements 3.03%*
Expenses net of waivers/reimbursements and dividend expenses 2.50%*
Portfolio turnover rate 232.93%
Average commission rate $0.0294
</TABLE>
- --------------------------
* Annualized.
** Calculated based on the average shares outstanding during the period.
(a) From commencement of operations on December 18, 1997 to March 31, 1998.
Each Fund's investment performance may from time to time be included in
advertisements about such Fund. Total return for a Fund is measured by
comparing the value of an investment in such Fund at the beginning of the
relevant period to the redemption value of the investment in such Fund at the
end of such period (assuming immediate reinvestment of any dividends or
capital gains distributions). All data are based on a Fund's past investment
results and do not predict future performance. Investment performance, which
will vary, is based on many factors, including market conditions, the
composition of a Fund's portfolio and a Fund's operating expenses.
Investment performance also often reflects the risks associated with a Fund's
investment objective and policies. These factors should be considered when
comparing a Fund's investment results with those of other mutual funds and
other investment vehicles. Quotations of investment performance for any
period when an expense limitation was in effect will be greater than if the
limitation had not been in effect.
INVESTMENT OBJECTIVES AND POLICIES
BARR ROSENBERG MARKET NEUTRAL FUND
The investment objective of the Barr Rosenberg Market Neutral Fund is to
seek long-term capital appreciation while maintaining minimal exposure to
general equity market risk. The Fund seeks a total return greater than the
return on 3-month U.S. Treasury Bills. The Fund attempts to achieve its
objective by taking long positions in stocks principally traded in the
markets of the United States that the Manager has identified as undervalued
and short
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<PAGE>
positions in such stocks that the Manager has identified as overvalued. See
"General Description of Risks and Fund Investments -- Risks of Short Sales"
below. By taking long and short positions in different stocks with similar
characteristics, the Fund attempts to cancel out the effect of general stock
market movements on the Fund's performance. The Manager will determine the
size of each long or short position by analyzing the tradeoff between the
attractiveness of each position and its impact on the risk of the overall
portfolio. The Fund seeks to construct a diversified portfolio that has
minimal net exposure to the U.S. equity market generally and near neutral
exposure to specific industries, specific capitalization ranges and certain
other risk factors. The Manager currently expects that the long and short
positions of the Fund will be invested primarily in small capitalization
stocks and smaller mid-capitalization stocks. For purposes of the preceeding
sentence, the 200 stocks principally traded in U.S. markets with the largest
market capitalizations are considered large capitalization stocks, the next
800 largest are considered mid-capitalization stocks and all others are
considered small capitalization stocks.
Although the Fund's investment strategy seeks to minimize the risk
associated with investing in the equity market, an investment in the Fund
will be subject to the risk of poor stock selection by the Manager. For
example, the Manager may not be successful in executing its strategy of
taking long positions in stocks and short positions in other stocks, such
that the portfolio of long positions outperforms the portfolio of short
positions. In addition, the Manager may fail to construct a portfolio that
has minimal exposure to general equity market risk or that has near neutral
exposure to specific industries, specific capitalization ranges and certain
other risk factors. Further, since the Manager will manage both a long and a
short portfolio, an investment in the Fund will involve the risk that the
Manager may make more poor investment decisions than a manager of a typical
stock mutual fund with only a long portfolio. An investment in 3-month U.S.
Treasury Bills is different from an investment in the Fund because Treasury
Bills are backed by the full faith and credit of the U.S. Government,
Treasury Bills have a fixed rate of return and investors in Treasury Bills do
not bear the risk of losing their investment.
To meet margin requirements, redemptions or pending investments, the
Fund may also temporarily hold a portion of its assets in full faith and
credit obligations of the United States government (E.G., U.S. Treasury
Bills) and in short-term notes, commercial paper or other money market
instruments of high quality (I.E., rated at least "A-2" or "AA" by Standard &
Poor's ("S&P") or Prime 2 or "Aa" by Moody's Investors Service, Inc.
("Moody's")) issued by companies having an outstanding debt issue rated at
least "AA" by S&P or at least "Aa" by Moody's, or determined by the Manager
to be of comparable quality to any of the foregoing.
The Fund's long and short positions may involve (without limit) equity
securities of foreign issuers that are principally traded in the markets of
the United States. See "General Description of Risks and Fund Investments
- --Special Considerations of Foreign Investments." The Fund will not invest
in equity securities that are principally traded outside of the United States.
BARR ROSENBERG DOUBLE ALPHA MARKET FUND
The investment objective of the Barr Rosenberg Double Alpha Market Fund
is to seek a total return greater than that of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"). The Fund seeks to achieve
its objective by investing in shares of the Barr Rosenberg Market Neutral
Fund while simultaneously utilizing S&P 500 Index Futures, options on S&P 500
Index Futures and equity swap contracts to gain exposure to the equity market
as measured by the S&P 500 Index. See "Investment Objectives and Policies --
Barr Rosenberg Market Neutral Fund" and "General Description of Risks and
Fund Investments --Risks of S&P 500 Index Futures and Related Options" and
"-- Equity Swap Contracts" below. The Fund has applied to the Securities and
Exchange Commission for an exemptive order allowing it to invest without
limit in the Barr Rosenberg Market Neutral Fund. Once the Fund has
indirectly constructed a diversified long and short portfolio through the
purchase of shares of the Barr Rosenberg Market Neutral Fund, the Manager
will purchase S&P 500 Index Futures, options on S&P 500 Index Futures and
equity swap contracts in an amount approximately equal to the net asset value
of the Fund in order to gain full net exposure to the U.S. equity market as
measured by the S&P 500 Index. In addition to purchasing shares of the Barr
Rosenberg Market Neutral Fund, the Fund may also take long positions in
stocks principally traded in the markets
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<PAGE>
of the United States that the Manager has identified as undervalued and short
positions in such stocks that the Manager has identified as overvalued. See
"General Description of Risks and Fund Investments -- Risks of Short Sales."
The S&P 500 Index is an unmanaged index composed of 500 common stocks,
most of which are listed on the New York Stock Exchange. The S&P 500 Index
assigns relative values to the stocks included in the index, weighted
according to each stock's total market value relative to the total market
value of the other stocks included in such index.
To meet margin requirements, redemptions or pending investments, the
Fund may also temporarily hold a portion of its assets in full faith and
credit obligations of the United States government (e.g., U.S. Treasury
Bills) and in short-term notes, commercial paper or other money market
instruments of high quality (i.e., rated at least "A-2" or "AA" by S&P or
Prime 2 or "Aa" by Moody's) issued by companies having an outstanding debt
issue rated at least "AA" by S&P or at least "Aa" by Moody's, or determined
by the Manager to be of comparable quality to any of the foregoing.
The Fund's long and short positions may involve (without limit) equity
securities of foreign issuers that are principally traded in the markets of
the United States. See "General Description of Risks and Fund Investments
- --Special Considerations of Foreign Investments." The Fund will not invest
in equity securities that are principally traded outside of the United States.
In a typical stock mutual fund the portfolio manager attempts to earn an
excess return (return above market return) or "alpha" by identifying and
purchasing UNDERVALUED stocks. However, there is another "alpha" possibility
- --identifying and selling short OVERVALUED stocks. The term "double alpha"
refers to the fact that there are thus two potential sources of alpha: one
from correctly identifying undervalued stocks and one from correctly
identifying overvalued stocks. The market neutral strategy employed by both
the Barr Rosenberg Market Neutral Fund and indirectly by the Barr Rosenberg
Double Alpha Market Fund (through investment in shares of the Barr Rosenberg
Market Neutral Fund) seeks to capture both alphas. The Barr Rosenberg Double
Alpha Market Fund also seeks gain (and incurs additional risk) by investing
in S&P 500 Index instruments.
INVESTMENT CONSIDERATIONS
An investor desiring capital appreciation with minimal exposure to the
equity market may wish to consider the Barr Rosenberg Market Neutral Fund.
An investor desiring enhanced equity market returns exceeding the return on
the S&P 500 Index may wish to consider the Barr Rosenberg Double Alpha Market
Fund.
GENERAL DESCRIPTION OF RISKS AND FUND INVESTMENTS
INVESTMENT RISKS. The value of Fund shares may increase or decrease
depending on market, economic, political, regulatory and other conditions
affecting each Fund's portfolio. Investment in shares of the Funds is more
volatile and risky than some other forms of investment. In addition, if the
Manager takes long positions in stocks and short positions in other stocks
such that the portfolio of long positions underperforms while the portfolio
of short positions outperforms the market, then the losses of the Barr
Rosenberg Market Neutral Fund and Barr Rosenberg Double Alpha Market Fund may
exceed those of other stock mutual funds. Moreover, the market neutral
strategy has the effect of accelerating the recognition of gain for tax
purposes and increasing the short-term gain component of gains in the Funds.
Short-term gains are ordinarily taxed to shareholders at ordinary income tax
rates.
RISKS OF SHORT SALES (BOTH FUNDS). When the Manager anticipates that a
security is overvalued, it may sell the security short and borrow the same
security from a broker or other institution to complete the sale. A Fund
will incur a loss as a result of a short sale if the price of the borrowed
security increases between the date of the short sale and the date on which
the Fund replaces such security. A Fund will realize a gain if the security
declines in price between those dates. There can be no assurance that a Fund
will be able to close out a short position at any particular time or at an
acceptable price. Although a Fund's gain is limited to the amount at which it
sold a security short, its
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<PAGE>
potential loss is limited only by the maximum attainable price of the
security less the price at which the security was sold. Until a Fund
replaces a borrowed security, it will maintain daily a segregated account
with its Custodian containing cash, U.S. Government securities, or other
liquid securities such that the amount deposited in the account plus any
amount deposited with a broker or other custodian as collateral will at least
equal the current market value of the security sold short. Depending on
arrangements made with such broker or custodian, a Fund may not receive any
payments (including interest) on collateral deposited with such broker or
custodian. The Funds will not make a short sale if, after giving effect to
such sale, the market value of all securities sold exceeds 100% of the value
of a Fund's net assets. A Fund's use of short sales may result in the Fund
realizing more short-term capital gains (subject to tax at ordinary income
rates) than it would if it did not engage in short sales.
RISKS OF S&P 500 INDEX FUTURES AND RELATED OPTIONS (BARR ROSENBERG
DOUBLE ALPHA MARKET FUND ONLY). An S&P 500 Index Future contract (an "Index
Future") is a contract to buy or sell an integral number of units of the S&P
500 Index at a specified future date at a price agreed upon when the contract
is made. A unit is the value at a given time of the S&P 500 Index. Entering
into a contract to buy units is commonly referred to as buying or purchasing
a contract or holding a long position in the S&P 500 Index. An option on an
Index Future gives the purchaser the right, in return for the premium paid,
to assume a long or a short position in an Index Future. The Barr Rosenberg
Double Alpha Market Fund will realize a loss if the value of the S&P 500
Index declines between the time the Fund purchases an Index Future or an
option transaction in which the Fund has assumed a long position and may
realize a gain if the value of the S&P 500 Index rises between such dates.
The Barr Rosenberg Double Alpha Market Fund may close out a futures
contract purchase by entering into a futures contract sale. This will
operate to terminate the Fund's position in the futures contract. Positions
in Index Futures may be closed out by the Fund only on the futures exchanges
on which the Index Futures are then traded. There can be no assurance that a
liquid market will exist for any particular contract at any particular time.
The liquidity of the market in futures contracts could be adversely affected
by "daily price fluctuation limits" established by the relevant futures
exchange which limit the amount of fluctuation in the price of an Index
Future during a single trading day. Once the daily limit has been reached in
the contract, no trades may be entered into at a price beyond the limit. In
such event, it may not be possible for the Fund to close its futures contract
purchase, and, in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin
(payments to and from a broker made on a daily basis as the price of the
Index Future fluctuates). The futures market may also attract more
speculators than does the securities market, because deposit requirements in
the futures market are less onerous than margin requirements in the
securities market. Increased participation by speculators in the futures
market may also cause price distortions.
Further, when the Barr Rosenberg Double Alpha Market Fund purchases an
Index Future, it is required to maintain, at all times while an Index Future
is held by the Fund, cash, U.S. Government securities or other high grade
liquid securities in a segregated account with its Custodian, in an amount
which, together with the initial margin deposit on the futures contract, is
equal to the current value of the futures contract.
EQUITY SWAP CONTRACTS (BARR ROSENBERG DOUBLE ALPHA MARKET FUND ONLY).
In an equity swap contract, the counterparty generally agrees to pay the Barr
Rosenberg Double Alpha Market Fund the amount, if any, by which the notional
amount of the equity swap contract would have increased in value had it been
invested in the basket of stocks comprising the S&P 500 Index, plus the
dividends that would have been received on those stocks. The Fund agrees to
pay to the counterparty a floating rate of interest (typically the London
Inter Bank Offered Rate) on the notional amount of the equity swap contract
plus the amount, if any, by which that notional amount would have decreased
in value had it been invested in such stocks. Therefore, the return to the
Fund on any equity swap contract should be the gain or loss on the notional
amount plus dividends on the stocks comprising the S&P 500 Index (as if the
Fund had invested the notional amount in stocks comprising the S&P 500 Index)
less the interest paid by the Fund on the notional amount. Therefore, the
Fund will generally realize a loss if the value of the S&P 500 Index declines
and will generally realize a gain if the value of the S&P 500 Index rises.
The Fund will enter into equity swap contracts only on a net basis, i.e.,
where the two parties' obligations are netted out, with the Fund paying or
receiving,
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as the case may be, only the net amount of any payments. If there is a
default by the counterparty to an equity swap contract, the Fund will be
limited to contractual remedies pursuant to the agreements related to the
transaction. The Fund's use of equity swap contracts may result in the Fund
realizing more income subject to tax at ordinary income tax rates than it
would if it did not enter into equity swap contracts.
There is no assurance that the equity swap contract counterparties will
be able to meet their obligations or that, in the event of default, the Barr
Rosenberg Double Alpha Market Fund will succeed in pursing contractual
remedies. The Fund thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to these contracts.
The Fund will closely monitor the credit of equity swap contract
counterparties in order to minimize this risk. The Fund will not use equity
swap contracts for leverage.
The Barr Rosenberg Double Alpha Market Fund will not enter into any
equity swap contract unless, at the time of entering into such transaction,
the unsecured senior debt of the counterparty is rated at least A by Moody's
or S&P. In addition, the staff of the Securities and Exchange Commission
considers equity swap contracts to be illiquid securities. Consequently,
while the staff maintains this position, the Fund will not invest in equity
swap contracts if, as a result of the investment, the total value of such
investments together with that of all other illiquid securities which the
Fund owns would exceed 15% of the Fund's net assets.
The net amount of the excess, if any, of the Fund's obligations over its
entitlement with respect to each equity swap contract will be accrued on a
daily basis, and an amount of cash, U.S. Government Securities or other
liquid securities having an aggregate market value at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
Custodian. The Fund does not believe that the Fund's obligations under
equity swap contracts are senior securities, so long as such a segregated
account is maintained, and accordingly, the Fund will not treat them as being
subject to its borrowing restrictions.
SPECIAL CONSIDERATIONS OF FOREIGN INVESTMENTS (BOTH FUNDS). Investing
in securities of foreign issuers involves certain risks not typically found
in investing in securities of U.S. issuers. These include risks of adverse
change in foreign economic, political, regulatory and other conditions, and
changes in currency exchange rates, exchange control regulations (including
currency blockage), expropriation of assets or nationalization, imposition of
withholding taxes on dividend or interest payments, and possible difficulty
in obtaining and enforcing judgments against foreign entities. Furthermore,
issuers of foreign securities are subject to different, and often less
comprehensive, accounting, reporting and disclosure requirements than
domestic issuers. In certain countries, legal remedies available to
investors may be more limited than those available with respect to
investments in the United States or other countries. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. There are also special tax considerations which
apply to securities of foreign issuers.
REPURCHASE AGREEMENTS (BOTH FUNDS). Each Fund may enter into repurchase
agreements, by which a Fund purchases a security and obtains a simultaneous
commitment from the seller (a bank or, to the extent permitted by the
Investment Company Act of 1940, as amended (the "1940 Act"), a recognized
securities dealer) to repurchase the security at an agreed-upon price and
date (usually seven days or less from the date of original purchase). The
resale price is in excess of the purchase price and reflects an agreed-upon
market rate unrelated to the coupon rate on the purchased security. Such
transactions afford the Funds the opportunity to earn a return on temporarily
available cash. Although the underlying security may be a bill, certificate
of indebtedness, note or bond issued by an agency, authority or
instrumentality of the U.S. Government, the obligation of the seller is not
guaranteed by the U.S. Government and there is a risk that the seller may
fail to repurchase the underlying security. In such event, a Fund would
attempt to exercise rights with respect to the underlying security, including
possible disposition in the market. However, a Fund may be subject to
various delays and risks of loss, including (a) possible declines in the
value of the underlying security during the period while a Fund seeks to
enforce its rights thereto and (b) inability to enforce rights and the
expenses involved in attempted enforcement.
LOANS OF PORTFOLIO SECURITIES (BOTH FUNDS). Each Fund may lend some or
all of its portfolio securities to broker-dealers. Securities loans are made
to broker-dealers pursuant to agreements requiring that loans be continuously
secured by collateral in cash or U.S. Government securities at least equal at
all times to the market value
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of the securities lent. The borrower pays to the lending Fund an amount
equal to any dividends or interest received on the securities lent. When the
collateral is cash, the Funds may invest the cash collateral in
interest-bearing, short-term securities. When the collateral is U.S.
Government securities, the Fund usually receives a fee from the borrower.
Although voting rights or rights to consent with respect to the loaned
securities pass to the borrower, a Fund retains the right to call the loans
at any time on reasonable notice, and it will do so in order that the
securities may be voted by the Fund if the holders of such securities are
asked to vote upon or consent to matters materially affecting the investment.
A Fund may also call such loans in order to sell the securities involved.
The risks in lending portfolio securities, as with other extensions of
credit, include possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. However,
such loans will be made only to broker-dealers that are believed by the
Manager to be of relatively high credit standing.
ILLIQUID SECURITIES (BOTH FUNDS). Each Fund may purchase "illiquid
securities", defined as securities which cannot be sold or disposed of in the
ordinary course of business within seven days at approximately the price at
which a Fund has valued such securities, so long as no more than 15% of a
Fund's net assets would be invested in such illiquid securities after giving
effect to a purchase. Investment in illiquid securities involves the risk
that, because of the lack of consistent market demand for such securities, a
Fund may be forced to sell them at a discount from the last offer price.
PORTFOLIO TURNOVER. Portfolio turnover is not a limiting factor with
respect to investment decisions of the Manager. The rate of a Fund's
portfolio turnover may vary significantly from time to time depending on the
volatility of economic and market conditions. Although the rate of portfolio
turnover is difficult to predict, it is not anticipated that under normal
circumstances the annual portfolio turnover rate of each of the long and
short portfolios of the Barr Rosenberg Market Neutral Fund will exceed 150%,
and it is not anticipated that under normal circumstances the annual
portfolio turnover rate of the Barr Rosenberg Double Alpha Market Fund will
exceed 50%. It is, however, impossible to predict portfolio turnover in
future years. High portfolio turnover involves correspondingly greater
brokerage commissions and other transaction costs, which will be borne
directly by a Fund, and could involve realization of capital gains that would
be taxable when distributed to shareholders of such Fund. To the extent
portfolio turnover results in the realization of net short-term capital
gains, such gains ordinarily are taxed to shareholders at ordinary income tax
rates. See "Taxes."
INVESTMENT OBJECTIVES AND POLICIES. Except as explicitly described
otherwise, the investment objective and policies of each of the Funds may be
changed without shareholder approval.
PERFORMANCE INFORMATION
Rosenberg Institutional Equity Management also serves as the manager of
other accounts that have investment objectives, policies and strategies that
are substantially similar to those of the Barr Rosenberg Market Neutral Fund
(collectively, the "Market Neutral Accounts"). The information below should
not be considered a prediction of the future performance of the Barr
Rosenberg Market Neutral Fund. The performance of such Fund may be higher or
lower than the performance of the Market Neutral Accounts. The performance
information shown below is based on a composite of all of the Manager's
accounts with substantially similar investment objectives, policies and
strategies and has been adjusted to give effect to the estimated annualized
expenses (without giving effect to any expense waivers or reimbursements) of
Institutional Shares of the Barr Rosenberg Market Neutral Fund during its
first year of operations. The Market Neutral Accounts were not registered
under the 1940 Act and therefore were not subject to certain investment
restrictions imposed by the 1940 Act. If the Market Neutral Accounts had been
registered under the 1940 Act, their performance might have been adversely
affected. In addition, the Market Neutral Accounts were not subject to
Subchapter M of the Internal Revenue Code. The following table shows the
average annual total return for the one-year, three-year, five-year and
since-inception periods ending _______, 1998 for the Market Neutral Accounts.
The following table also shows the average annual total return on 3-month
U.S. Treasury bills for the same periods.
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<TABLE>
<CAPTION>
ONE-YEAR PERIOD THREE-YEAR PERIOD FIVE-YEAR PERIOD PERIOD FROM
ENDING ENDING ENDING FEBRUARY 28, 1989
, 1998 , 1998 , 1998 TO , 1998
--------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Market Neutral Accounts . . . . . ____% ____% ____% ____%
3-month U.S. Treasury Bills . . . ____% ____% ____% ____%
</TABLE>
An investment in 3-month U.S. Treasury Bills is different from an
investment in the Barr Rosenberg Market Neutral Fund because Treasury Bills
are backed by the full faith and credit of the U.S. Government, Treasury
Bills have a fixed rate of return and investors in Treasury Bills do not bear
the risk of losing their investment. Giving effect to the expense limitation
of 2.00% on the expenses of the Institutional Shares of the Barr Rosenberg
Market Neutral Fund as set forth in the "Fund Expenses" section, the average
annual total return for the one-year, three-year, five-year and
since-inception periods ending ________, 1998 for the Market Neutral Accounts
would have been ____%, _____%, _____% and _____%, respectively. There have
been two enhancements to the Manager's market neutral strategy since its
inception in 1989. First, the Manager incorporated its Earnings Change Model
and Investor Sentiment Model into its market neutral strategy in October 1992
and April 1993, respectively. See "Management of the Trust -- The Manager's
General Investment Philosophy and Strategy." The second change to the
Manager's market neutral strategy occurred in July 1995, when the Manager
focused its strategy on medium and smaller capitalization companies. Prior
to such date, the Manager had applied its market neutral strategy to
companies across the capitalization spectrum (I.E., large, medium and small
capitalization companies). Throughout both periods, however, the Manager has
maintained long and short positions of approximately the same dollar amount
within a given capitalization sector. The Funds may invest in stocks of
companies of any capitalization to meet risk/return objectives and liquidity
needs. Despite the two enhancements to the Manager's market neutral strategy
since 1989, the Barr Rosenberg Market Neutral Fund will have substantially
similar investment objectives, policies and strategies as the Market Neutral
Accounts.
MANAGEMENT OF THE TRUST
Each Fund is advised and managed by Rosenberg Institutional Equity
Management (the "Manager") which provides investment advisory services to a
substantial number of institutional investors. The Manager is also the
investment manager of the other funds of the Trust.
KEY PERSONNEL OF THE MANAGER
The biography of each of the General Partners of the Manager, each of
whom is also a Trustee of the Trust, is set forth below.
BARR ROSENBERG. Dr. Rosenberg is Managing General Partner and Chief
Investment Officer of the Manager. As such, he has ultimate responsibility
for the Manager's securities valuation and portfolio optimization systems
used to manage the Funds and for the implementation of the decisions
developed therein. His area of special concentration is the design of the
Manager's proprietary securities valuation model.
Dr. Rosenberg earned a B.A. degree from the University of California,
Berkeley, in 1963. He earned an M.Sc. from the London School of Economics in
1965, and a Ph.D. from Harvard University, Cambridge, Massachusetts, in 1968.
From 1968 until 1983, Dr. Rosenberg was a Professor of Finance, Econometrics,
and Economics at the School of Business Administration at the University of
California, Berkeley. Concurrently, from 1968 until 1974, Dr. Rosenberg
worked as a consultant in applied decision theory in finance, banking and
medicine. In 1975, he founded Barr Rosenberg Associates, a financial
consulting firm (now known as BARRA) where he was a managing partner, and
later chief scientist. Dr. Rosenberg, the founder of the Berkeley Program in
Finance, is acknowledged as an expert in the modeling of complex processes
with substantial elements of risk.
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<PAGE>
MARLIS S. FRITZ. Ms. Fritz is a General Partner of the Manager. She has
primary responsibility for the Manager's new business development and secondary
responsibility for client service.
Ms. Fritz earned a B.S. degree from the University of Michigan, Ann
Arbor, in 1971. After working in life insurance management and sales for
seven years, she entered the investment management business in 1978 as
Marketing Associate with Forstmann-Leff Associates, New York. From 1983
until 1985, she was Vice President, Marketing at Criterion Investment
Management Company, Houston, Texas.
KENNETH REID. Dr. Reid is a General Partner and Director of Research of
the Manager. His work is focused on the design and estimation of the
Manager's valuation models and he has primary responsibility for analyzing
the empirical evidence that validates and supports the day-to-day
recommendations of the Manager's securities valuation models. Patterns of
short-term price behavior discussed by Dr. Reid as part of his Ph.D.
dissertation have been refined and incorporated into the Manager's
proprietary valuation and trading systems.
Dr. Reid earned both a B.A. degree (1973) and an M.D.S. (1975) from
Georgia State University, Atlanta. In 1982, he earned a Ph.D. from the
University of California, Berkeley, where he was awarded the American Bankers
Association Fellowship. From 1981 until June 1986, Dr. Reid worked as a
consultant at BARRA in Berkeley, California. His responsibilities included
estimating multiple-factor risk models, designing and evaluating active
management strategies, and serving as an internal consultant on econometric
matters in finance.
There are 42 professional staff members of the Manager and the Manager's
affiliate, Barr Rosenberg Investment Management, Inc., located in Orinda,
California. Included among the Manager's professional staff are seven
individuals with Ph.D.s and eighteen individuals with other graduate degrees.
Five members of the staff have been awarded C.F.A. certificates.
THE OUTSIDE TRUSTEES
William F. Sharpe and Nils H. Hakansson are Trustees of the Trust who
are not "interested persons" (as defined in the 1940 Act) of the Trust or the
Manager.
Dr. Sharpe is the STANCO 25 Professor of Finance at Stanford
University's Graduate School of Business. He is best known as one of the
developers of the Capital Asset Pricing Model, including the beta and alpha
concepts used in risk analysis and performance measurement. He developed the
widely-used binomial method for the valuation of options and other contingent
claims. He also developed the computer algorithm used in many asset
allocation procedures. Dr. Sharpe has published articles in a number of
professional journals. He has also written six books, including PORTFOLIO
THEORY AND CAPITAL MARKETS, (McGraw-Hill, 1970), ASSET ALLOCATION TOOLS,
(Scientific Press, 1987), FUNDAMENTALS OF INVESTMENTS (with Gordon J.
Alexander and Jeffery Bailey, Prentice-Hall, 1993) and INVESTMENTS (with
Gordon J. Alexander and Jeffery Bailey, Prentice-Hall, 1995). Dr. Sharpe is
a past President of the American Finance Association. He has also served as
consultant to a number of corporations and investment organizations. He is
also a member of the Board of Trustees of Smith Breeden Trust, an investment
company, and a director at CATS Software and Stanford Management Company. He
received the Nobel Prize in Economic Sciences in 1990.
Professor Hakansson is the Sylvan C. Coleman Professor of Finance and
Accounting at the Haas School of Business, University of California,
Berkeley. He is a former member of the faculty at UCLA as well as at Yale
University. At Berkeley, he served as Director of the Berkeley Program in
Finance (1988-1991) and as Director of the Professional Accounting Program
(1985-1988). Professor Hakansson is a Certified Public Accountant and spent
three years with Arthur Young & Company prior to receiving his Ph.D. from
UCLA in 1966. He has twice been a Visiting Scholar at Bell Laboratories in
New Jersey and was, in 1975, the Hoover Fellow at the University of New South
Wales in Sydney and, in 1982, the Chevron Fellow at Simon Fraser University
in British Columbia. In 1984, Professor Hakansson was a Special Visiting
Professor at the Stockholm School of Economics, where he was also
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<PAGE>
awarded an honorary doctorate in economics. He is a past president of the
Western Finance Association (1983-1984). Professor Hakansson has published
numerous articles in academic journals and in professional volumes. Many of
his papers address various aspects of asset allocation procedures as well as
topics in securities innovation, information economics and financial
reporting. He has served on the editorial boards of several professional
journals and been a consultant to the RAND Corporation and a number of
investment organizations. Professor Hakansson is a member of the board of
two foundations and a past board member of SuperShare Service Corporation and
of Theatrix Interactive, Inc. He is also a Fellow of the Accounting
Researchers International Association and a member of the Financial
Economists Roundtable.
THE MANAGER'S GENERAL INVESTMENT PHILOSOPHY AND STRATEGY
The Manager attempts to add value relative to a benchmark through a
quantitative stock selection process, and seeks to diversify investment risk
across the holdings in each Fund. In seeking to outperform each Fund's
benchmark, the Manager also attempts to control risk in a Fund's portfolio
relative to the benchmark.
INVESTMENT PHILOSOPHY. The Manager's investment strategy is based on
the belief that stock prices imperfectly reflect the present value of the
expected future earnings of companies, their "fundamental value." The
Manager believes that market prices will converge towards fundamental value
over time, and that therefore, if the Manager can accurately determine
fundamental value, and can apply a disciplined investment process to select
those stocks that are currently undervalued (in the case of purchases) or
overvalued (in the case of short sales), the Manager will outperform a Fund's
benchmark over time.
The premise of the Manager's investment philosophy is that there is a
link between the price of a stock and the underlying financial and
operational characteristics of the company. In other words, the price
reflects the market's assessment of how well the company is positioned to
generate future earnings and/or future cash flow. The Manager identifies and
purchases those stocks which are undervalued (I.E., they are currently
cheaper than similar stocks with the same characteristics) and engages in
short sales with respect to those stocks that are overvalued (I.E., they are
currently more expensive than similar stocks with the same characteristics).
The Manager believes that the market will recognize the "better value" and
that the mispricing will be corrected as the stocks in the Fund's portfolios
are purchased or sold by other investors.
Determination of the relative valuation of a stock is based upon a
comparison of similar companies. In any group of similar companies, it is
the Manager's view that there are always some that are overvalued, some that
are undervalued, and some that are fairly-valued relative to the average
valuation for the group. These moderate valuation errors are believed to be
present in every sector of the market and can be identified through rigorous
quantitative analysis of fundamental data.
In determining whether or not a stock is attractive, the Manager
considers the company's current estimated fundamental value as determined by
the Manager's proprietary Appraisal Model, the Manager's model for expected
earnings, and analysis of investor sentiment toward the stock. The Manager
identifies and causes a Fund to purchase an undervalued stock and to hold it
in the Fund's portfolio until the market recognizes and corrects for the
misvaluation. Conversely, the Manager identifies and causes a Fund to sell
short an overvalued stock.
DECISION PROCESS. The Manager's decision process is a continuum. Its
research function develops Models which analyze the approximately 12,000
securities in the global universe, both fundamentally and technically, and
determines the risk characteristics of the Fund's benchmark. The portfolio
management function optimizes each portfolio's composition, executes trades,
and monitors performance and trading costs.
The essence of the Manager's approach is rigorous attention to important
aspects of the investment process. Factors crucial to successful stock
selection include: (1) accurate and timely data on a large universe of
companies; (2) subtle quantitative descriptors of value and predictors of
changes in value; and (3) insightful definitions of similar
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<PAGE>
businesses. The Manager takes great care assimilating, checking and
structuring the input data on which its Models rely. The Manager believes
that if the data is correct, the recommendations made by the system will be
sound.
STOCK SELECTION. Fundamental valuation of stocks is key to the
Manager's investment process, and the heart of the valuation process lies in
the Manager's proprietary Appraisal Model. Analysis of companies in the
United States and Canada is conducted in a single unified Model. The
Appraisal Model discriminates where the two markets are substantially
different, while simultaneously comparing companies in the two markets
according to their degrees of similarity. European companies and Asian
companies (other than Japanese companies) are analyzed in a nearly global
Model, which includes the United States and Canada as a further basis for
comparative valuation, but which excludes Japan. Japanese companies are
analyzed in an independent national Model. The Model incorporates the
various accounting standards which apply in different markets and makes
adjustments to ensure meaningful comparisons.
An important feature of the Appraisal Model is the classification of
companies into one or more of 166 groups of "similar" businesses. Currently,
in the United States, 160 groups are applicable; in Japan, 122 groups are
applicable; and in Europe, 154 groups are applicable. Each company is broken
down into its individual business segments, and each segment is compared with
similar business operations of other companies doing business in the same
geographical market. In most cases, the comparison is extended to include
companies with similar business operations in different markets. Subject to
the availability of data in different markets, the Manager appraises the
company's assets, operating earnings and sales within each business segment,
accepting the market's valuation of that category of business as fair. The
Manager then integrates the segment appraisals into balance sheet, income
statement and sales valuation models for the total company, and
simultaneously adjusts the segment appraisals to include appraisals for
variables which are declared only for the total company, such as taxes,
capital structure, and pension funding. The result is a single valuation for
each of the approximately 12,000 companies followed.
The difference between the Manager's appraisal and the market price is
believed to represent an opportunity for profit. For each stock, the Manager
develops "appraisal alphas" (I.E., the expected rate of extraordinary return)
by adjusting for the rate at which the market has corrected for such
misvaluations in the past.
A second sphere of analysis is captured by the Manager's proprietary
Earnings Change Model, which analyzes more than 20 variables to predict
individual company earnings over a one year horizon. The variables are
fundamental and fall into three categories: measures of past profitability,
measures of company operations and consensus earnings forecasts. The
Earnings Change Model is independent of the Appraisal Model and projects the
change in a company's earnings in cents/current price. The value of the
projected earnings change is converted to an "earnings change alpha" by
multiplying the projected change by the market's historical response to
changes of that magnitude.
Finally, the Manager's proprietary Investor Sentiment Model quantifies
investor sentiment about features of stocks which influence price but which
are not captured by the Appraisal Model or the Earnings Change Model. This
Model measures company quality by looking at past price patterns and by
predicting the probability of deficient earnings. The Investor Sentiment
Model also captures market enthusiasm towards individual stocks by looking at
broker recommendations and analyst estimates. Investor sentiment alphas are
developed by multiplying the Model's sentiment scores by the market's
historical response to such scores.
Each company's earnings change alpha and investor sentiment alpha are
added to its appraisal alpha to arrive at a total company alpha. Stocks with
large positive total company alphas are candidates for purchase. Stocks with
large negative total company alphas are candidates for short sales. Stocks
held in a portfolio with total company alphas that are only slightly
positive, zero or negative are candidates for sale.
Before trading, the Manager systematically analyzes the short-term price
behavior of individual stocks to determine the timing of trades. The
Investor Sentiment Model quantifies investor enthusiasm for each stock by
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analyzing its short-term performance relative to similar stocks, changes in
analyst and broker opinions about the stock, and earnings surprises. The
Manager develops a "trading alpha" for each stock, which is the Manager's
prediction of the short-term return of a particular stock. This return is
calculated by the Manager's proprietary model by analyzing short-term factors
such as trading volume and price movements. The Manager believes its model,
used in this way, can add value by helping determine the optimal timing of
portfolio trades.
OPTIMIZATION. The Manager's portfolio optimization system seeks to
optimize the trade-off between risk and reward relative to a Fund's
benchmark. It exploits the information developed by the Manager's stock
selection Models to maximize return relative to the benchmark, while avoiding
a portfolio with exposure to any other extraneous factors that would
distinguish the Fund's portfolio from the relevant benchmark. Within the
geographic zone appropriate for a Fund, the optimizer recommends positions in
companies which in the aggregate constitute the most efficient portfolio.
The optimizer simultaneously considers total company alphas, trading alphas,
and risk and quantifies the expected "net benefit" to the portfolio of each
recommended transaction. No transaction will be executed unless the
opportunity offered by a purchase or sale candidate sufficiently exceeds the
potential of an existing holding to justify the transaction costs. In most
markets, portfolios are reoptimized continuously throughout the day, allowing
the Manager to respond immediately to investment opportunities.
TRADING. The Manager's trading system aggregates the recommended
transactions for a Fund and determines the feasibility of each recommendation
in light of the stock's liquidity, the expected transaction costs, and
general market conditions. It relays target price information to a trader
for each stock considered for purchase or sale. Trades are executed through
any one of four trading strategies: traditional brokerage, networks,
accommodation, and package or "basket" trades.
The network arrangements the Manager has developed with Instinet
Matching System (IMS), Portfolio System for Institutional Trading (POSIT),
and the Arizona Stock Exchange (AZX) facilitate large volume trading with
little or no price disturbance and low commission rates.
Accommodative trading (which we also refer to as the Manager's "match
system") allows institutional buyers and sellers of stock to electronically
present the Manager with their "interest" lists each morning. Any matches
between the inventory which the brokers have presented and the Manager's own
recommended trades are signaled to the Manager's traders. Since the broker
is doing agency business and has a client on the other side of the trade, the
Manager expects that the other side will be accommodative in the price. The
Manager's objective in using this match system is to execute most trades on
the Manager's side of the bid/ask spread so as to minimize market impact.
Package trades further allow the Manager to trade large lists of orders
simultaneously using state of the art tools such as the Instinet Real-Time
System, Instinet Order Matching System and Lattice Trading System. Those
tools provide order entry, negotiation and execution capabilities, either
directly to other institutions or electronically to the floor of the
exchange. The advantages of using such systems include speed of execution,
low commissions, anonymity and very low market impact.
The Manager continuously monitors trading costs to determine the impact
of commissions and price disturbance on a Fund's portfolio.
INDIVIDUALS RESPONSIBLE FOR THE FUNDS
Each of the following General Partners of the Manager holds a greater
than 5% interest in the Manager: Marlis S. Fritz and Kenneth Reid. Rosenberg
Alpha L.P., a California limited partnership, is a limited partner of the
Manager and holds a greater than 5% interest in the Manager. Barr M.
Rosenberg, the Managing General Partner of the Manager, and his wife, June
Rosenberg, each holds a greater than 5% general partnership interest in
Rosenberg Alpha L.P.
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Management of the portfolio of each Fund is overseen by the Manager's
General Partners who are responsible for the design and maintenance of the
Manager's portfolio system, and by a portfolio manager who is responsible for
research and monitoring each Fund's characteristic performance against the
relevant benchmark and for monitoring cash balances.
Dr. Rosenberg, Dr. Reid and F. William Jump, Jr., the portfolio manager,
are responsible for the day-to-day management of each Fund's portfolio. Dr.
Rosenberg and Dr. Reid both have been employed by the Manager since 1985.
Mr. Jump has had numerous responsibilities including trading, applications
programming, new product development and portfolio engineering since he
joined the Manager in 1990. He received a B.A. from Swarthmore College in
1977 and a M.B.A. from The Wharton School, University of Pennsylvania in 1983.
MANAGEMENT CONTRACTS
Under a Management Contract with the Trust on behalf of each Fund, the
Manager selects and reviews each Fund's investments and provides executive
and other personnel for the management of the Trust. Pursuant to the Trust's
Agreement and Declaration of Trust, as amended, the Board of Trustees
supervises the affairs of the Trust as conducted by the Manager. In the
event that the Manager ceases to be the manager of a Fund, the right of the
Trust to use the identifying name "Barr Rosenberg" and/or "Rosenberg" may be
withdrawn.
Each Fund will pay all other expenses incurred in the operation of such
Fund, including, but not limited to, brokerage commissions and transfer taxes
in connection with the Fund's portfolio transactions, all applicable taxes
and filing fees, distribution fees, shareholder servicing fees, the fees and
expenses for registration or qualification of its shares under the federal or
state securities laws, the compensation of trustees who are not partners,
officers or employees of the Manager, interest charges, expenses of issue or
redemption of shares, charges of custodians, auditing and legal expenses,
expenses of determining net asset value of Fund shares, expenses of reports
to shareholders, expenses of meetings of shareholders, expenses of printing
and mailing prospectuses, proxy statements and proxies to existing
shareholders, insurance premiums and professional association dues or
assessments.
In addition, each Fund has agreed to pay the Manager a quarterly
management fee at the annual percentage rate of such Fund's average daily net
assets set forth below. The Manager has voluntarily undertaken to waive some
or all of its management fee and, if necessary, to bear certain expenses of
each Fund until further notice to the extent required to limit the total
annual operating expenses (which do not include nonrecurring account fees and
extraordinary expenses) of each class of shares to the percentage of each
Fund's average daily net assets attributable to that class listed in the
Expense Limitation column below. The Manager's fee for management of the
Barr Rosenberg Market Neutral Fund is higher than that paid by most other
mutual funds although the Manager believes it is competitive with the fees
for similar collective investment vehicles.
<TABLE>
<CAPTION>
CONTRACTUAL
MANAGEMENT FEE (AS EXPENSE LIMITATION
A % OF AVERAGE DAILY (AS A % OF AVERAGE
NET ASSETS) DAILY NET ASSETS)*
-------------------- ------------------
<S> <C> <C>
INSTITUTIONAL SHARES
Market Neutral Fund 1.90% 2.00%
Double Alpha Market Fund 0.10% 2.35%
INVESTOR SHARES
Market Neutral Fund 1.90% 2.50%
Double Alpha Market Fund 0.10% 2.85%
</TABLE>
_______________
* Includes indirect expenses borne by the Barr Rosenberg Double Alpha
Market Fund through ownership of Institutional Shares of the Barr Rosenberg
Market Neutral Fund.
-17-
<PAGE>
ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN
BISYS Fund Services (the "Administrator"), a wholly-owned subsidiary of
The BISYS Group, Inc., serves as the Trust's administrator and generally
assists the Trust in all aspects of its administration and operation. As
compensation for its administrative services, the Administrator receives a
monthly fee based upon an annual percentage rate of 0.15% of the aggregate
average daily net assets of the Trust.
BISYS Fund Services, Inc. (the "Transfer Agent") has entered into an
agreement with the Trust for the provision of transfer agency services and
dividend disbursing services for the Trust. The principal business address
of the Transfer Agent is 3435 Stelzer Road, Columbus, Ohio 43219.
Custodial Trust Company (the "Custodian") serves as custodian of the
assets of the Funds. The principal address of the Custodian is 101 Carnegie
Center, Princeton, New Jersey 08540.
DISTRIBUTOR
Investor Shares of the Funds are sold on a continuous basis by the
Trust's distributor, Barr Rosenberg Funds Distributor, Inc. (the
"Distributor"), a wholly-owned subsidiary of BISYS. The Distributor's
principal offices are located at 125 West 55th Street, 11th Floor, New York,
NY 10019. Institutional Shares are sold directly by the Funds.
Solely for the purpose of compensating the Distributor for services and
expenses primarily intended to result in the sale of Investor Shares of the
Funds, such shares are subject to an annual Distribution Fee of up to 0.50%
of the average daily net assets attributable to such shares in accordance
with a Distribution Plan (the "Distribution Plan") adopted by the Trust
pursuant to Rule 12b-1 under the 1940 Act. Currently, each Fund pays the
Distributor an annual Distribution Fee of 0.25% of each Fund's average daily
net assets attributable to Investor Shares. Activities for which the
Distributor may be reimbursed include (but are not limited to) the
development and implementation of direct mail promotions and advertising for
each Fund, the preparation, printing and distribution of prospectuses for the
Funds to recipients other than existing shareholders, and contracting with
one or more wholesalers of the Funds' shares. The Distribution Plan is of
the type known as a "compensation" plan. This means that, although the
Trustees of the Trust are expected to take into account the expenses of the
Distributor in their periodic review of the Distribution Plan, the fees are
payable to compensate the Distributor for services rendered even if the
amount paid exceeds the Distributor's expenses.
The Distributor may also provide (or arrange for another intermediary or
agent to provide) personal and/or account maintenance services to Investor
shareholders of the Funds (the Distributor or such entity is referred to as a
"Servicing Agent" in such capacity). A Servicing Agent will be paid some or
all of the Shareholder Servicing Fees charged with respect to Investor Shares
of the Funds pursuant to a Servicing Plan for such shares.
MULTIPLE CLASSES
As indicated previously, the Funds offer two classes of shares to
investors, with eligibility generally depending on the amount invested in a
particular Fund. The two classes of shares are Institutional Shares and
Investor Shares. The following table sets forth basic investment and fee
information for each class.
<TABLE>
<CAPTION>
MINIMUM ANNUAL ANNUAL
FUND SUBSEQUENT METHOD OF SHAREHOLDER DISTRIBUTION
NAME OF CLASS INVESTMENT* INVESTMENTS* INVESTMENT SERVICE FEE FEE
- ------------- ----------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Institutional.......... $1 million $10,000 Direct None None
Investor............... $ 2,500 $ 500 Direct .25% .25%
</TABLE>
-18-
<PAGE>
_______________
* Certain exceptions apply. See "Institutional Shares" and "Investor
Shares" below."
The offering price of Fund shares is based on the net asset value per
share next determined after an order is received. See "Purchase of Shares"
and "Redemption of Shares."
INSTITUTIONAL SHARES
Institutional Shares may be purchased by endowments, foundations and
plan sponsors of 401(a), 401(k), 457 and 403(b) plans and by individuals. In
order to be eligible to purchase Institutional Shares, an institution, plan
or individual must make an initial investment of at least $1 million in the
particular Fund. In its sole discretion, the Manager may waive this minimum
investment requirement and the Manager intends to do so for employees of the
Manager, for the spouse, parents, children, siblings, grandparents or
grandchildren of such employees, for employees of the Administrator and for
Trustees of the Trust who are not interested persons of the Trust or Manager
and their spouses. Institutional Shares are sold without any initial or
deferred sales charges and are not subject to any ongoing distribution
expenses or shareholder servicing fees.
INVESTOR SHARES
Investor Shares may be purchased by intermediary financial institutions
and certain individual retirement accounts and individuals. In order to be
eligible to purchase Investor Shares, an eligible investor must make an
initial investment of at least $2,500 in the particular Fund. In its sole
discretion, the Manager may waive this minimum investment requirement.
Investor Shares are subject to an annual Shareholder Service Fee equal to
0.25% of the average daily net assets attributable to Investor Shares and an
annual Distribution Fee equal to 0.25% of the average daily net assets
attributable to Investor Shares. As described above, the Distribution Plan
for Investor Shares permits payments of up to 0.50% of the Funds' average
daily net assets attributable to Investor Shares.
GENERAL
The Shareholder Service Fee charged with respect to Investor Shares is
intended to be compensation for personal services rendered and for account
maintenance with respect to such shares. The Distribution Fee charged with
respect to Investor Shares is intended to compensate the Distributor for
services and expenses primarily intended to result in the sale of Investor
Shares. See "Multiple Classes -- Distributor".
As described above, shares of the Funds may be sold to corporations or
other institutions such as trusts, foundations or broker-dealers purchasing
for the accounts of others ("Shareholder Organizations"). Investors
purchasing and redeeming shares of the Funds through a Shareholder
Organization may be charged a transaction-based fee or other fee for the
services provided by the Shareholder Organization. Each such Shareholder
Organization is responsible for transmitting to its customers a schedule of
any such fees and information regarding any additional or different
conditions regarding purchases and redemptions of Fund shares. Customers of
Shareholder Organizations should read this Prospectus in light of the terms
governing accounts with their particular organization.
PURCHASE OF SHARES
The offering price for shares of each Fund is the net asset value per
share next determined after receipt of a purchase order. See "Determination
of Net Asset Value." Investors may be charged an additional fee by their
broker or agent if they effect transactions through such persons.
-19-
<PAGE>
INITIAL CASH INVESTMENTS BY WIRE
Subject to acceptance by the Trust, shares of the Funds may be purchased
by wiring federal funds. Please call 1-800-447-3332 for complete wiring
instructions. A completed Account Application must be overnighted to the
Trust at Barr Rosenberg Series Trust c/o BISYS Fund Services, Inc., 3435
Stelzer Road, Columbus, Ohio 43219-8021. Notification must be given to the
Trust at 1-800-447-3332 prior to 4:00 p.m., New York Time, of the wire date.
Federal funds purchases will be accepted only on a day on which the Trust,
the Distributor and the custodian bank are all open for business.
INITIAL CASH INVESTMENTS BY MAIL
Subject to acceptance by the Trust, an account may be opened by
completing and signing an Account Application and mailing it to Barr
Rosenberg Series Trust, P.O. Box 182495, Columbus, Ohio 43219-2495.
The Fund(s) to be purchased should be specified on the Account
Application. In all cases, subject to acceptance by the Trust, payment for
the purchase of shares received by mail will be credited to a shareholder's
account at the net asset value per share of a Fund next determined after
receipt, even though the check may not yet have been converted into federal
funds.
ADDITIONAL CASH INVESTMENTS
Additional cash investments may be made at any time by mailing a check
to the Trust at the address noted under "Initial Cash Investments by Mail"
(payable to Barr Rosenberg Series Trust) or by wiring monies as noted under
"Initial Cash Investments by Wire". Notification must be given at
1-800-447-3332 prior to 4:00 p.m., New York time, of the wire date. The
minimum amounts for additional cash investments are $10,000 for Institutional
Shares and $500 for Investor Shares. In its sole discretion, the Manager may
waive the minimum additional investment requirements.
INVESTMENTS IN-KIND (INSTITUTIONAL SHARES)
Institutional Shares may be purchased in exchange for common stocks on
deposit at The Depository Trust Company ("DTC") or by a combination of such
common stocks and cash. Purchase of Institutional Shares of a Fund in
exchange for stocks is subject in each case to the determination by the
Manager that the stocks to be exchanged are acceptable. Securities accepted
by the Manager in exchange for Fund shares will be valued as set forth under
"Determination of Net Asset Value" (generally the last quoted sale price) as
of the time of the next determination of net asset value after such
acceptance. All dividends, subscription or other rights which are reflected
in the market price of accepted securities at the time of valuation become
the property of the Fund and must be delivered to the Fund upon receipt by
the investor from the issuer. Generally, the exchange of common stocks for
Institutional Shares will be a taxable event for federal income tax purposes,
which will trigger gain or loss to an investor subject to federal income
taxation, measured by the difference between the value of the Institutional
Shares received and the investor's basis in the securities tendered.
The Manager will not approve the acceptance of securities in exchange
for Fund shares unless (1) the Manager, in its sole discretion, believes the
securities are appropriate investments for the Fund; (2) the investor
represents and agrees that all securities offered to the Fund are not subject
to any restrictions upon their sale by the Fund under the Securities Act of
1933, or otherwise; and (3) the securities may be acquired under the Fund's
investment restrictions.
OTHER PURCHASE INFORMATION
-20-
<PAGE>
An eligible shareholder may also participate in the Barr Rosenberg
Automatic Investment Program, an investment plan that automatically debits
money from the shareholder's bank account and invests it in Investor Shares
of one or more of the Funds through the use of electronic funds transfers.
Investors may commence their participation in this program with a minimum
initial investment of $2,500 and may elect to make subsequent investments by
transfers of a minimum of $50 into their established Fund account. You may
contact the Trust for more information about the Barr Rosenberg Automatic
Investment Program.
For purposes of calculating the purchase price of Fund shares, a
purchase order is received by the Trust on the day that it is in "good order"
unless it is rejected by the Distributor. For a purchase order of Investor
Shares to be in "good order" on a particular day a check or money wire must
be received on or before 4:00 p.m., New York Time of that day. In the case
of Institutional Shares, the investor's securities must be placed on deposit
at the Depository Trust Company prior to 10:00 a.m., New York Time or, in the
case of cash investments, the Trust must have received adequate assurances
that federal funds will be wired to a Fund prior to 4:00 p.m., New York Time,
on the following business day. If the consideration is received by the Trust
after the deadline, the purchase price of Fund shares will be based upon the
next determination of net asset value of Fund shares. No third party or
foreign checks will be accepted.
The Trust reserves the right, in its sole discretion, to suspend the
offering of shares of a Fund or to reject purchase orders when, in the
judgment of the Manager, such suspension or rejection would be in the best
interests of the Trust.
Purchases of each Fund's shares may be made in full or in fractional
shares of such Fund calculated to three decimal places. In the interest of
economy and convenience, certificates for shares will not be issued.
IRA ACCOUNTS
Investor Shares of the Funds may be used as a funding medium for IRAs.
The minimum initial investment for an IRA is $2,000. A special application
must be completed in order to create such an account. Contributions to IRAs
are subject to prevailing amount limits set by the Internal Revenue Service.
For more information about IRAs, call the Trust at 1-800-447-3332.
REDEMPTION OF SHARES
Shares of the Funds may be redeemed by mail, or, if authorized by an
investor in an account application, by telephone. The value of shares
redeemed may be more or less than the original cost of those shares,
depending on the market value of the investment securities held by the
particular Fund at the time of the redemption.
BY MAIL
The Trust will redeem its shares at the net asset value next determined
after the request is received in "good order". See "Determination of Net
Asset Value." Requests should be addressed to Barr Rosenberg Series Trust,
P.O. Box 182495, Columbus, Ohio 43219-2495.
Requests in "good order" must include the following documentation:
(a) a letter of instruction, if required, specifying the number of
shares or dollar amount to be redeemed, signed by all registered owners
of the shares in the exact names in which they are registered;
(b) any required signature guarantees (see "Signature Guarantees"
below); and
-21-
<PAGE>
(c) other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
SIGNATURE GUARANTEES
To protect shareholder accounts, the Trust and its transfer agent from
fraud, signature guarantees are required to enable the Trust to verify the
identity of the person who has authorized a redemption from an account.
Signature guarantees are required for (1) redemptions where the proceeds are
to be sent to someone other than the registered shareholder(s) at the
registered address, (2) redemptions of $25,000 or more, and (3) share
transfer requests. Signature guarantees may be obtained from certain eligible
financial institutions, including but not limited to, the following: banks,
trust companies, credit unions, securities brokers and dealers, savings and
loan associations and participants in the Securities and Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or
the New York Stock Exchange Medallion Signature Program ("MSP").
Shareholders may contact the Trust at 1-800-447-3332 for further details.
BY TELEPHONE
Provided the Telephone Redemption Option has been authorized by an
investor in an account application, a redemption of shares may be requested
by calling the Transfer Agent at 1-800-447-3332 and requesting that the
redemption proceeds be mailed to the primary registration address or wired
per the authorized instructions. If the Telephone Redemption Option or the
Telephone Exchange Option (as described below) is authorized, the Transfer
Agent may act on telephone instruction from any person representing himself
or herself to be a shareholder and believed by the Transfer Agent to be
genuine. The Transfer Agent's records of such instructions are binding and
the shareholder, and not the Trust or the Transfer Agent, bears the risk of
loss in the event of unauthorized instructions reasonably believed by the
Transfer Agent to be genuine. The Transfer Agent will employ reasonable
procedures to confirm that instructions communicated are genuine and, if it
does not, it may be liable for any losses due to unauthorized or fraudulent
instructions. The procedures employed in connection with transactions
initiated by telephone include tape recording of telephone instructions and
requiring some form of personal identification prior to acting upon
instructions received by telephone. Telephone Redemption will be suspended
for a period of 10 days following a telephonic address change.
SYSTEMATIC WITHDRAWAL PLAN
An owner of $12,000 or more of shares of a Fund may elect to have
periodic redemptions made from the investor's account to be paid on a
monthly, quarterly, semiannual or annual basis. The maximum payment per year
is 12% of the account value at the time of the election. The shareholder
will normally redeem a sufficient number of shares to make the scheduled
redemption payments on a date selected by the shareholder. Depending on the
size of the payment requested and fluctuation in the net asset value, if any,
of the shares redeemed, redemptions for the purpose of making such payments
may reduce or even exhaust the account. A shareholder may request that these
payments be sent to a predesignated bank or other designated party. Capital
gains and dividend distributions paid to the account will automatically be
reinvested at net asset value on the distribution payment date.
FURTHER REDEMPTION INFORMATION
Purchases of shares of the Trust made by check are not permitted to be
redeemed until payment of the purchase price has been collected, which may
take up to fifteen days after purchase. Shareholders can avoid this delay by
utilizing the wire purchase option.
If the Manager determines, in its sole discretion, that it would not be
in the best interests of the remaining shareholders of a Fund to make a
redemption payment wholly or partly in cash, such Fund may pay the redemption
price of Institutional Shares in whole or in part by a distribution in kind
of readily marketable securities held by such
-22-
<PAGE>
Fund in lieu of cash. Securities used to redeem Fund shares in kind will be
valued in accordance with the Funds' procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by a Fund in kind
will be selected by the Manager in light of each Fund's objective and will
not generally represent a PRO RATA distribution of each security held in a
Fund's portfolio. Investors may incur brokerage charges on the sale of any
such securities so received in payment of redemptions.
The Trust may suspend the right of redemption and may postpone payment
for more than seven days when the New York Stock Exchange is closed for other
than weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission, during periods when trading on the Exchange is
restricted or during an emergency which makes it impracticable for the Funds
to dispose of their securities or to fairly determine the value of their net
assets, or during any other period permitted by the Securities and Exchange
Commission for the protection of investors.
EXCHANGE OF FUND SHARES
The Funds offer two convenient ways to exchange shares in one Fund for
shares of another Fund. Shares of a particular class of a Fund may be
exchanged only for shares of the same class in another Fund. There is no
sales charge on exchanges. Before engaging in an exchange transaction, a
shareholder should read carefully the information in the Prospectus
describing the Fund into which the exchange will occur. A shareholder may
not exchange shares of a class of one Fund for shares of the same class of
another Fund that is not qualified for sale in the state of the shareholder's
residence. Although the Trust has no current intention of terminating or
modifying the exchange privilege, it reserves the right to do so at any time.
An exchange is taxable as a sale of a security on which a gain or loss
may be recognized. Shareholders should receive written confirmation of the
exchange within a few days of the completion of the transaction.
A new account opened by exchange must be established with the same
name(s), address and social security number as the existing account. All
exchanges will be made based on the respective net asset values next
determined following receipt of the request by the Funds containing the
information indicated below.
EXCHANGE BY MAIL
To exchange Fund shares by mail, shareholders should simply send a
letter of instruction to the Trust. The letter of instruction must include:
(a) the investor's account number; (b) the class of shares to be exchanged;
(c) the Fund from and the Fund into which the exchange is to be made; (d) the
dollar or share amount to be exchanged; and (e) the signatures of all
registered owners or authorized parties.
EXCHANGE BY TELEPHONE
To exchange Fund shares by telephone or to ask questions about the
exchange privilege, shareholders may call the Trust at 1-800-447-3332. If
you wish to exchange shares, please be prepared to give the telephone
representative the following information: (a) the account number, social
security number and account registration; (b) the class of shares to be
exchanged; (c) the name of the Fund from which and the Fund into which the
exchange is to be made; and (d) the dollar or share amount to be exchanged.
Telephone exchanges are available only if the shareholder so indicates by
checking the "yes" box on the Account Application. The Trust employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. A Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trust reserves the right to suspend or
-23-
<PAGE>
terminate the privilege of exchanging by mail or by telephone at any time.
The telephone exchange privilege will be suspended for a period of 10 days
following a telephonic address change.
DETERMINATION OF NET ASSET VALUE
The net asset value of each class of shares of the Funds will be
determined once on each day on which the New York Stock Exchange is open as
of 4:00 p.m., New York time.
The net asset value per share of each class of the Funds is determined
by dividing the particular class's proportionate interest in the total market
value of the Fund's portfolio investments and other assets, less any
applicable liabilities, by the total outstanding shares of that class of such
Fund. Specifically, each Fund's liabilities are allocated among its classes.
The total of such liabilities allocated to a particular class plus that
class's shareholder servicing and/or distribution expenses, if any, and any
other expenses specially allocated to that class are then deducted from the
class's proportionate interest in a Fund's assets. The resulting amount for
each class is divided by the number of shares of that class outstanding to
produce the net asset value per share.
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or, if there is no such reported sale, at the most recent
quoted bid price. Price information on listed securities is generally taken
from the closing price on the exchange where the security is primarily
traded. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price, except that debt
obligations with sixty days or less remaining until maturity may be valued at
their amortized cost. Exchange-traded options on futures are valued at the
settlement price as determined by the appropriate clearing corporation.
Futures contracts are valued by computing the gain or loss by reference to
the current settlement price as determined by the appropriate clearing
corporation. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees of the Trust or by persons acting at their direction.
DISTRIBUTIONS
Each Fund intends to pay out as dividends substantially all of its net
investment income (which comes from dividends and any interest it receives
from its investments and net short-term capital gains). Each Fund also
intends to distribute substantially all of its net long-term capital gains,
if any, after giving effect to any available capital loss carryover. Each
Fund's policy is to declare and pay distributions of its dividends and
interest annually although it may do so more frequently as determined by the
Trustees of the Trust. Each Fund's policy is to distribute net short-term
capital gains and net long-term gains annually, although it may do so more
frequently as determined by the Trustees of the Trust to the extent permitted
by applicable regulations.
All dividends and/or distributions will be paid out in the form of
additional shares of the relevant Fund to which the dividends and/or
distributions relate at net asset value unless the shareholder elects to
receive cash. Shareholders may make this election by marking the appropriate
box on the Account Application or by writing to the Administrator.
If you elect to receive distributions in cash and checks (1) are
returned and marked as "undeliverable" or (2) remain uncashed for six months,
your cash election will be changed automatically and your future dividend and
capital gains distributions will be reinvested in the Fund at the per share
net asset value determined as of the date of payment of the distribution. In
addition, any undeliverable checks or checks that remain uncashed for six
months will be canceled and will be reinvested in the Fund at the per share
net asset value determined as of the date of cancellation.
-24-
<PAGE>
TAXES
Each Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long
as a Fund distributes, as dividends, substantially all of the sum of its
taxable net investment income, its net tax-exempt income (if any), and, the
excess, if any, of net short-term capital gains over net long-term capital
losses for such year and otherwise qualifies for the special rules governing
the taxation of regulated investment companies, the Fund itself will not pay
federal income tax on the amount distributed. Such dividends will be taxable
to shareholders subject to income tax as ordinary income. Distributions
designated by the Fund as deriving from net gains on capital assets held for
more than one year but not more than 18 months and from net gains on capital
assets held for more than 18 months will be taxable to shareholders as such,
regardless of how long a shareholder has held the shares. Distributions will
be taxed as described above whether received in cash or in shares through the
reinvestment of distributions. A distribution paid to shareholders by a Fund
in January of a year is generally deemed to have been received by
shareholders on December 31 of the preceding year, if the distribution was
declared and payable to shareholders of record on a date in October, November
or December of that preceding year. Each Fund will provide federal tax
information annually, including information about dividends and distributions
paid during the preceding year.
To the extent such investments are permissible for a Fund, the Fund's
short sales and transactions in options, futures contracts, hedging
transactions, forward contracts, equity swap contracts and straddles will be
subject to special tax rules (including mark-to-market, constructive sale,
straddle, wash sale and short sale rules), the effect of which may be to
accelerate income to the Fund, defer losses to the Fund, cause adjustments in
the holding periods of the Fund's securities and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders. A Fund's use
of such transactions may result in the Fund realizing more short-term capital
gains and ordinary income subject to tax at ordinary income tax rates than it
would if it did not engage in such transactions.
The foregoing is a general summary of the federal income tax
consequences of investing in a Fund to shareholders who are U.S. citizens or
U.S. corporations. Shareholders should consult their own tax advisers about
the tax consequences of an investment in the Funds in light of each
shareholder's particular tax situation. Shareholders should also consult
their own tax advisers about consequences under foreign, state, local or
other applicable tax laws.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is a diversified open-end series management investment company
organized as a Massachusetts business trust under the laws of The
Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
April 1, 1988, as amended from time to time (the "Declaration of Trust").
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest which are
presently divided into five series. Interests in each of the Funds described
in this Prospectus are represented by shares of such Fund. The Declaration
of Trust also permits the Trustees, without shareholder approval, to
subdivide any series of shares into various sub-series of shares with such
preferences and other rights as the Trustees may designate. While the
Trustees have no current intention to exercise this power, it is intended to
allow them to provide for an equitable allocation of the impact of any future
regulatory requirements which might affect various classes of shareholders
differently. The Trustees may also, without shareholder approval, establish
one or more additional separate portfolios for investments in the Trust,
terminate a series of the Trust or merge two or more existing portfolios.
Shareholders' investments in such a portfolio would be evidenced by a
separate series of shares.
Each Fund is further divided into two classes of shares designated as
Institutional Shares and Investor Shares. Each class of shares of a Fund
represents interests in the assets of such Fund and has identical dividend,
liquidation
-25-
<PAGE>
and other rights and the same terms and conditions except that expenses, if
any, related to the distribution and shareholder servicing of a particular
class are borne solely by such class and each class may, at the Trustees'
discretion, also pay a different share of other expenses, not including
advisory or custodial fees or other expenses related to the management of the
Trust's assets, if these expenses are actually incurred in a different amount
by that class, or if the class receives services of a different kind or to a
different degree than the other classes. All other expenses are allocated to
each class on the basis of the net asset value of that class in relation to
the net asset value of such Fund.
Each class of shares of a Fund has identical voting rights except that
each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class. Each class of shares has
exclusive voting rights with respect to matters pertaining to any
distribution or servicing plan applicable to that class. Matters submitted
to shareholder vote must be approved by each Fund separately except (i) when
required by the Investment Company Act of 1940, all shares shall be voted
together and (ii) when the Trustees have determined that the matter does not
affect all Funds, then only shareholders of the Fund or Funds affected shall
be entitled to vote on the matter. All classes of shares of a Fund will vote
together, except with respect to any distribution or servicing plan
applicable to a class or when a class vote is required as specified above or
otherwise by the Investment Company Act of 1940. Shares are freely
transferable, are entitled to dividends as declared by the Trustees and, in
liquidation of a Fund portfolio, are entitled to receive the net assets of
that portfolio, but not of the other Funds. The Trust does not generally
hold annual meetings of shareholders and will do so only when required by
law. Shareholders holding a majority of the outstanding shares may remove
Trustees from office by votes cast in person or by proxy at a meeting of
shareholders or by written consent.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, may, however, be terminated at any time by vote of at least
two-thirds of the outstanding shares of each series of the Trust.
Shareholders could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the risk of a shareholder
incurring financial loss on account of that liability is considered remote
since it may arise only in very limited circumstances.
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries to the Trust at Barr Rosenberg Series
Trust, P.O. Box 182495, Columbus, Ohio 43219-2495.
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<PAGE>
SHAREHOLDER SERVICES
1-800-447-3332 (INVESTOR SHARE CUSTOMERS)
1-800-527-6026 (INSTITUTIONAL SHARE CUSTOMERS)
Additional Information may be found on the World
Wide Web at http://www.riem.com
BARR ROSENBERG SERIES TRUST
3435 Stelzer Road BARR
Columbus, Ohio 43219 ROSENBERG
SERIES
MANAGER TRUST
Rosenberg Institutional Equity Management
Four Orinda Way, Building E
Orindo, CA 94563
ADMINISTRATOR, TRANSFER AND DIVIDEND AGENT
BISYS Fund Services
3435 Stelzer Road / / Barr Rosenberg Market
Columbus, OH 43219 Neutral Fund
DISTRIBUTOR / / Barr Rosenberg Double
Barr Rosenberg Funds Distributor, Inc. Alpha Market Fund
125 West 55th Street
11th Floor
New York, NY 10019
CUSTODIAN OF ASSETS PROSPECTUS
Custodial Trust Company JULY __, 1998
101 Carnegie Center
Princeton, NJ 08540
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
555 California Street
San Francisco, CA 94104
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
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<PAGE>
BARR ROSENBERG SERIES TRUST
BARR ROSENBERG MARKET NEUTRAL FUND
BARR ROSENBERG DOUBLE ALPHA MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
JULY __, 1998
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the prospectus of the Barr
Rosenberg Market Neutral Fund and Barr Rosenberg Double Alpha Market Fund of
Barr Rosenberg Series Trust dated July __, 1998 (the "Prospectus") and should
be read in conjunction therewith. A copy of the Prospectus may be obtained
from Barr Rosenberg Series Trust, 3435 Stelzer Road, Columbus, Ohio 43219.
<PAGE>
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . 3
MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . . . . 4
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS . . . . . . . . . . . . . . . 6
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . . .10
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .12
TOTAL RETURN CALCULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . .13
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES . . . . . . . . . . . . . .15
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . .17
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . .17
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each of the Barr Rosenberg
Market Neutral Fund and Barr Rosenberg Double Alpha Market Fund (each, a
"Fund" and collectively, the "Funds") of Barr Rosenberg Series Trust (the
"Trust") are summarized on the front page of the Prospectus and in the text
of the Prospectus under the headings "Investment Objectives and Policies" and
"General Description of Risks and Fund Investments."
In addition, the following is an additional description of certain
investments of the Fund(s).
SHORT SALES (BOTH FUNDS). The Barr Rosenberg Market Neutral Fund will
seek, and the Barr Rosenberg Double Alpha Market Fund may seek, to realize
additional gains through short sales. Short sales are transactions in which
a Fund sells a security it does not own, in anticipation of a decline in the
value of that security relative to the long positions held by the Fund. To
complete such a transaction, a Fund must borrow the security to make delivery
to the buyer. A Fund then is obligated to replace the security borrowed by
purchasing it at the market price at or prior to the time of replacement.
The price at such time may be more or less than the price at which the
security was sold by a Fund. Until the security is replaced, a Fund is
required to repay the lender any dividends or interest that accrue during the
period of the loan. To borrow the security, a Fund also may be required to
pay a premium, which would increase the cost of the security sold. The net
proceeds of the short sale will be retained by the broker (or by the Fund's
custodian in a special custody account), to the extent necessary to meet
margin requirements, until the short position is closed out. A Fund also
will incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. A Fund will realize a gain if
the security declines in price between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of the
premium, dividends, interest or expenses a Fund may be required to pay in
connection with a short sale. An increase in the value of a security sold
short by a Fund over the price at which it was sold short will result in a
loss to the Fund, and there can be no assurance that the Fund will be able to
close out the position at any particular time or at an acceptable price.
S&P 500 INDEX FUTURES AND RELATED OPTIONS (BARR ROSENBERG DOUBLE ALPHA
MARKET FUND ONLY). An S&P 500 Index Future contract (an "Index Future") is a
contract to buy or sell an integral number of units of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index") at a specified future
date at a price agreed upon when the contract is made. A unit is the value
of the S&P 500 Index from time to time. Entering into a contract to buy
units is commonly referred to as buying or purchasing a contract or holding a
long position in the S&P 500 Index.
Index Futures can be traded through all major commodity brokers.
Currently, contracts are expected to expire on the tenth day of March, June,
September and December. The Barr Rosenberg Double Alpha Market Fund will
ordinarily be able to close open positions on the United States futures
exchange on which Index Futures are then traded at any time up to and
including the expiration day.
In contrast to purchases of a common stock, no price is paid or received
by the Barr Rosenberg Double Alpha Market Fund upon the purchase of a futures
contract. Upon entering into a futures contract, the Fund will be required
to deposit with its custodian in a segregated account in the name of the
futures broker a specified amount of cash or securities. This is known by
participants in the market as "initial margin". The type of instruments that
may be deposited as initial margin, and the required amount of initial
margin, are determined by the futures exchange(s) on which the Index Futures
are traded. The nature of initial margin in futures transactions is different
from that of margin in securities transactions in that futures contract
margin does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance
bond or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied. Subsequent payments, called "variation margin", to and
from the broker, will be
-3-
<PAGE>
made on a daily basis as the price of the S&P 500 Index fluctuates, making
the position in the futures contract more or less valuable, a process known
as "marking to the market". For example, when the Fund has purchased an
Index Future and the price of the S&P 500 Index has risen, that position will
have increased in value and the Fund will receive from the broker a variation
margin payment equal to that increase in value. Conversely, when the Fund
has purchased an Index Future and the price of the S&P 500 Index has
declined, the position would be less valuable and the Fund would be required
to make a variation margin payment to the broker. When the Fund terminates a
position in a futures contract, a final determination of variation margin is
made, additional cash is paid by or to the Fund, and the Fund realizes a gain
or a loss.
The price of Index Futures may not correlate perfectly with movement in
the underlying index due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the S&P 500
Index and futures markets. Secondly, the deposit requirements in the futures
market are less onerous than margin requirements in the securities market,
and as a result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures
market may also cause temporary price distortions.
Options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the holder would assume the
underlying futures position and would receive a variation margin payment of
cash or securities approximating the increase in the value of the holder's
option position. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in
cash based on the difference between the exercise price of the option and the
closing level of the index on which the futures contract is based on the
expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
The ability to establish and close out positions in options on futures
contracts will be subject to the development and maintenance of a liquid
secondary market. It is not certain that such a market will develop.
Although the Barr Rosenberg Double Alpha Market Fund generally will purchase
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will
exist for any particular option or at any particular time. In the event no
such market exists for particular options, it might not be possible to effect
closing transactions in such options, with the result that the Fund would
have to exercise the options in order to realize any profit.
MISCELLANEOUS INVESTMENT PRACTICES
PORTFOLIO TURNOVER. A change in securities held by a Fund is known as
"portfolio turnover" and almost always involves the payment by a Fund of
brokerage commissions or dealer markup and other transaction costs on the
sale of securities as well as on the reinvestment of the proceeds in other
securities. Portfolio turnover is not a limiting factor with respect to
investment decisions. As disclosed in the Prospectus, high portfolio
turnover involves correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Funds, and could
involve realization of capital gains that would be taxable when distributed
to shareholders of a Fund. To the extent that portfolio turnover results in
the realization of net short-term capital gains, such gains are ordinarily
taxed to shareholders at ordinary income tax rates. See "Portfolio
Transactions" and "Income Dividends, Distributions and Tax Status".
NOTICE ON SHAREHOLDER APPROVAL. Unless otherwise indicated in the
Prospectus or this Statement of Additional Information, the investment
objective and policies of each of the Funds may be changed without
shareholder approval.
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<PAGE>
INVESTMENT RESTRICTIONS
Without a vote of the majority of the outstanding voting securities of a
Fund, the Trust will not take any of the following actions with respect to
such Fund:
(1) Borrow money in excess of 10% of the value (taken at the lower of
cost or current value) of the Fund's total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes or for payments of
variation margin (in the case of the Barr Rosenberg Double Alpha Market Fund
only). Such borrowings will be repaid before any additional investments are
purchased. Short sales and related borrowings of securities are not subject
to this restriction.
(2) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of the Fund's total assets (taken at cost) and then only to
secure borrowings permitted by Restriction 1 above. (For the purposes of
this restriction, collateral arrangements with respect to options, short
sales, stock index, interest rate, currency or other futures, options on
futures contracts and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge or other encumbrance of
assets. Collateral arrangements with respect to swaps and other derivatives
are also not deemed to be a pledge or other encumbrance of assets.)
(3) Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities.
(For this purpose, the deposit or payment of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.)
(4) Make short sales of securities or maintain a short position if,
when added together, more than 100% of the value of a Fund's net assets would
be (i) deposited as collateral for the obligation to replace securities
borrowed to effect short sales, and (ii) allocated to segregated accounts in
connection with short sales. Short sales "against the box" are not subject
to this limitation.
(5) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under federal securities laws.
(6) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests
in real estate.
(7) Concentrate more than 25% of the value of its total assets in any
one industry.
(8) Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act of 1940, as amended (the "1940
Act"), or by an exemptive order issued by the Securities and Exchange
Commission.
(9) Purchase or sell commodities or commodity contracts except that
each of the Funds may purchase and sell stock index and other financial
futures contracts and options thereon.
(10) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of the Fund's portfolio
securities.
(11) Issue senior securities. (For the purpose of this restriction none
of the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (2) above; any borrowing
-5-
<PAGE>
permitted by restriction (1) above; short sales permitted by restriction (4)
above; any collateral arrangements with respect to short sales, swaps,
options, future contracts and options on future contracts and with respect to
initial and variation margin; and the purchase or sale of options, future
contracts or options on future contracts.)
Notwithstanding the latitude permitted by Restriction 9 above, the Funds
have no current intention of purchasing interest rate futures.
It is contrary to the present policy of each of the Funds, which may be
changed by the Trustees of the Trust without shareholder approval, to:
(a) Invest in warrants or rights (other than warrants or rights
acquired by the Fund as a part of a unit or attached to securities at the
time of purchase).
(b) Write, purchase or sell options on particular securities (as
opposed to market indices).
(c) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(d) Make investments for the purpose of exercising control of a
company's management.
(e) Invest in (a) securities which at the time of investment are not
readily marketable and (b) repurchase agreements maturing in more than seven
days if, as a result, more than 15% of the Fund's net assets (taken at
current value) would then be invested in such securities.
Unless otherwise indicated, all percentage limitations on investments
set forth herein and in the Prospectus will apply at the time of the making
of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
The phrase "shareholder approval," as used in the Prospectus and herein,
and the phrase "vote of a majority of the outstanding voting securities", as
used herein, means the affirmative vote of the lesser of (1) more than 50% of
the outstanding shares of a Fund or the Trust, as the case may be, or (2) 67%
or more of the shares of a Fund or the Trust, as the case may be, present at
a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The tax status of the Funds and the distributions which they may make
are summarized in the Prospectus under the heading "Taxes." The Funds intend
to qualify each year as a regulated investment company under the Internal
Revenue Code. In order to qualify as a "regulated investment company" and to
qualify for the special tax treatment accorded regulated investment companies
and their shareholders, each Fund must, among other things, (a) derive at
least 90% of its gross income from dividends, interest, payments with respect
to certain securities loans, gains from the sale or other disposition of
securities or foreign currencies or other income (including but not limited
to gains from options, futures or forward contracts) derived with respect to
its business of investing in such securities or currencies; (b) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at
least 50% of the value of its total assets consists of cash, cash items, U.S.
Government securities, securities of other regulated investment companies,
and other securities limited generally with respect to any one issuer to not
more than 5% of the total assets of such Fund and not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any issuer
(other than U.S. Government securities or securities of other regulated
investment companies); and (c) distribute annually at least 90% of the sum of
its taxable net investment income, its net tax-exempt income (if any), and,
the excess, if any, of net short-term capital gains over net long-term
capital losses for such year. To the extent a Fund qualifies for treatment
as a
-6-
<PAGE>
regulated investment company, the Fund will not be subject to federal income
tax on income paid to its shareholders in the form of dividends or capital
gain distributions.
As described in the Prospectus under the heading "Distributions," each
Fund intends to pay out substantially all of its ordinary income and net
short-term capital gains, and to distribute substantially all of its net
capital gains, if any, after giving effect to any available capital loss
carryover. Net capital gain is the excess of net gains from assets held for
more than one year over net losses from capital assets held for not more than
one year. In order to avoid an excise tax imposed on certain undistributed
income, a Fund must distribute prior to each calendar year end without regard
to the Fund's fiscal year end (i) 98% of the Fund's ordinary income, and (ii)
98% of the Fund's capital gain net income, if any, realized in the one-year
period ending on October 31.
In general, all dividend distributions derived from ordinary income and
short-term capital gain are taxable to investors as ordinary income (eligible
in part for the dividends-received deduction in the case of corporations,
subject to certain conditions). Pursuant to the Taxpayer Relief Act of 1997
(the "1997 Act"), two different tax rates apply to net capital gains. One
rate (generally 28%) applies to net gains on capital assets held for more
than one year but not more than 18 months ("mid-term gains") and a second,
preferred rate (generally 20%) applies to the balance of such net capital
gains ("adjusted net capital gains"). Distributions of net capital gains
will be treated in the hands of shareholders as mid-term gains to the extent
designated by the Fund as deriving from net gains from assets held for more
than one year but not more than 18 months, and the balance will be treated as
adjusted net capital gains. Distributions of mid-term gains and adjusted net
capital gains will be taxable to shareholders as such, regardless of how long
a shareholder has held the shares in the Fund. Distributions will be taxable
as described above whether received in cash or in shares through the
reinvestment of distributions. The dividends-received deduction for
corporations will generally apply to a Fund's dividends from investment
income to the extent derived from dividends received by the Fund from
domestic corporations, provided the Fund and the shareholder each meet the
relevant holding period requirements.
Certain tax-exempt organizations or entities may not be subject to
federal income tax on dividends or distributions from a Fund. Each
organization or entity should review its own circumstances and the federal
tax treatment of its income.
Each Fund is generally required to withhold and remit to the U.S.
Treasury 31% of the taxable dividends and other distributions, whether
distributed in cash or reinvested in shares of the Fund, paid or credited to
any shareholder account for which an incorrect or no taxpayer identification
number has been provided or where the Fund is notified that the shareholder
has under reported income in the past (or the shareholder fails to certify
that he is not subject to such withholding). However, the general back-up
withholding rules set forth above will not apply to tax-exempt entities so
long as each such entity furnishes a Fund with an appropriate certificate.
To the extent such investments are permissible for a particular Fund,
the Fund's transactions in options, futures contracts, hedging transactions,
forward contracts and straddles will be subject to special tax rules
(including mark-to-market, constructive sale, straddle, wash sale and short
sale rules), the effect of which may be to accelerate income to the Fund,
defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities and convert short-term capital losses into long-term
capital losses. These rules could therefore affect the amount, timing and
character of distributions to shareholders.
Pursuant to the 1997 Act, new "constructive sale" provisions apply to
activities by a Fund which lock in gain on an "appreciated financial
position." Generally, a "position" is defined to include stock, a debt
instrument, or partnership interest, or an interest in any of the foregoing,
including through a short sale, a swap contract, or a future or forward
contract. Under the 1997 Act, the entry into a short sale, a swap contract
or a future or forward contract relating to an appreciated direct position in
any stock or debt instrument, or the acquisition of stock or debt instrument
at a time when the Fund occupies an offsetting (short) appreciated position
in the stock or debt instrument, is treated as a "constructive sale" that
gives rise to the immediate recognition of gain (but not loss). The
application of these
-7-
<PAGE>
new provisions may cause a Fund to recognize taxable income from these
offsetting transactions in excess of the cash generated by such activities.
THE TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY INCLUDED FOR GENERAL
INFORMATION PURPOSES ONLY. EACH SHAREHOLDER IS ADVISED TO CONSULT ITS OWN
TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO IT OF AN
INVESTMENT IN THE FUNDS, INCLUDING THE EFFECT AND APPLICABILITY OF STATE,
LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL OR OTHER TAX LAWS. THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE
FOR CAREFUL TAX PLANNING.
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust and their principal occupations during
the past five years are as follows:
Kenneth Reid* (47) General Partner and Director of Research,
President, Trustee Rosenberg Institutional, Equity Management,
June 1986 to present.
Marlis S. Fritz* (47) General Partner and Director of Marketing,
Vice President, Trustee Rosenberg Institutional Equity Management,
April 1985 to present.
Nils H. Hakansson (60) Sylvan C. Coleman Professor of Finance and
Trustee Accounting, Haas School of Business, University
of California, Berkeley, June 1969 to present.
Director, Supershare Services Corporation
(investment management), Los Angeles,
California, November 1989 to 1995.
Barr M. Rosenberg* (54) Managing General Partner and Chief Investment
Trustee Officer, Rosenberg Institutional Equity
Management, January 1985 to present.
William F. Sharpe (63) STANCO 25 Professor of Finance, Stanford
Trustee University. Chairman, Financial Engines
Incorporated, Los Altos, California (electronic
investment advice), March 1996 to present.
Po-Len Hew (31) Accounting Manager, Rosenberg Institutional
Treasurer Equity Management, October 1989 to present.
Carolyn Demler (53) Administrative Coordinator, Rosenberg
Clerk Institutional Equity Management, December, 1988
to present.
Edward H. Lyman (53) Executive Vice President, Barr Rosenberg
Vice President Investment Management, Inc., and General Counsel
to the Rosenberg Group of companies, 1990 to
present.
Richard L. Saalfeld (54) President and Chief Executive Officer of mutual
Vice President fund unit of Rosenberg Institutional Equity
Management from June 1996 to present; Consultant
to Rosenberg Institutional Equity Management,
September 1995 to May 1996; Chairman and Chief
Executive Officer of CoreLink Resources, Inc.
(mutual fund marketing organization), Concord,
California, April 1993 to August 1995;
Consultant, December 1992 to March 1993.
Harold L. Arbit (50) Vice President and Partner, Rosenberg Alpha
Vice President L.P., 1984 to present.
-8-
<PAGE>
F. William Jump, Jr. (42) Portfolio engineer, Rosenberg Institutional
Vice President Equity Management, August, 1990 to present.
David Bunstine (32) Employee of BISYS Fund Services.
Assistant Treasurer
Gregory Maddox (30) Director, Client Services, BISYS Fund Services.
Assistant Treasurer
Bruce Treff (31) Employee of BISYS Fund Services.
Assistant Clerk
Ellen Stoutamire (48) Employee of BISYS Fund Services.
Assistant Clerk
Jeanette Peplowski (39) Employee of BISYS Fund Services.
Assistant Clerk
Alaina Metz (31) Employee of BISYS Fund Services.
Assistant Clerk
- ----------------------
* Trustees who are "interested persons" (as defined in the 1940 Act) of
the Trust or the Manager.
The mailing address of each of the officers and Trustees is c/o Barr
Rosenberg Series Trust, 3435 Stelzer Road, Columbus, OH 43219.
The principal occupations of the officers and Trustees for the last five
years have been with the employers as shown above, although in some cases
they have held different positions with such employers.
The Trust pays the Trustees other than those who are interested persons
of the Trust or Manager an annual fee of $37,950 plus $4,125 for each meeting
attended. The Trust does not pay any pension or retirement benefits for its
Trustees. The Trust does not pay any compensation to officers or Trustees of
the Trust other than those Trustees who are not interested persons of the
Trust or Manager. The following table sets forth information concerning the
total compensation paid to each of the Trustees who are not interested
persons of the Trust or Manager in the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation
Accrued as Estimated from Registrant
Name of Aggregate Part Annual Benefits and Fund
Person Compensation of Fund Upon Complex Paid
Position from Registrant Expenses Retirement to Directors
- -------- --------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Nils H. Hakansson $ $ 0 $ 0 $
Trustee
William F. Sharpe $ $ 0 $ 0 $
Trustee
</TABLE>
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<PAGE>
Messrs. Rosenberg, Reid, Arbit, Lyman and Saalfeld and Ms. Fritz,
Demler and Hew, each being a general partner, limited partner, officer or
employee of the Manager, will each benefit from the management fees paid by
the Trust to the Manager, but receive no direct compensation from the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACT
As disclosed in the Prospectus under the heading "Management of the
Trust", under management contracts (each, a "Management Contract") between
the Trust, on behalf of each Fund, and Rosenberg Institutional Equity
Management (the "Manager"), subject to the control of the Trustees of the
Trust and such policies as the Trustees may determine, the Manager will
furnish continuously an investment program for each Fund and will make
investment decisions on behalf of each Fund and place all orders for the
purchase and sale of portfolio securities. Subject to the control of the
Trustees, the Manager furnishes office space and equipment, provides
bookkeeping and certain clerical services and pays all salaries, fees and
expenses of officers and Trustees of the Trust who are affiliated with the
Manager. As indicated under "Portfolio Transactions -- Brokerage and
Research Services," the Trust's portfolio transactions may be placed with
broker-dealers which furnish the Manager, at no cost, certain research,
statistical and quotation services of value to the Manager in advising the
Trust or its other clients.
As disclosed in the Prospectus, each of the Funds has agreed to pay the
Manager a quarterly management fee at the annual percentage rate of the
relevant Fund's average daily net assets set forth in the Prospectus. The
Manager has informed the Trust that it will voluntarily waive some or all of
its management fees under the Management Contracts and, if necessary, will
bear certain expenses of each Fund until further notice so that each Fund's
total annual operating expenses (including the management fee but not
including nonrecurring account fees and extraordinary expenses) applicable to
each class will not exceed the percentage of each Fund's average daily net
assets attributable to that class as set forth in the Prospectus. In
addition, the Manager's compensation under each Management Contract is
subject to reduction to the extent that in any year the expenses of a Fund
(including investment advisory fees but excluding taxes, portfolio brokerage
commissions and any distribution expenses paid by a class of shares of a Fund
pursuant to a distribution plan or otherwise) exceed the limits on investment
company expenses imposed by any statute or regulatory authority of any
jurisdiction in which shares of the Fund are qualified for offer and sale.
Each Management Contract provides that the Manager shall not be subject
to any liability to the Trust or to any shareholder of the Trust in
connection with the performance of its services thereunder in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties thereunder.
Each Management Contract will continue in effect for a period of no more
than two years from the date of its execution only so long as its continuance
is approved at least annually by (i) vote, cast in person at a meeting called
for that purpose, of a majority of those Trustees who are not "interested
persons" of the Manager or the Trust, and by (ii) the majority vote of either
the full Board of Trustees or the vote of a majority of the outstanding
shares of the relevant Fund. Each Management Contract automatically
terminates on assignment, and is terminable on not more than 60 days' notice
by the Trust to the Manager. In addition, each Management Contract may be
terminated on not more than 60 days' written notice by the Manager to the
Trust.
As disclosed in the Prospectus, the general partners of the Manager are
Barr M. Rosenberg, Marlis S. Fritz and Kenneth Reid. Each of these persons
may be deemed a controlling person of the Manager.
As discussed in this Statement of Additional Information under the
heading "Management of the Trust," Barr M. Rosenberg is a Trustee of the
Trust as well as Managing General Partner and Chief Investment Officer of the
Manager; Marlis S. Fritz is a Trustee and Vice President of the Trust as well
as a general partner of the Manager;
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<PAGE>
and Kenneth Reid is a Trustee and President of the Trust as well as a general
partner and Director of Research of the Manager.
During the fiscal period ended March 31, 1998, the Barr Rosenberg Market
Neutral Fund paid the following amounts as management fees to the Manager
pursuant to its Management Contract:
Gross Reduction Net
----- --------- ---
12/16/97 - 3/31/98
ADMINISTRATIVE SERVICES
The Trust has entered into a Fund Administration Agreement with BISYS
Fund Services (the "Administrator") pursuant to which the Administrator
provides certain management and administrative services necessary for the
Funds' operations including: (i) general supervision of the operation of the
Funds including coordination of the services performed by the Funds'
investment advisor, transfer agent, custodian, independent accountants and
legal counsel, regulatory compliance, including the compilation of
information for documents such as reports to, and filings with, the SEC and
state securities commissions, and preparation of proxy statements and
shareholder reports for the Funds; (ii) general supervision relative to the
compilation of data required for the preparation of periodic reports
distributed to the Funds' officers and Board of Trustees; and (iii)
furnishing office space and certain facilities required for conducting the
business of the Funds. The Trust's principal underwriter is an affiliate of
the Administrator. For these services, the Administrator is entitled to
receive a fee, payable monthly, at the annual rate of 0.15% of the average
daily net assets of the Trust. For the fiscal period ended March 31, 1998
the Barr Rosenberg Double Alpha Market Fund paid $______ in administration
fees. The Trust has also entered into a Fund Accounting Agreement with BISYS
Fund Services, Inc. (the "Fund Accountant") pursuant to which the Fund
Accountant provides certain accounting services necessary for the Funds'
operations. For these services, the Fund Accountant is entitled to receive
an annual fee of $40,000 for each Fund. For the fiscal period ended March
31, 1998 the Barr Rosenberg Market Neutral Fund paid $______ in fund
accounting fees. The Trust's principal underwriter is an affiliate of the
Fund Accountant.
DISTRIBUTOR AND DISTRIBUTION PLAN
As stated in the text of the Prospectus under the heading "Management of
the Trust -- Distributor", Investor Shares of each Fund are sold on a
continuous basis by the Trust's distributor, Barr Rosenberg Funds
Distributor, Inc. (the "Distributor"). Under the Distributor's Contract
between the Trust and the Distributor (the "Distributor's Contract"), the
Distributor is not obligated to sell any specific amount of shares of the
Trust and will purchase shares for resale only against orders for shares.
Pursuant to the Distribution Plan (the "Plan") described in the
Prospectus, in connection with the distribution of Investor Shares of the
Trust, the Distributor receives certain distribution fees from the Trust.
Subject to the percentage limitation on the distribution fee set forth in the
Prospectus, the distribution fee may be paid in respect of services rendered
and expenses borne in the past with respect to Investor Shares as to which no
distribution fee was paid on account of such limitation. The Distributor may
pay all or a portion of the distribution fees it receives from the Trust to
participating and introducing brokers. The Barr Rosenberg Market Neutral
Fund paid the Distributor $________ in distribution fees pursuant to the Plan
for the fiscal year ended March 31, 1998.
The Plan may be terminated with respect to Investor Shares of any Fund
to which the Plan relates by vote of a majority of the Trustees of the Trust
who are not interested persons of the Trust (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the
Plan or the Distributor's Contract (the "Independent Trustees"), or by vote
of a majority of the outstanding voting securities of that class. Any change
in the Plan that would materially increase the cost to the Investors Shares
of any Fund to which the Plan relates requires approval by the Investor
shareholders of that Fund. The Trustees of the Trust review quarterly a
written report of
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<PAGE>
such costs and the purposes for which such costs have been incurred. Except
as described above, the Plan may be amended by vote of the Trustees of the
Trust, including a majority of the Independent Trustees, cast in person at a
meeting called for the purpose. For so long as the Plan is in effect,
selection and nomination of those Trustees of the Trust who are not
interested persons of the Trust shall be committed to the discretion of such
disinterested persons.
The Distributor's Contract may be terminated with respect to any Fund or
Investor shares thereof at any time by not more than 60 days' nor less than
30 days' written notice without payment of any penalty either by the
Distributor or by such Fund or class and will terminate automatically,
without the payment of any penalty, in the event of its assignment.
The Distributor's Contract and the Plan will continue in effect with
respect to each class of shares to which they relate for successive one-year
periods, provided that each such continuance is specifically approved (i) by
the vote of a majority of the Independent Trustees and (ii) by the vote of a
majority of the entire Board of Trustees (or by vote of a majority of the
outstanding shares of a class, in the case of the Distributor's Contract)
cast in person at a meeting called for that purpose.
If the Distributor's Contract or the Plan are terminated (or not
renewed) with respect to one or more classes, they may continue in effect
with respect to any class of any Fund as to which they have not been
terminated (or have been renewed).
The Trustees of the Trust believe that the Plan will provide benefits to
the Trust. The Trustees believe that the Plan will result in greater sales
and/or fewer redemptions of Investor Shares, although it is impossible to
know for certain the level of sales and redemptions of Investor Shares that
would occur in the absence of the Plan or under alternative distribution
schemes. The Trustees believe that the effect on sales and/or redemptions
benefit the Trust by reducing Fund expense ratios and/or by affording greater
flexibility to Fund managers.
CUSTODIAL ARRANGEMENTS. Custodial Trust Company ("CTC"), Princeton, NJ
08540, is the Trust's custodian. As such, CTC holds in safekeeping
certificated securities and cash belonging to the Trust and, in such
capacity, is the registered owner of securities in book-entry form belonging
to a Fund. Upon instruction, CTC receives and delivers cash and securities
of a Fund in connection with Fund transactions and collects all dividends and
other distributions made with respect to Fund portfolio securities.
INDEPENDENT ACCOUNTANTS. The Trust's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts an annual audit of the Trust's financial statements,
assists in the preparation of the Trust's federal and state income tax
returns and the Trust's filings with the Securities and Exchange Commission,
and consults with the Trust as to matters of accounting and federal and state
income taxation.
PORTFOLIO TRANSACTIONS
INVESTMENT DECISIONS. The purchase and sale of portfolio securities for
the Funds and for the other investment advisory clients of the Manager are
made by the Manager with a view to achieving each client's investment
objective. For example, a particular security may be purchased or sold on
behalf of certain clients of the Manager even though it could also have been
purchased or sold for other clients at the same time.
Likewise, a particular security may be purchased on behalf of one or
more clients when the Manager is selling the same security on behalf of one
or more other clients. In some instances, therefore, the Manager, acting for
one client may sell indirectly a particular security to another client. It
also happens that two or more clients may simultaneously buy or sell the same
security, in which event purchases or sales are effected PRO RATA on the
basis of cash available or other equitable basis so as to avoid any one
account's being preferred over any other account.
-12-
<PAGE>
BROKERAGE AND RESEARCH SERVICES. Transactions on stock exchanges and
other agency transactions involve the payment of negotiated brokerage
commissions. Such commissions vary among different brokers. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the price paid for such securities usually
includes an undisclosed dealer commission or mark up. In placing orders for
the portfolio transactions of a Fund, the Manager will seek the best price
and execution available, except to the extent it may be permitted to pay
higher brokerage commissions for brokerage and research services as described
below. The determination of what may constitute best price and execution by
a broker-dealer in effecting a securities transaction involves a number of
considerations, including, without limitation, the overall net economic
result to the Fund (involving price paid or received and any commissions and
other costs paid), the efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future and the financial strength and stability of the
broker. Because of such factors, a broker-dealer effecting a transaction may
be paid a commission higher than that charged by another broker-dealer. Most
of the foregoing are judgmental considerations.
Over-the-counter transactions often involve dealers acting for their own
account. It is the Manager's policy to place over-the-counter market orders
for a Fund with primary market makers unless better prices or executions are
available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for a Fund,
the Manager will receive such services from brokers who are expected to
handle a substantial amount of a Fund's portfolio transactions. Research
services may include a wide variety of analyses, reviews and reports on such
matters as economic and political developments, industries, companies,
securities and portfolio strategy. The Manager uses such research in
servicing other clients as well as the Trust.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended, and subject to such policies as the Trustees of the Trust may
determine, the Manager may pay an unaffiliated broker or dealer that provides
"brokerage and research services" (as defined in the Act) to the Manager an
amount of commission for effecting a portfolio investment transaction in
excess of the amount of commission another broker or dealer would have
charged for effecting that transaction.
The Barr Rosenberg Market Neutral Fund paid brokerage commissions of
$_______ for the fiscal year ended March 31, 1998.
TOTAL RETURN CALCULATIONS
Each Fund computes its cumulative total return separately for its share
classes by determining the cumulative rates of return during specified
periods that would equate the initial amount invested in a particular share
class to the ending redeemable value of such investment in such class,
according to the following formula:
Where: n
P(1 + T) = ERV
T = Average annual total return
ERV = Ending redeemable value of a hypothetical $1,000 payment made
at the beginning of a period at the end of such period
P = A hypothetical initial payment of $1,000
n = Number of years
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<PAGE>
Each Fund computes its cumulative total return separately for its share
classes by determining the cumulative rates of return during specified
periods that would equate the initial amount invested in a particular share
class to the ending redeemable value of such investment in such class,
according to the following formula:
Where: T = ERV-1,000
-------------
1,000
Where:
T = Cumulative rate of return
ERV = Ending redeemable value of a hypothetical $1,000 investment made
at the beginning of a period at the end of such period.
The calculations of average annual total return and cumulative total
returns assume that any dividends and distributions are reinvested
immediately, rather than paid to the investor in cash. The ending redeemable
value (variable "ERV" in each formula) is determined by assuming complete
redemption of the hypothetical investment and the deduction of all
nonrecurring charges at the end of the period covered by the computations.
Unlike bank deposits or other investments that pay a fixed yield or
return for a stated period of time, the return for each Fund will fluctuate
from time to time and does not provide a basis for determining future
returns. Average annual total return is based on many factors, including
market conditions, the composition of a Fund's portfolio and a Fund's
operating expenses.
Average annual total return is calculated separately for Investor Shares
and Institutional Shares. Investor Shares and Institutional Shares are
subject to different fees and expenses and may have different performance for
the same period.
The cumulative return of the Barr Rosenberg Market Neutral Fund for the
period ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
Inception Date
Inception Date to 3/31/98
-------------- --------------
<S> <C> <C>
Investor Shares 12/16/97 ____%
Institutional Shares 12/16/97 ____%
</TABLE>
PERFORMANCE COMPARISONS
Investors may judge the performance of the Funds by comparing them to
the performance of other mutual fund portfolios with comparable investment
objectives and policies through various mutual fund or market indices such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation and
to data prepared by Lipper Analytical Services, Inc., a widely recognized
independent service which monitors the performance of mutual funds.
Comparisons may also be made to indices or data published in MONEY MAGAZINE,
FORBES, BARRON'S, THE WALL STREET JOURNAL, MORNINGSTAR, INC., IBBOTSON
ASSOCIATES, CDA/WIESENBERGER, THE NEW YORK TIMES, BUSINESS WEEK, U.S.A.
TODAY, INSTITUTIONAL INVESTOR and other periodicals. In addition to
performance information, general information about the Funds that appears in
a publication such as those mentioned above may be included in
advertisements, sales literature and reports to shareholders. The Funds may
also include in advertisements and reports to shareholders information
discussing the performance of the Manager in comparison to other investment
advisers and to other institutions.
From time to time, the Trust may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (1) discussions of general economic or financial principles
(such as the effects of inflation, the power of compounding and the benefits
of dollar cost averaging); (2) discussions of general
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<PAGE>
economic trends; (3) presentations of statistical data to supplement such
discussions; (4) descriptions of past or anticipated portfolio holdings for
the Funds; (5) descriptions of investment strategies for the Funds; (6)
descriptions or comparisons of various investment products, which may or may
not include the Funds; (7) comparisons of investment products (including the
Funds) with relevant market or industry indices or other appropriate
benchmarks; (8) discussions of fund rankings or ratings by recognized rating
organizations; and (9) testimonials describing the experience of persons that
have invested in a Fund. The Trust may also include calculations, such as
hypothetical compounding examples, which describe hypothetical investment
results in such communications. Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of a
Fund.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
As more fully described in the Prospectus, the Trust is a diversified
open-end series investment company organized as a Massachusetts business
trust. A copy of the Agreement and Declaration of Trust of the Trust, as
amended (the "Declaration of Trust"), is on file with the Secretary of The
Commonwealth of Massachusetts. The fiscal year of the Trust ends on March
31. The Trust changed its name to "Barr Rosenberg Series Trust" from
"Rosenberg Series Trust" on August 5, 1996.
Interests in the Trust's portfolios are currently represented by shares
of five series, the Barr Rosenberg Market Neutral Fund, Barr Rosenberg Double
Alpha Market Fund, U.S. Small Capitalization Series, International Small
Capitalization Series and Japan Series, issued pursuant to the Declaration of
Trust. The rights of shareholders and powers of the Trustees of the Trust
with respect to such shares are described in the Prospectus.
As described in the Prospectus, each Fund is further divided into two
classes of shares designated as Institutional Shares and Investor Shares.
Each class of shares of each Fund represents interests in the assets of the
Fund and has identical dividend, liquidation and other rights and the same
terms and conditions except that expenses, if any, related to the
distribution and shareholder servicing of a particular class are borne solely
by such class and each class may, at the discretion of the Trustees of the
Trust, also pay a different share of other expenses, not including advisory
or custodial fees or other expenses related to the management of the Trust's
assets, if these expenses are actually incurred in a different amount by that
class, or if the class receives services of a different kind or to a
different degree than the other classes. All other expenses are allocated to
each class on the basis of the net asset value of that class in relation to
the net asset value of the particular Fund.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust may, however, be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote (to the extent
provided herein) in the election of Trustees and the termination of the Trust
and on other matters submitted to the vote of shareholders. Shareholders
will vote by individual Fund on all matters except (i) when required by the
1940 Act, shares shall be voted in the aggregate and not by individual Fund,
and (ii) when the Trustees have determined that the matter affects only the
interests of one or more Funds, then only shareholders of such Funds shall be
entitled to vote thereon. Shareholders of one Fund shall not be entitled to
vote on matters exclusively affecting another Fund, such matters including,
without limitation, the adoption of or change in any fundamental policies or
restrictions of the other Fund and the approval of the investment advisory
contracts of the other Fund.
Each class of shares of each Fund has identical voting rights except
that each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class. Each class
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<PAGE>
of shares has exclusive voting rights with respect to matters pertaining to
any distribution or servicing plan applicable to that class. All classes of
shares of a Fund will vote together, except with respect to any distribution
or servicing plan applicable to a class or when a class vote is required as
specified above or otherwise by the 1940 Act.
There will normally be no meetings of shareholders for the purpose of
electing Trustees, except that in accordance with the 1940 Act (i) the Trust
will hold a shareholders' meeting for the election of Trustees at such time
as less than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders.
In addition, Trustees may be removed from office by a written consent signed
by the holders of two-thirds of the outstanding shares and filed with the
Trust's custodian or by a vote of the holders of two-thirds of the
outstanding shares at a meeting duly called for the purpose, which meeting
shall be held upon the written request of the holders of not less than 10% of
the outstanding shares. Upon written request by the holders of at least 1% of
the outstanding shares stating that such shareholders wish to communicate
with the other shareholders for the purpose of obtaining the signatures
necessary to demand a meeting to consider removal of a Trustee, the Trust has
undertaken to provide a list of shareholders or to disseminate appropriate
materials (at the expense of the requesting shareholders). Except as set
forth above, the Trustees shall continue to hold office and may appoint
successor Trustees. Voting rights are not cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except
(i) to change the Trust's name or to cure technical problems in the
Declaration of Trust and (ii) to establish, designate or modify new and
existing series, sub-series or classes of shares of any series of Trust
shares or other provisions relating to Trust shares in response to applicable
laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Declaration of Trust provides for indemnification
out of all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is considered remote since it is limited to
circumstances in which the disclaimer is inoperative and the Fund of which he
is or was a shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing
in the Declaration of Trust protects a Trustee against any liability to which
the Trustee would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. The Declaration of Trust also provides for
indemnification by the Trust of the Trustees and the officers of the Trust
against liabilities and expenses reasonably incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner specified in the Declaration
of Trust that such Trustees are liable to the Trust or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. In addition, the Manager has agreed to
indemnify each Trustee who is not "an interested person" of the Trust to the
maximum extent permitted by the 1940 Act against any liabilities arising by
reason of such Trustee's status as a Trustee of the Trust.
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<PAGE>
OWNERS OF 5% OR MORE OF A FUND'S SHARES
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially and of record 5% or more
of the outstanding shares of the Barr Rosenberg Market Neutral Fund as of
July __, 1998:
Name and Address Percentage Ownership
of Owner of the Fund
---------------- ---------------------
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially and of record 5% or more
of the outstanding shares of the Barr Rosenberg Double Alpha Market Fund as
of July __, 1998:
Name and Address Percentage Ownership
of Owner of the Fund
---------------- ---------------------
The officers and trustees of the Trust, as a group, own less than 1% of
any class of outstanding shares of the Trust.
DETERMINATION OF NET ASSET VALUE
As indicated in the Prospectus, the net asset value of each Fund share
is determined on each day on which the New York Stock Exchange is open for
trading. The Trust expects that the days, other than weekend days, that the
New York Stock Exchange will not be open are Christmas Day, New Year's Day,
Martin Luther King's Day, President's Day, Good Friday and Memorial Day,
Independence Day (observed), Labor Day and Thanksgiving Day.
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or, if there is no such reported sale, at the most recent
quoted bid price. Price information on listed securities is generally taken
from the closing price on the exchange where the security is primarily
traded. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price, except that debt
obligations with sixty days or less remaining until maturity may be valued at
their amortized cost. Exchange-traded options, futures and options on futures
are valued at the settlement price as determined by the appropriate clearing
corporation. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees of the Trust or by persons acting at their direction.
PURCHASE AND REDEMPTION OF SHARES
The procedures for purchasing shares of each of the Funds and for
determining the offering price of such shares are described in the
Prospectus. The Trust has elected to be governed by Rule 18f-1 under the 1940
Act pursuant to which the Trust is obligated to redeem shares solely in cash
for any shareholder during any 90-day period up to the lesser of (i) $250,000
or (ii) 1% of the total net asset value of the Trust at the beginning of such
period. The procedures for redeeming shares of each of the Funds are
described in the Prospectus.
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<PAGE>
FINANCIAL STATEMENTS
The Report of Independent Accountants, financial highlights and
financial statements of the Funds included in their Annual Report for the
period ended March 31, 1998 (the "Annual Report") are incorporated herein by
reference to such Annual Report. Copies of such Annual Report are available
without charge upon request by writing to Barr Rosenberg Series Trust, 3435
Stelzer Road, Columbus, Ohio 43219 or telephoning 1-800-447-3332.
The financial statements incorporated by reference into this Statement
of Additional Information have been audited by Price Waterhouse LLP,
independent accountants, and have been so included and incorporated by
reference in reliance upon the report of said firm, which report is given
upon their authority as experts in auditing and accounting.
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<PAGE>
BARR ROSENBERG SERIES TRUST
BARR ROSENBERG MARKET NEUTRAL FUND
BARR ROSENBERG DOUBLE ALPHA MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
JULY __, 1998
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the prospectus of the Barr
Rosenberg Market Neutral Fund and Barr Rosenberg Double Alpha Market Fund of
Barr Rosenberg Series Trust dated July __, 1998 (the "Prospectus") and should
be read in conjunction therewith. A copy of the Prospectus may be obtained
from Barr Rosenberg Series Trust, 3435 Stelzer Road, Columbus, Ohio 43219.
This Statement of Additional Information is used solely in connection
with the offer and sale of Institutional Shares of the Barr Rosenberg Market
Neutral Fund and Barr Rosenberg Double Alpha Market Fund. This Statement of
Additional Information should not be relied upon by offerees or purchasers of
Investor Shares of the Barr Rosenberg Market Neutral Fund or Barr Rosenberg
Double Alpha Market Fund. Please telephone 1-800-447-3332 or write to Barr
Rosenberg Funds Distributor, Inc. at 3435 Stelzer Road, Columbus, Ohio 43219
to obtain a copy of the Statement of Additional Information used in
connection with the offer and sale of Investor Shares.
<PAGE>
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . 3
MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . . . 4
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 5
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS . . . . . . . . . . . . . . 6
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . 8
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . .10
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . .12
TOTAL RETURN CALCULATIONS. . . . . . . . . . . . . . . . . . . . . . . . .13
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES . . . . . . . . . . . . .15
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . .17
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . .17
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .17
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each of the Barr Rosenberg
Market Neutral Fund and Barr Rosenberg Double Alpha Market Fund (each, a
"Fund" and collectively, the "Funds") of Barr Rosenberg Series Trust (the
"Trust") are summarized on the front page of the Prospectus and in the text
of the Prospectus under the headings "Investment Objectives and Policies" and
"General Description of Risks and Fund Investments."
In addition, the following is an additional description of certain
investments of the Fund(s).
SHORT SALES (BOTH FUNDS). The Barr Rosenberg Market Neutral Fund will
seek, and the Barr Rosenberg Double Alpha Market Fund may seek, to realize
additional gains through short sales. Short sales are transactions in which
a Fund sells a security it does not own, in anticipation of a decline in the
value of that security relative to the long positions held by the Fund. To
complete such a transaction, a Fund must borrow the security to make delivery
to the buyer. A Fund then is obligated to replace the security borrowed by
purchasing it at the market price at or prior to the time of replacement.
The price at such time may be more or less than the price at which the
security was sold by a Fund. Until the security is replaced, a Fund is
required to repay the lender any dividends or interest that accrue during the
period of the loan. To borrow the security, a Fund also may be required to
pay a premium, which would increase the cost of the security sold. The net
proceeds of the short sale will be retained by the broker (or by the Fund's
custodian in a special custody account), to the extent necessary to meet
margin requirements, until the short position is closed out. A Fund also
will incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of the
premium, dividends, interest or expenses a Fund may be required to pay in
connection with a short sale. An increase in the value of a security sold
short by a Fund over the price at which it was sold short will result in a
loss to the Fund, and there can be no assurance that the Fund will be able to
close out the position at any particular time or at an acceptable price.
S&P 500 INDEX FUTURES AND RELATED OPTIONS (BARR ROSENBERG DOUBLE ALPHA
MARKET FUND ONLY). An S&P 500 Index Future contract (an "Index Future") is a
contract to buy or sell an integral number of units of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index") at a specified future
date at a price agreed upon when the contract is made. A unit is the value
of the S&P 500 Index from time to time. Entering into a contract to buy
units is commonly referred to as buying or purchasing a contract or holding a
long position in the S&P 500 Index.
Index Futures can be traded through all major commodity brokers.
Currently, contracts are expected to expire on the tenth day of March, June,
September and December. The Barr Rosenberg Double Alpha Market Fund will
ordinarily be able to close open positions on the United States futures
exchange on which Index Futures are then traded at any time up to and
including the expiration day.
In contrast to purchases of a common stock, no price is paid or received
by the Barr Rosenberg Double Alpha Market Fund upon the purchase of a futures
contract. Upon entering into a futures contract, the Fund will be required
to deposit with its custodian in a segregated account in the name of the
futures broker a specified amount of cash or securities. This is known by
participants in the market as "initial margin". The type of instruments that
may be deposited as initial margin, and the required amount of initial
margin, are determined by the futures exchange(s) on which the Index Futures
are traded. The nature of initial margin in futures transactions is different
from that of margin in securities transactions in that futures contract
margin does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance
bond or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied. Subsequent payments, called "variation margin", to and
from the broker, will be
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<PAGE>
made on a daily basis as the price of the S&P 500 Index fluctuates, making
the position in the futures contract more or less valuable, a process known
as "marking to the market". For example, when the Fund has purchased an
Index Future and the price of the S&P 500 Index has risen, that position will
have increased in value and the Fund will receive from the broker a variation
margin payment equal to that increase in value. Conversely, when the Fund
has purchased an Index Future and the price of the S&P 500 Index has
declined, the position would be less valuable and the Fund would be required
to make a variation margin payment to the broker. When the Fund terminates a
position in a futures contract, a final determination of variation margin is
made, additional cash is paid by or to the Fund, and the Fund realizes a gain
or a loss.
The price of Index Futures may not correlate perfectly with movement in
the underlying index due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the S&P 500
Index and futures markets. Secondly, the deposit requirements in the futures
market are less onerous than margin requirements in the securities market,
and as a result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures
market may also cause temporary price distortions.
Options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the holder would assume the
underlying futures position and would receive a variation margin payment of
cash or securities approximating the increase in the value of the holder's
option position. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in
cash based on the difference between the exercise price of the option and the
closing level of the index on which the futures contract is based on the
expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
The ability to establish and close out positions in options on futures
contracts will be subject to the development and maintenance of a liquid
secondary market. It is not certain that such a market will develop.
Although the Barr Rosenberg Double Alpha Market Fund generally will purchase
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will
exist for any particular option or at any particular time. In the event no
such market exists for particular options, it might not be possible to effect
closing transactions in such options, with the result that the Fund would
have to exercise the options in order to realize any profit.
MISCELLANEOUS INVESTMENT PRACTICES
PORTFOLIO TURNOVER. A change in securities held by a Fund is known as
"portfolio turnover" and almost always involves the payment by a Fund of
brokerage commissions or dealer markup and other transaction costs on the
sale of securities as well as on the reinvestment of the proceeds in other
securities. Portfolio turnover is not a limiting factor with respect to
investment decisions. As disclosed in the Prospectus, high portfolio
turnover involves correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Funds, and could
involve realization of capital gains that would be taxable when distributed
to shareholders of a Fund. To the extent that portfolio turnover results in
the realization of net short-term capital gains, such gains are ordinarily
taxed to shareholders at ordinary income tax rates. See "Portfolio
Transactions" and "Income Dividends, Distributions and Tax Status".
NOTICE ON SHAREHOLDER APPROVAL. Unless otherwise indicated in the
Prospectus or this Statement of Additional Information, the investment
objective and policies of each of the Funds may be changed without
shareholder approval.
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<PAGE>
INVESTMENT RESTRICTIONS
Without a vote of the majority of the outstanding voting securities of a
Fund, the Trust will not take any of the following actions with respect to
such Fund:
(1) Borrow money in excess of 10% of the value (taken at the lower of
cost or current value) of the Fund's total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes or for payments of
variation margin (in the case of the Barr Rosenberg Double Alpha Market Fund
only). Such borrowings will be repaid before any additional investments are
purchased. Short sales and related borrowings of securities are not subject
to this restriction.
(2) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of the Fund's total assets (taken at cost) and then only to
secure borrowings permitted by Restriction 1 above. (For the purposes of
this restriction, collateral arrangements with respect to options, short
sales, stock index, interest rate, currency or other futures, options on
futures contracts and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge or other encumbrance of
assets. Collateral arrangements with respect to swaps and other derivatives
are also not deemed to be a pledge or other encumbrance of assets.)
(3) Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities.
(For this purpose, the deposit or payment of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.)
(4) Make short sales of securities or maintain a short position if,
when added together, more than 100% of the value of a Fund's net assets would
be (i) deposited as collateral for the obligation to replace securities
borrowed to effect short sales, and (ii) allocated to segregated accounts in
connection with short sales. Short sales "against the box" are not subject
to this limitation.
(5) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under federal securities laws.
(6) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests
in real estate.
(7) Concentrate more than 25% of the value of its total assets in any
one industry.
(8) Invest in securities of other investment companies, except to the
extent permitted by the Investment Company Act of 1940, as amended (the "1940
Act"), or by an exemptive order issued by the Securities and Exchange
Commission.
(9) Purchase or sell commodities or commodity contracts except that
each of the Funds may purchase and sell stock index and other financial
futures contracts and options thereon.
(10) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of the Fund's portfolio
securities.
(11) Issue senior securities. (For the purpose of this restriction none
of the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (2) above; any borrowing
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<PAGE>
permitted by restriction (1) above; short sales permitted by restriction (4)
above; any collateral arrangements with respect to short sales, swaps,
options, future contracts and options on future contracts and with respect to
initial and variation margin; and the purchase or sale of options, future
contracts or options on future contracts.)
Notwithstanding the latitude permitted by Restriction 9 above, the Funds
have no current intention of purchasing interest rate futures.
It is contrary to the present policy of each of the Funds, which may be
changed by the Trustees of the Trust without shareholder approval, to:
(a) Invest in warrants or rights (other than warrants or rights
acquired by the Fund as a part of a unit or attached to securities at the
time of purchase).
(b) Write, purchase or sell options on particular securities (as
opposed to market indices).
(c) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(d) Make investments for the purpose of exercising control of a
company's management.
(e) Invest in (a) securities which at the time of investment are not
readily marketable and (b) repurchase agreements maturing in more than seven
days if, as a result, more than 15% of the Fund's net assets (taken at
current value) would then be invested in such securities.
Unless otherwise indicated, all percentage limitations on investments
set forth herein and in the Prospectus will apply at the time of the making
of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
The phrase "shareholder approval," as used in the Prospectus and herein,
and the phrase "vote of a majority of the outstanding voting securities", as
used herein, means the affirmative vote of the lesser of (1) more than 50% of
the outstanding shares of a Fund or the Trust, as the case may be, or (2) 67%
or more of the shares of a Fund or the Trust, as the case may be, present at
a meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
The tax status of the Funds and the distributions which they may make
are summarized in the Prospectus under the heading "Taxes." The Funds intend
to qualify each year as a regulated investment company under the Internal
Revenue Code. In order to qualify as a "regulated investment company" and to
qualify for the special tax treatment accorded regulated investment companies
and their shareholders, each Fund must, among other things, (a) derive at
least 90% of its gross income from dividends, interest, payments with respect
to certain securities loans, gains from the sale or other disposition of
securities or foreign currencies or other income (including but not limited
to gains from options, futures or forward contracts) derived with respect to
its business of investing in such securities or currencies; (b) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at
least 50% of the value of its total assets consists of cash, cash items, U.S.
Government securities, securities of other regulated investment companies,
and other securities limited generally with respect to any one issuer to not
more than 5% of the total assets of such Fund and not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any issuer
(other than U.S. Government securities or securities of other regulated
investment companies); and (c) distribute annually at least 90% of the sum of
its taxable net investment income, its net tax-exempt income (if any), and,
the excess, if any, of net short-term capital gains over net long-term
capital losses for such year. To the extent a Fund qualifies for treatment
as a
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<PAGE>
regulated investment company, the Fund will not be subject to federal income
tax on income paid to its shareholders in the form of dividends or capital
gain distributions.
As described in the Prospectus under the heading "Distributions," each
Fund intends to pay out substantially all of its ordinary income and net
short-term capital gains, and to distribute substantially all of its net
capital gains, if any, after giving effect to any available capital loss
carryover. Net capital gain is the excess of net gains from assets held for
more than one year over net losses from capital assets held for not more than
one year. In order to avoid an excise tax imposed on certain undistributed
income, a Fund must distribute prior to each calendar year end without regard
to the Fund's fiscal year end (i) 98% of the Fund's ordinary income, and (ii)
98% of the Fund's capital gain net income, if any, realized in the one-year
period ending on October 31.
In general, all dividend distributions derived from ordinary income and
short-term capital gain are taxable to investors as ordinary income (eligible
in part for the dividends-received deduction in the case of corporations,
subject to certain conditions). Pursuant to the Taxpayer Relief Act of 1997
(the "1997 Act"), two different tax rates apply to net capital gains. One
rate (generally 28%) applies to net gains on capital assets held for more
than one year but not more than 18 months ("mid-term gains") and a second,
preferred rate (generally 20%) applies to the balance of such net capital
gains ("adjusted net capital gains"). Distributions of net capital gains
will be treated in the hands of shareholders as mid-term gains to the extent
designated by the Fund as deriving from net gains from assets held for more
than one year but not more than 18 months, and the balance will be treated as
adjusted net capital gains. Distributions of mid-term gains and adjusted net
capital gains will be taxable to shareholders as such, regardless of how long
a shareholder has held the shares in the Fund. Distributions will be taxable
as described above whether received in cash or in shares through the
reinvestment of distributions. The dividends-received deduction for
corporations will generally apply to a Fund's dividends from investment
income to the extent derived from dividends received by the Fund from
domestic corporations, provided the Fund and the shareholder each meet the
relevant holding period requirements.
Certain tax exempt organizations or entities may not be subject to
federal income tax on dividends or distributions from a Fund. Each
organization or entity should review its own circumstances and the federal
tax treatment of its income.
Each Fund is generally required to withhold and remit to the U.S.
Treasury 31% of the taxable dividends and other distributions, whether
distributed in cash or reinvested in shares of the Fund, paid or credited to
any shareholder account for which an incorrect or no taxpayer identification
number has been provided or where the Fund is notified that the shareholder
has underreported income in the past (or the shareholder fails to certify
that he is not subject to such withholding). However, the general back-up
withholding rules set forth above will not apply to tax exempt entities so
long as each such entity furnishes a Fund with an appropriate certificate.
To the extent such investments are permissible for a particular Fund,
the Fund's transactions in options, futures contracts, hedging transactions,
forward contracts and straddles will be subject to special tax rules
(including mark-to-market, constructive sale, straddle, wash sale and short
sale rules), the effect of which may be to accelerate income to the Fund,
defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities and convert short-term capital losses into long-term
capital losses. These rules could therefore affect the amount, timing and
character of distributions to shareholders.
Pursuant to the 1997 Act, new "constructive sale" provisions apply to
activities by a Fund which lock in gain on an "appreciated financial
position." Generally, a "position" is defined to include stock, a debt
instrument, or partnership interest, or an interest in any of the foregoing,
including through a short sale, a swap contract, or a future or forward
contract. Under the 1997 Act, the entry into a short sale, a swap contract
or a future or forward contract relating to an appreciated direct position in
any stock or debt instrument, or the acquisition of stock or debt instrument
at a time when the Fund occupies an offsetting (short) appreciated position
in the stock or debt instrument, is treated as a "constructive sale" that
gives rise to the immediate recognition of gain (but not loss). The
application of these
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<PAGE>
new provisions may cause a Fund to recognize taxable income from these
offsetting transactions in excess of the cash generated by such activities.
THE TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY INCLUDED FOR GENERAL
INFORMATION PURPOSES ONLY. EACH SHAREHOLDER IS ADVISED TO CONSULT ITS OWN
TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO IT OF AN
INVESTMENT IN THE FUNDS, INCLUDING THE EFFECT AND APPLICABILITY OF STATE,
LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL OR OTHER TAX LAWS. THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE
FOR CAREFUL TAX PLANNING.
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
Kenneth Reid* (47) General Partner and Director of Research,
President, Trustee Rosenberg Institutional Equity Management,
June 1986 to present.
Marlis S. Fritz* (47) General Partner and Director of Marketing,
Vice President, Trustee Rosenberg Institutional Equity Management
April 1985 to present.
Nils H. Hakansson (60) Sylvan C. Coleman Professor of Finance and
Trustee Accounting, Haas School of Business, University
of California, Berkeley, June 1969 to present.
Director, Supershare Services Corporation
(investment management), Los Angeles,
California, November 1989 to 1995.
Barr M. Rosenberg* (54) Managing General Partner and Chief Investment
Trustee Officer, Rosenberg Institutional Equity
Management, January 1985 to present.
William F. Sharpe (63) STANCO 25 Professor of Finance, Stanford
Trustee University. Chairman, Financial Engines
Incorporated, Los Altos, California (electronic
investment advice), March 1996 to present.
Po-Len Hew (31) Accounting Manager, Rosenberg Institutional
Treasurer Equity Management, October 1989 to present.
Carolyn Demler (53)
Administrative Coordinator, Rosenberg
Clerk Institutional Equity Management, December 1988
to present.
Edward H. Lyman (53) Investment Management, Inc., and General Counsel
Vice President to the Rosenberg Group of companies, 1990 to
present.
Richard L. Saalfeld (54) President and Chief Executive Officer of mutual
Vice President fund unit of Rosenberg Institutional Equity
Management from June 1996 to present; Consultant
to Rosenberg Institutional Equity Management,
September 1995 to May 1996; Chairman and Chief
Executive Officer of CoreLink Resources, Inc.
(mutual fund marketing organization), Concord,
California, April 1993 to August 1995;
Consultant, December 1992 to March 1993.
Harold L. Arbit (50) Vice President and Partner, Rosenberg
Vice President Alpha L.P., 1984 to present.
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<PAGE>
F. William Jump, Jr. (42) Portfolio engineer, Rosenberg
Vice President Institutional Equity Management,
August 1990 to present.
David Bunstine (32) Employee of BISYS Fund Services.
Assistant Treasurer
Gregory Maddox (30) Director, Client Services,
Assistant Treasurer BISYS Fund Services.
Bruce Treff (31) Employee of BISYS Fund Services.
Assistant Clerk
Ellen Stoutamire (48) Employee of BISYS Fund Services.
Assistant Clerk
Jeanette Peplowski (39) Employee of BISYS Fund Services.
Assistant Clerk
Alaina Metz (31) Employee of BISYS Fund Services.
Assistant Clerk
* Trustees who are "interested persons" (as defined in the 1940 Act) of
the Trust or the Manager.
The mailing address of each of the officers and Trustees is c/o Barr
Rosenberg Series Trust, 3435 Stelzer Road, Columbus, OH 43219.
The principal occupations of the officers and Trustees for the last five
years have been with the employers as shown above, although in some cases
they have held different positions with such employers.
The Trust pays the Trustees other than those who are interested persons
of the Trust or Manager an annual fee of $37,950 plus $4,125 for each meeting
attended. The Trust does not pay any pension or retirement benefits for its
Trustees. The Trust does not pay any compensation to officers or Trustees of
the Trust other than those Trustees who are not interested persons of the
Trust or Manager. The following table sets forth information concerning the
total compensation paid to each of the Trustees who are not interested
persons of the Trust or Manager in the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Benefits from Registrant
Compensation Accrued Estimated and Fund
Name of from as Part of Annual Benefits Complex Paid
Person/Position Registrant Fund Expenses Upon Retirement to Directors
<S> <C> <C> <C> <C>
Nils H. Hakansson $ $ 0 $ 0 $
Trustee
William F. Sharpe $ $ 0 $ 0 $
Trustee
</TABLE>
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<PAGE>
Messrs. Rosenberg, Reid, Arbit, Lyman and Saalfeld and Ms. Fritz,
Demler and Hew, each being a general partner, limited partner, officer or
employee of the Manager, will each benefit from the management fees paid by
the Trust to the Manager, but receive no direct compensation from the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACT. As disclosed in the Prospectus under the heading
"Management of the Trust", under management contracts (each, a "Management
Contract") between the Trust, on behalf of each Fund, and Rosenberg
Institutional Equity Management (the "Manager"), subject to the control of
the Trustees of the Trust and such policies as the Trustees may determine,
the Manager will furnish continuously an investment program for each Fund and
will make investment decisions on behalf of each Fund and place all orders
for the purchase and sale of portfolio securities. Subject to the control of
the Trustees, the Manager furnishes office space and equipment, provides
bookkeeping and certain clerical services and pays all salaries, fees and
expenses of officers and Trustees of the Trust who are affiliated with the
Manager. As indicated under "Portfolio Transactions -- Brokerage and
Research Services," the Trust's portfolio transactions may be placed with
broker-dealers which furnish the Manager, at no cost, certain research,
statistical and quotation services of value to the Manager in advising the
Trust or its other clients.
As disclosed in the Prospectus, each of the Funds has agreed to pay the
Manager a quarterly management fee at the annual percentage rate of the
relevant Fund's average daily net assets set forth in the Prospectus. The
Manager has informed the Trust that it will voluntarily waive some or all of
its management fees under the Management Contracts and, if necessary, will
bear certain expenses of each Fund until further notice so that each Fund's
total annual operating expenses (including the management fee but not
including nonrecurring account fees and extraordinary expenses) applicable to
each class will not exceed the percentage of each Fund's average daily net
assets attributable to that class as set forth in the Prospectus. In
addition, the Manager's compensation under each Management Contract is
subject to reduction to the extent that in any year the expenses of a Fund
(including investment advisory fees but excluding taxes, portfolio brokerage
commissions and any distribution expenses paid by a class of shares of a Fund
pursuant to a distribution plan or otherwise) exceed the limits on investment
company expenses imposed by any statute or regulatory authority of any
jurisdiction in which shares of the Fund are qualified for offer and sale.
Each Management Contract provides that the Manager shall not be subject
to any liability to the Trust or to any shareholder of the Trust in
connection with the performance of its services thereunder in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties thereunder.
Each Management Contract will continue in effect for a period of no more
than two years from the date of its execution only so long as its continuance
is approved at least annually by (i) vote, cast in person at a meeting called
for that purpose, of a majority of those Trustees who are not "interested
persons" of the Manager or the Trust, and by (ii) the majority vote of either
the full Board of Trustees or the vote of a majority of the outstanding
shares of the relevant Fund. Each Management Contract automatically
terminates on assignment, and is terminable on not more than 60 days' notice
by the Trust to the Manager. In addition, each Management Contract may be
terminated on not more than 60 days' written notice by the Manager to the
Trust.
As disclosed in the Prospectus, the general partners of the Manager are
Barr M. Rosenberg, Marlis S. Fritz and Kenneth Reid. Each of these persons
may be deemed a controlling person of the Manager.
As discussed in this Statement of Additional Information under the
heading "Management of the Trust," Barr M. Rosenberg is a Trustee of the
Trust as well as Managing General Partner and Chief Investment Officer of the
Manager; Marlis S. Fritz is a Trustee and Vice President of the Trust as well
as a general partner of the Manager; and Kenneth Reid is a Trustee and
President of the Trust as well as a general partner and Director of Research
of the Manager.
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<PAGE>
During the fiscal period ended March 31, 1998, the Barr Rosenberg Market
Neutral Fund paid the following amounts as management fees to the Manager
pursuant to its Management Contract:
Gross Reduction Net
12/16/97 - 3/31/98
ADMINISTRATIVE SERVICES. The Trust has entered into a Fund
Administration Agreement with BISYS Fund Services (the "Administrator")
pursuant to which the Administrator provides certain management and
administrative services necessary for the Funds' operations including: (i)
general supervision of the operation of the Funds including coordination of
the services performed by the Funds' investment advisor, transfer agent,
custodian, independent accountants and legal counsel, regulatory compliance,
including the compilation of information for documents such as reports to,
and filings with, the SEC and state securities commissions, and preparation
of proxy statements and shareholder reports for the Funds; (ii) general
supervision relative to the compilation of data required for the preparation
of periodic reports distributed to the Funds' officers and Board of Trustees;
and (iii) furnishing office space and certain facilities required for
conducting the business of the Funds. The Trust's principal underwriter is
an affiliate of the Administrator. For these services, the Administrator is
entitled to receive a fee, payable monthly, at the annual rate of 0.15% of
the average daily net assets of the Trust. For the fiscal period ended March
31, 1998 the Barr Rosenberg Double Alpha Market Fund paid $_____ in
administration fees. The Trust has also entered into a Fund Accounting
Agreement with BISYS Fund Services, Inc. (the "Fund Accountant") pursuant to
which the Fund Accountant provides certain accounting services necessary for
the Funds' operations. For these services, the Fund Accountant is entitled
to receive an annual fee of $40,000 for each Fund. For the fiscal period
ended March 31, 1998 the Barr Rosenberg Market Neutral Fund paid $______ in
fund accounting fees. The Trust's principal underwriter is an affiliate of
the Fund Accountant.
DISTRIBUTOR AND DISTRIBUTION PLAN. As stated in the text of the
Prospectus under the heading "Management of the Trust -- Distributor",
Investor Shares of each Fund are sold on a continuous basis by the Trust's
distributor, Barr Rosenberg Funds Distributor, Inc. (the "Distributor").
Under the Distributor's Contract between the Trust and the Distributor (the
"Distributor's Contract"), the Distributor is not obligated to sell any
specific amount of shares of the Trust and will purchase shares for resale
only against orders for shares.
Pursuant to the Distribution Plan (the "Plan") described in the
Prospectus, in connection with the distribution of Investor Shares of the
Trust, the Distributor receives certain distribution fees from the Trust.
Subject to the percentage limitation on the distribution fee set forth in the
Prospectus, the distribution fee may be paid in respect of services rendered
and expenses borne in the past with respect to Investor Shares as to which no
distribution fee was paid on account of such limitation. The Distributor may
pay all or a portion of the distribution fees it receives from the Trust to
participating and introducing brokers. The Barr Rosenberg Market Neutral
Fund paid the Distributor $______ in distribution fees pursuant to the Plan
for the fiscal year ended March 31, 1998.
The Plan may be terminated with respect to Investor Shares of any Fund
to which the Plan relates by vote of a majority of the Trustees of the Trust
who are not interested persons of the Trust (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the
Plan or the Distributor's Contract (the "Independent Trustees"), or by vote
of a majority of the outstanding voting securities of that class. Any change
in the Plan that would materially increase the cost to the Investors Shares
of any Fund to which the Plan relates requires approval by the Investor
shareholders of that Fund. The Trustees of the Trust review quarterly a
written report of such costs and the purposes for which such costs have been
incurred. Except as described above, the Plan may be amended by vote of the
Trustees of the Trust, including a majority of the Independent Trustees, cast
in person at a meeting called for the purpose. For so long as the Plan is in
effect, selection and nomination of those Trustees of the Trust who are not
interested persons of the Trust shall be committed to the discretion of such
disinterested persons.
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<PAGE>
The Distributor's Contract may be terminated with respect to any Fund or
Investor shares thereof at any time by not more than 60 days' nor less than
30 days' written notice without payment of any penalty either by the
Distributor or by such Fund or class and will terminate automatically,
without the payment of any penalty, in the event of its assignment.
The Distributor's Contract and the Plan will continue in effect with
respect to each class of shares to which they relate for successive one-year
periods, provided that each such continuance is specifically approved (i) by
the vote of a majority of the Independent Trustees and (ii) by the vote of a
majority of the entire Board of Trustees (or by vote of a majority of the
outstanding shares of a class, in the case of the Distributor's Contract)
cast in person at a meeting called for that purpose.
If the Distributor's Contract or the Plan are terminated (or not
renewed) with respect to one or more classes, they may continue in effect
with respect to any class of any Fund as to which they have not been
terminated (or have been renewed).
The Trustees of the Trust believe that the Plan will provide benefits to
the Trust. The Trustees believe that the Plan will result in greater sales
and/or fewer redemptions of Investor Shares, although it is impossible to
know for certain the level of sales and redemptions of Investor Shares that
would occur in the absence of the Plan or under alternative distribution
schemes. The Trustees believe that the effect on sales and/or redemptions
benefit the Trust by reducing Fund expense ratios and/or by affording greater
flexibility to Fund managers.
CUSTODIAL ARRANGEMENTS. Custodial Trust Company ("CTC"), Princeton, NJ
08540, is the Trust's custodian. As such, CTC holds in safekeeping
certificated securities and cash belonging to the Trust and, in such
capacity, is the registered owner of securities in book-entry form belonging
to a Fund. Upon instruction, CTC receives and delivers cash and securities
of a Fund in connection with Fund transactions and collects all dividends and
other distributions made with respect to Fund portfolio securities.
INDEPENDENT ACCOUNTANTS. The Trust's independent accountants are Price
Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP conducts an annual audit of the Trust's financial statements,
assists in the preparation of the Trust's federal and state income tax
returns and the Trust's filings with the Securities and Exchange Commission,
and consults with the Trust as to matters of accounting and federal and state
income taxation.
PORTFOLIO TRANSACTIONS
INVESTMENT DECISIONS. The purchase and sale of portfolio securities for
the Funds and for the other investment advisory clients of the Manager are
made by the Manager with a view to achieving each client's investment
objective. For example, a particular security may be purchased or sold on
behalf of certain clients of the Manager even though it could also have been
purchased or sold for other clients at the same time. Likewise, a particular
security may be purchased on behalf of one or more clients when the Manager
is selling the same security on behalf of one or more other clients. In some
instances, therefore, the Manager, acting for one client may sell indirectly
a particular security to another client. It also happens that two or more
clients may simultaneously buy or sell the same security, in which event
purchases or sales are effected prorata on the basis of cash available or
other equitable basis so as to avoid any one account's being preferred over
any other account.
BROKERAGE AND RESEARCH SERVICES. Transactions on stock exchanges and
other agency transactions involve the payment of negotiated brokerage
commissions. Such commissions vary among different brokers. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the price paid for such securities usually
includes an undisclosed dealer commission or mark up. In placing orders for
the portfolio transactions of a Fund, the Manager will seek the best price
and execution available, except to the extent it may be
-12-
<PAGE>
permitted to pay higher brokerage commissions for brokerage and research
services as described below. The determination of what may constitute best
price and execution by a broker-dealer in effecting a securities transaction
involves a number of considerations, including, without limitation, the
overall net economic result to the Fund (involving price paid or received and
any commissions and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the transaction at all where a
large block is involved, availability of the broker to stand ready to execute
possibly difficult transactions in the future and the financial strength and
stability of the broker. Because of such factors, a broker-dealer effecting
a transaction may be paid a commission higher than that charged by another
broker-dealer. Most of the foregoing are judgmental considerations.
Over-the-counter transactions often involve dealers acting for their own
account. It is the Manager's policy to place over-the-counter market orders
for a Fund with primary market makers unless better prices or executions are
available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for a Fund,
the Manager will receive such services from brokers who are expected to
handle a substantial amount of a Fund's portfolio transactions. Research
services may include a wide variety of analyses, reviews and reports on such
matters as economic and political developments, industries, companies,
securities and portfolio strategy. The Manager uses such research in
servicing other clients as well as the Trust.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended, and subject to such policies as the Trustees of the Trust may
determine, the Manager may pay an unaffiliated broker or dealer that provides
"brokerage and research services" (as defined in the Act) to the Manager an
amount of commission for effecting a portfolio investment transaction in
excess of the amount of commission another broker or dealer would have
charged for effecting that transaction.
The Barr Rosenberg Market Neutral Fund paid brokerage commissions of
$______ for the fiscal year ended March 31, 1998.
TOTAL RETURN CALCULATIONS
Each Fund computes its average annual total return separately for its share
classes by determining the average annual compounded rates of return during
specified periods that would equate the initial amount invested in a particular
share class to the ending redeemable value of such investment in the class,
according to the following formula:
n
P(1 + T) = ERV
Where:
T = Average annual total return
ERV = Ending redeemable value of a hypothetical $1,000 payment made at
the beginning of a period at the end of such period
P = A hypothetical initial payment of $1,000
n = Number of years
Each Fund computes its cumulative total return separately for its share
classes by determining the cumulative rates of return during specified
periods that would equate the initial amount invested in a particular share
class to the ending redeemable value of such investment in such class,
according to the following formula:
-13-
<PAGE>
Where: T = ERV-1,000
1,000
Where:
T = Cumulative rate of return
ERV = Ending redeemable value of a hypothetical $1,000 investment made
at the beginning of a period at the end of such period.
The calculations of average annual total return and cumulative total
return assume that any dividends and distributions are reinvested
immediately, rather than paid to the investor in cash. The ending redeemable
value (variable "ERV" in each formula) is determined by assuming complete
redemption of the hypothetical investment and the deduction of all
nonrecurring charges at the end of the period covered by the computations.
Unlike bank deposits or other investments that pay a fixed yield or
return for a stated period of time, the return for each Fund will fluctuate
from time to time and does not provide a basis for determining future
returns. Average annual total return is based on many factors, including
market conditions, the composition of a Fund's portfolio and a Fund's
operating expenses.
Average annual total return is calculated separately for Investor Shares
and Institutional Shares. Investor Shares and Institutional Shares are
subject to different fees and expenses and may have different performance for
the same period.
The cumulative return of the Barr Rosenberg Market Neutral Fund for the
period ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
Inception Date
Inception Date to 3/31/98
<S> <C> <C>
Investor Shares 12/16/97 ____%
Institutional Shares 12/16/97 ____%
</TABLE>
PERFORMANCE COMPARISONS. Investors may judge the performance of the
Funds by comparing them to the performance of other mutual fund portfolios
with comparable investment objectives and policies through various mutual
fund or market indices such as those prepared by Dow Jones & Co., Inc. and
Standard & Poor's Corporation and to data prepared by Lipper Analytical
Services, Inc., a widely recognized independent service which monitors the
performance of mutual funds. Comparisons may also be made to indices or data
published in MONEY MAGAZINE, FORBES, BARRON'S, THE WALL STREET JOURNAL,
MORNINGSTAR, INC., IBBOTSON ASSOCIATES, CDA/WIESENBERGER, THE NEW YORK TIMES,
BUSINESS WEEK, U.S.A. TODAY, INSTITUTIONAL INVESTOR and other periodicals.
In addition to performance information, general information about the Funds
that appears in a publication such as those mentioned above may be included
in advertisements, sales literature and reports to shareholders. The Funds
may also include in advertisements and reports to shareholders information
discussing the performance of the Manager in comparison to other investment
advisers and to other institutions.
From time to time, the Trust may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (1) discussions of general economic or financial principles
(such as the effects of inflation, the power of compounding and the benefits
of dollar cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for the Funds; (5)
descriptions of investment strategies for the Funds; (6) descriptions or
comparisons of various investment products, which may or may not include the
Funds; (7) comparisons of investment products (including the Funds) with
relevant market or industry indices or other appropriate benchmarks; (8)
discussions of fund rankings or ratings by recognized rating organizations;
and (9) testimonials describing the experience of persons that have invested
in a Fund. The Trust may also include calculations, such as hypothetical
-14-
<PAGE>
compounding examples, which describe hypothetical investment results in such
communications. Such performance examples will be based on an express set of
assumptions and are not indicative of the performance of a Fund.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
As more fully described in the Prospectus, the Trust is a diversified
open-end series investment company organized as a Massachusetts business
trust. A copy of the Agreement and Declaration of Trust of the Trust, as
amended (the "Declaration of Trust"), is on file with the Secretary of The
Commonwealth of Massachusetts. The fiscal year of the Trust ends on March
31. The Trust changed its name to "Barr Rosenberg Series Trust" from
"Rosenberg Series Trust" on August 5, 1996.
Interests in the Trust's portfolios are currently represented by shares
of five series, the Barr Rosenberg Market Neutral Fund, Barr Rosenberg Double
Alpha Market Fund, U.S. Small Capitalization Series, International Small
Capitalization Series and Japan Series, issued pursuant to the Declaration of
Trust. The rights of shareholders and powers of the Trustees of the Trust
with respect to such shares are described in the Prospectus.
As described in the Prospectus, each Fund is further divided into two
classes of shares designated as Institutional Shares and Investor Shares.
Each class of shares of each Fund represents interests in the assets of the
Fund and has identical dividend, liquidation and other rights and the same
terms and conditions except that expenses, if any, related to the
distribution and shareholder servicing of a particular class are borne solely
by such class and each class may, at the discretion of the Trustees of the
Trust, also pay a different share of other expenses, not including advisory
or custodial fees or other expenses related to the management of the Trust's
assets, if these expenses are actually incurred in a different amount by that
class, or if the class receives services of a different kind or to a
different degree than the other classes. All other expenses are allocated to
each class on the basis of the net asset value of that class in relation to
the net asset value of the particular Fund.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust may, however, be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust.
VOTING RIGHTS. Shareholders are entitled to one vote for each full
share held (with fractional votes for fractional shares held) and will vote
(to the extent provided herein) in the election of Trustees and the
termination of the Trust and on other matters submitted to the vote of
shareholders. Shareholders will vote by individual Fund on all matters
except (i) when required by the 1940 Act, shares shall be voted in the
aggregate and not by individual Fund, and (ii) when the Trustees have
determined that the matter affects only the interests of one or more Funds,
then only shareholders of such Funds shall be entitled to vote thereon.
Shareholders of one Fund shall not be entitled to vote on matters exclusively
affecting another Fund, such matters including, without limitation, the
adoption of or change in any fundamental policies or restrictions of the
other Fund and the approval of the investment advisory contracts of the other
Fund.
Each class of shares of each Fund has identical voting rights except
that each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class. Each class of shares has
exclusive voting rights with respect to matters pertaining to any
distribution or servicing plan applicable to that class. All classes of
shares of a Fund will vote together, except with respect to any distribution
or servicing plan applicable to a class or when a class vote is required as
specified above or otherwise by the 1940 Act.
There will normally be no meetings of shareholders for the purpose of
electing Trustees, except that in accordance with the 1940 Act (i) the Trust
will hold a shareholders' meeting for the election of Trustees at such time
as less than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
-15-
<PAGE>
shareholders, that vacancy may only be filled by a vote of the shareholders.
In addition, Trustees may be removed from office by a written consent signed
by the holders of two-thirds of the outstanding shares and filed with the
Trust's custodian or by a vote of the holders of two-thirds of the
outstanding shares at a meeting duly called for the purpose, which meeting
shall be held upon the written request of the holders of not less than 10% of
the outstanding shares. Upon written request by the holders of at least 1% of
the outstanding shares stating that such shareholders wish to communicate
with the other shareholders for the purpose of obtaining the signatures
necessary to demand a meeting to consider removal of a Trustee, the Trust has
undertaken to provide a list of shareholders or to disseminate appropriate
materials (at the expense of the requesting shareholders). Except as set
forth above, the Trustees shall continue to hold office and may appoint
successor Trustees. Voting rights are not cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except
(i) to change the Trust's name or to cure technical problems in the
Declaration of Trust and (ii) to establish, designate or modify new and
existing series, sub-series or classes of shares of any series of Trust
shares or other provisions relating to Trust shares in response to applicable
laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law,
shareholders could, under certain circumstances, be held personally liable
for the obligations of the Trust. However, the Declaration of Trust
disclaims shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the Trust or the
Trustees. The Declaration of Trust provides for indemnification out of all
the property of the relevant Fund for all loss and expense of any shareholder
of that Fund held personally liable for the obligations of the Trust. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is considered remote since it is limited to circumstances in which
the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing
in the Declaration of Trust protects a Trustee against any liability to which
the Trustee would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. The Declaration of Trust also provides for
indemnification by the Trust of the Trustees and the officers of the Trust
against liabilities and expenses reasonably incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, except if it is determined in the manner specified in the Declaration
of Trust that such Trustees are liable to the Trust or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. In addition, the Manager has agreed to
indemnify each Trustee who is not "an interested person" of the Trust to the
maximum extent permitted by the 1940 Act against any liabilities arising by
reason of such Trustee's status as a Trustee of the Trust.
OWNERS OF 5% OR MORE OF A FUND'S SHARES. The following chart sets forth
the names, addresses and percentage ownership of those shareholders owning
beneficially and of record 5% or more of the outstanding shares of the Barr
Rosenberg Market Neutral Fund as of July __, 1998:
Name and Address Percentage Ownership
of Owner of the Fund
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially and of record 5% or more
of the outstanding shares of the Barr Rosenberg Double Alpha Market Fund as
of July __, 1998:
Name and Address Percentage Ownership
of Owner of the Fund
-16-
<PAGE>
The officers and trustees of the Trust, as a group, own less than 1% of
any class of outstanding shares of the Trust.
DETERMINATION OF NET ASSET VALUE
As indicated in the Prospectus, the net asset value of each Fund share
is determined on each day on which the New York Stock Exchange is open for
trading. The Trust expects that the days, other than weekend days, that the
New York Stock Exchange will not be open are Christmas Day, New Year's Day,
Martin Luther King's Day, President's Day, Good Friday and Memorial Day,
Independence Day (observed), Labor Day and Thanksgiving Day.
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or, if there is no such reported sale, at the most recent
quoted bid price. Price information on listed securities is generally taken
from the closing price on the exchange where the security is primarily
traded. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price, except that debt
obligations with sixty days or less remaining until maturity may be valued at
their amortized cost. Exchange-traded options, futures and options on futures
are valued at the settlement price as determined by the appropriate clearing
corporation. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees of the Trust or by persons acting at their direction.
PURCHASE AND REDEMPTION OF SHARES
The procedures for purchasing shares of each of the Funds and for
determining the offering price of such shares are described in the
Prospectus. The Trust has elected to be governed by Rule 18f-1 under the 1940
Act pursuant to which the Trust is obligated to redeem shares solely in cash
for any shareholder during any 90-day period up to the lesser of (i) $250,000
or (ii) 1% of the total net asset value of the Trust at the beginning of such
period. The procedures for redeeming shares of each of the Funds are
described in the Prospectus.
FINANCIAL STATEMENTS
The Report of Independent Accountants, financial highlights and
financial statements of the Funds included in their Annual Report for the
period ended March 31, 1998 (the "Annual Report") are incorporated herein by
reference to such Annual Report. Copies of such Annual Report are available
without charge upon request by writing to Barr Rosenberg Series Trust, 3435
Stelzer Road, Columbus, Ohio 43219 or telephoning 1-800-447-3332.
The financial statements incorporated by reference into this Statement
of Additional Information have been audited by Price Waterhouse LLP,
independent accountants, and have been so included and incorporated by
reference in reliance upon the report of said firm, which report is given
upon their authority as experts in auditing and accounting.
-17-
<PAGE>
APPENDIX I
THE FOLLOWING INFORMATION ON PAGES A-1 THROUGH A-104 PERTAINS PRIMARILY
TO THE PERFORMANCE OF PRIVATE ACCOUNTS MANAGED BY ROSENBERG INSTITUTIONAL
EQUITY MANAGEMENT, THE TRUST'S INVESTMENT ADVISER, WITH SUBSTANTIALLY SIMILAR
INVESTMENT OBJECTIVES, POLICIES, AND STRATEGIES AS THE BARR ROSENBERG MARKET
NEUTRAL FUND. THIS INFORMATION DOES NOT REPRESENT ACTUAL PERFORMANCE OF THE
BARR ROSENBERG MARKET NEUTRAL FUND NOR IS IT INDICATIVE OF FUTURE
PERFORMANCE. PLEASE REFER TO THE PROSPECTUS FOR INFORMATION ABOUT THE
DIFFERENCES BETWEEN SUCH PRIVATE ACCOUNTS AND THE BARR ROSENBERG MARKET
NEUTRAL FUND.
CERTAIN TERMS THAT ARE INITIALLY CAPITALIZED IN THIS APPENDIX ARE
DEFINED IN THE GLOSSARY. PLEASE READ THE GLOSSARY CAREFULLY.
A-1
<PAGE>
SELECTED HIGHLIGHTS
A-2
<PAGE>
BACKGROUND ON RIEM (1)
/ / Barr M. Rosenberg (2) -- over 25 years' experience in developing
valuation and risk models
/ / Quantitative (3) investment approach
/ / Over $5 billion in assets under management
/ / Founded in 1985
/ / Offices in Orinda (CA), London, Tokyo and Singapore
- ---------------------
(1) Rosenberg Institutional Equity Management, the investment advisor
to the Barr Rosenberg Market Neutral Fund and Barr Rosenberg Double Alpha
Market Fund, is referred to herein as "RIEM," "Rosenberg" or the "Manager."
(2) Barr M. Rosenberg is Managing General Partner and Chief Investment
Officer of RIEM.
(3) Certain terms that are initially capitalized are defined in the
Glossary. Please read the Glossary carefully.
A-3
<PAGE>
POTENTIAL BENEFITS OF A MARKET NEUTRAL STRATEGY
MARKET NEUTRAL (4)
/ / Potential for:
- higher return as a substitute for fixed income
- positive return even in down equity markets
- superior Risk/return trade-off
/ / Portable Alpha (use of futures provides exposure to any asset class)
EQUITIZED MARKET NEUTRAL
/ / Alternative to core (large stock) manager:
- Benefits from valuation inefficiencies by stock selection
throughout all capitalization sectors
- ---------------------
(4) Certain terms that are initially capitalized in this Appendix are
defined in the Glossary. Please read the Glossary carefully.
A-4
<PAGE>
WHAT IS MARKET NEUTRAL?
/ / An investment strategy that seeks superior (5) performance by
simultaneously combining and balancing a Long and a Short component while
neutralizing the impact of the stock market.
- Stocks that are purchased comprise the Long component.
- Stocks that are borrowed and then sold comprise the Short component.
- ---------------------
(5) Superior performance relative to an appropriate Benchmark. T-bills are
a common Benchmark for Market Neutral strategies.
A-5
<PAGE>
KEY FEATURES OF MARKET NEUTRAL
/ / Simultaneously combines Long and Short components of equivalent dollar
value
/ / Returns come from the differential performance between the Long and
Short components
/ / Returns are not tied to overall stock market performance
/ / Returns driven by stock selection
A-6
<PAGE>
EXAMPLE
Assumptions: $100 million invested in portfolio
Long component outperforms Short component by 10%(6)
/ / Market up 15%
- Fund's Long component up by 20%
- Fund's Short component up only 10%
Long component plus gains = $ 120 million
Short component's increased liability = $ - 110 million
$ 10 million increase
in net portfolio value
(plus interest on cash)
/ / Market down 15%
- Fund's Long component down only 10%
- Fund's Short component down 20%
Long component minus losses = $ 90 million
Short component's decreased liability = $- 80 million
$ 10 million increase
in net portfolio value
(plus interest on cash)
- ---------------------
(6) This example shows the results if the Long component outperforms
the Short component by 10%. However, if the Short component outperformed the
Long component by 10%, the portfolio in this example would lose $10 million
in value (less the interest on cash).
A-7
<PAGE>
ROSENBERG MARKET NEUTRAL STRATEGY
PORTFOLIO CHARACTERISTICS AS OF 12/31/97
/ / 390 Long Positions
/ / 509 Short positions
/ / Largest 10 Long Positions represent 11.1% of the portfolio
/ / Largest 10 Short positions represent 9.2% of the portfolio
/ / Average annual turnover for last 3 years for Longs: 133%(7)
/ / Average annual turnover for last 3 years for Shorts: 85%
- ---------------------
(7) Average annual turnover is the annual average of the lesser of purchases
or sales for the portfolio as a percentage of the monthly average value of
the portfolio for 1995 through 1997.
A-8
<PAGE>
RETURN VS. RISK FOR SELECTED INVESTMENT ALTERNATIVES
1926 -1997
(ROSENBERG 3/89 -1997)
<TABLE>
<CAPTION>
STANDARD DEVIATION
ANNUALIZED ANNUALIZED
RETURN (%) RETURN (%)
<S> <C> <C>
U.S. Large Company Stocks (8) (1926 - 1997) 11.0 20.3
U.S. Small Company Stocks (1926 - 1997) 12.6 33.9
Long-Term Corporate Bonds (1926 - 1997) 5.7 8.7
Long-Term Government Bonds (1926 - 1997) 5.2 9.2
Intermediate-Term Government Bonds (1926 - 1997) 5.2 5.7
U.S. Treasury Bills (1926 - 1997) 3.8 3.2
Rosenberg Market Neutral Strategy (9) (inception 3/89 - 1997) 8.3 5.3
</TABLE>
- ---------------------
(8) The performance of these asset classes over the last 5 years has, in
some cases, been significantly different from the long-term performance
quoted in this exhibit. See page A-11.
(9) See Glossary.
A-9
<PAGE>
RETURN VS. RISK FOR SELECTED INVESTMENT ALTERNATIVES NOTES
Return: Annualized total return of standard asset classes and Rosenberg's
Market Neutral Strategy. Stock, bond and T-Bill information is based on
historical data from 1926 - 1997:
- - U.S. LARGE COMPANY STOCKS: total return of the S&P 500 Index.
- - U.S. SMALL COMPANY STOCKS: 1926 - 1981 based on historical series developed
by Professor Rolf W. Banz composed of the fifth quintile of the New York
Stock Exchange (NYSE), rebalanced every five years. 1982 - 1997 based on
the total return of the Dimensional Fund Advisors (DFA) Small Company 9/10
Fund, a market-value-weighted index of the ninth and tenth deciles (fifth
quintile) of the NYSE, the American Stock Exchange, and the
over-the-counter (OTC) market.
- - LONG-TERM CORPORATE BONDS: 1926 - 1945 based on Standard & Poor's
High-Grade Corporate Composite Yield, assuming a 4 percent coupon and
20-year maturity. 1946 - 1968 based on backdating of Salomon Brother's
Long-Term High-Grade Corporate Bond Index using similar methodology to the
1969 - 1996 period. 1969 - 1997 based on Salomon Brothers Long-Term
High-Grade Corporate Bond Index.
- - LONG-TERM GOVERNMENT BONDS: 1926 - 1976 based on total returns for
long-term government bonds obtained from the Center for Research in
Security Prices (CRSP) at the University of Chicago Graduate School of
Business. 1977 - 1997 based on total returns on long-term government bonds
constructed with data from the WALL STREET JOURNAL.
- - INTERMEDIATE-TERM GOVERNMENT BONDS: 1926 - 1933 based on estimates of
five-year bond Yields from Thomas S. Coleman, Lawrence Fisher, and Roger G.
Ibbotson, HISTORICAL U.S. TREASURY YIELD CURVES: 1926 - 1992. 1934 - 1986
based on total returns for intermediate-term government bonds obtained from
CRSP at the University of Chicago. 1987 - 1997 based on total returns on
intermediate-term government bonds calculated from data from the WALL
STREET JOURNAL.
- - U.S. TREASURY BILLS: 1926 - 1976 based on data from CRSP at the University
of Chicago. 1977 - 1997 based on data from the WALL STREET JOURNAL.
- - Return for the Rosenberg Market Neutral Strategy is the annualized total
return from inception in March 1989 through December 1997.
Risk: The Standard Deviation of the annualized total returns of the data
series described above measured over the time periods described above.
Standard Deviation is a measure of the dispersion of returns around an
average or expected value and is a common measure of Risk. See page A-42.
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
A-10
<PAGE>
RETURN VS. RISK FOR SELECTED INVESTMENT ALTERNATIVES
(1993 -1997)
<TABLE>
<CAPTION>
STANDARD DEVIATION
ANNUALIZED OF ANNUALIZED
RETURN (%) RETURN (%)
<S> <C> <C>
U.S. Large Company Stocks 20.2 15.3
U.S. Small Company Stocks 19.4 11.3
Long-Term Corporate Bonds 9.1 12.3
Long-Term Government Bonds 10.5 15.8
Intermediate-Term Government Bonds 6.4 8.5
U.S. Treasury Bills 4.6 1.1
Rosenberg Market Neutral Strategy 13.4 5.7
</TABLE>
A-11
<PAGE>
RETURN VS. RISK FOR SELECTED INVESTMENT ALTERNATIVES NOTES
Returns: Annualized total return of the data series described in a previous
exhibit (page A-10) measured over the period from January 1, 1993 through
December 1997.
Risk: The annualized Standard Deviation of the monthly total returns of the
data series described in a previous exhibit (page A-10) over the period from
January 1, 1993 through December 1997.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
A-12
<PAGE>
COMPONENTS OF RISK
UNITS OF VARIANCE (%2) AND AS PERCENTAGE OF TOTAL RISK
<TABLE>
<CAPTION>
ROSENBERG
TYPICAL TYPICAL INSTITUTIONAL MARKET NEUTRAL
INDIVIDUAL STOCK (10) STOCK PORTFOLIO (11) STRATEGY PORTFOLIO (12)
VARIANCE TOTAL RISK VARIANCE TOTAL RISK VARIANCE TOTAL RISK
<S> <C> <C> <C> <C> <C> <C>
Residual Specific Risk 174.8 40% 7.3 5% 9.8 20%
Residual Common Factor Risk 131.1 30% 7.3 5% 39.2 80%
Systematic Risk 131.1 30% 131.1 90% 0.0 0%
</TABLE>
- ---------------------
(10) Source: The reported total Variance for a Typical Individual Stock is
the average annual Variance of the stocks in the S&P 500 Index for the period
January 1993 through December 1997 as calculated by Rosenberg Institutional
Equity Management. The percentage of total Variance for each component of
Risk is from BARRA, THE UNITED STATES EQUITY MODEL HANDBOOK, 1995.
(11) Source: BARRA, THE UNITED STATES EQUITY MODEL HANDBOOK, 1995
(12) For illustrative purposes the expected Standard Deviation (total Risk)
for the Rosenberg Market Neutral Strategy Portfolio is assumed to be 7% (See
page A-22 for historical results.) Actual results may differ. Other Market
Neutral strategies may have different levels of expected Standard Deviation.
A-13
<PAGE>
COMPONENTS OF RISK NOTES
Risk, as measured by the Variance of returns, can be broken up into several
components. The components of Risk displayed in this chart are:
RESIDUAL SPECIFIC RISK: Risk arising from attributes that are unique to a
specific company (E.G., company management.)
RESIDUAL COMMON FACTOR: Risk common to a group of stocks, but not to the
overall market (E.G., industry Risk.)
SYSTEMATIC RISK: Risk common to all stocks (E.G., changes in the general
economy.)
The Risk for an individual stock is comprised of Residual Specific Risk,
Residual Common Factor Risk and Systematic Risk. By combining individual
stocks into a diversified portfolio, total Risk can be greatly reduced by
largely eliminating Residual Specific Risk and Residual Common Factor Risks.
Thus, the Risk in a diversified portfolio comes primarily from Systematic
Risk. In a Market Neutral portfolio like Rosenberg's, total Risk can be
reduced even further by forming Long and Short portfolios with offsetting
levels of Systematic Risk. With offsetting levels of Systematic Risk, the
combined Long-Short portfolio should contain almost no Systematic Risk. The
Risk left in a Market Neutral portfolio like Rosenberg's will be comprised of
Residual Common Factor Risk (the net exposure to these common factors will
not always be exactly zero) and a small amount of Residual Specific Risk.
A-14
<PAGE>
SELECTED RISKS
/ / Mis-matching Long/Short components
/ / Short selling
/ / Mis-measurement of Beta
/ / Poor stock selection
A-15
<PAGE>
RISK OF MIS-MATCHING LONG/SHORT COMPONENTS
/ / It is unlikely that there will ever be a perfect Hedge. Unlike matter and
anti-matter, there is not Stock A and anti-Stock A.
/ / There is a technique known as pair-wise Hedging, generally implemented
along industry lines: E.G., General Motors is bought and Chrysler is sold
Short. However, it is rare for two paired stocks to effectively Hedge all
factors of Risk. Most stocks have exposures to a number of different Risk
characteristics.
/ / A manager will intentionally accept a certain amount of Risk in order to
exploit the opportunities that arise from the identification of overvalued
and undervalued stocks.
/ / The key is, at the portfolio level, to be aware of the active Risk and
balance it against the opportunities for superior performance.
A-16
<PAGE>
INDUSTRY DIVERSIFICATION: SHORTS VS. LONGS
ROSENBERG MARKET NEUTRAL STRATEGY PORTFOLIO
<TABLE>
<CAPTION>
SHORT POSITION LONG POSITION
% OF PORTFOLIO VALUE % OF PORTFOLIO VALUE NET EXPOSURE*
<S> <C> <C> <C>
Aluminum 0.15 0.90 0.75
Iron and Steel 1.28 2.25 0.97
Precious Metals 2.09 0.01 -2.08
Misc. Mining, Metals 1.12 0.55 -0.57
Coal & Uranium 0.35 0.04 -0.31
International Oil 0.00 0.00 0.00
Dom Petroleum Reserves 3.18 0.67 -2.51
For Petroleum Reserves 0.12 0.00 -0.12
Oil Refining, Distribution 0.79 0.11 -0.68
Oil Service 0.37 2.44 2.07
Forest Products 1.11 0.87 -0.24
Paper 1.47 0.73 -0.74
Agriculture, Food 1.55 1.89 0.34
Beverages 0.07 0.00 -0.07
Liquor 0.00 0.71 0.71
Tobacco 0.00 0.00 0.00
Construction 2.04 3.48 1.44
Chemicals 3.63 1.51 -2.12
Tire & Rubber 0.27 0.44 0.17
Containers 0.14 0.72 0.58
Producers Goods 6.71 7.35 0.64
Pollution Control 0.01 0.64 0.63
Electronics 4.95 7.09 2.14
Aerospace 0.10 0.48 0.38
Business Machines 3.00 4.49 1.49
Soaps, Houseware 0.42 1.34 0.92
Cosmetics 0.06 0.24 0.18
Apparel, Textiles 2.22 1.75 -0.47
Photographic, Optical 0.22 0.24 0.02
Consumer Durables 1.81 1.19 -0.62
Motor Vehicles 1.86 3.91 2.05
Leisure, Luxury 3.11 0.87 -2.24
Health Care (Non-Drug) 4.26 6.14 1.88
Drugs, Medicine 5.15 1.86 -3.29
Publishing 1.31 1.52 0.21
Media 3.92 2.10 -1.82
Hotels, Restaurants 1.18 3.79 2.61
Trucking, Freight 0.52 1.87 1.35
Railroads, Transit 1.12 0.13 -0.99
Air Transport 0.46 2.04 1.58
Transport by Water 0.77 0.39 -0.38
Retail (Food) 0.81 0.27 -0.54
Retail (All Other) 3.56 4.89 1.33
Telephone, Telegraph 2.92 1.48 -1.44
</TABLE>
A-17
<PAGE>
<TABLE>
<S> <C> <C> <C>
Electric Utilities 6.33 1.92 -4.41
Gas Utilities 0.71 0.27 -0.44
Banks 0.98 1.82 0.84
Thrift Institutions 1.75 2.02 0.27
Misc. Finance 2.24 1.71 -0.53
Life Insurance 0.23 0.46 0.23
Other Insurance 2.16 1.21 -0.95
Real Property 3.21 4.32 1.11
Mortgage Financing 0.97 0.04 -0.93
Services 10.57 12.52 1.95
Miscellaneous 0.42 0.10 -0.32
Data in boxes*:
Iron and Steel Weight in Short Portfolio: 1.3%
Iron and Steel Weight in Long Portfolio: 2.3%
Total Portfolio Net Exposure to Iron and Steel: 1.0%
* Numbers have been rounded
</TABLE>
A-18
<PAGE>
INDUSTRY DIVERSIFICATION: SHORTS VS. LONGS
ROSENBERG MARKET NEUTRAL STRATEGY PORTFOLIO NOTES
One of the targets for Rosenberg's market neutral portfolios is to have
offsetting industry exposures in the Long and Short portfolio components.
The chart shows the industry positions of the Long and Short components of
Barr Rosenberg Market Neutral Strategy Portfolio as of December 31, 1997.
The composite portfolio's Long Position in each industry is shown in the bars
extending to the right and the Short position in the bars extending to the
left. The net industry exposure of the portfolio (the Long Position less the
Short position) is shown by the yellow dot. For example, in Iron and Steel
stocks, the portfolio has a 1.3% Short and a 2.3% Long Position, for a net
exposure to the Iron and Steel industry of +1.0%. The net exposure to an
industry is expected to be on average, over time, close to zero, but at any
given point the net exposure typically can range from (plus or minus) 5%.
This non-zero net industry exposure is the result of the Manager making
decisions about the trade-off between the potential return from an individual
stock and the Risk of creating a portfolio net exposure to an industry.
Example of offsetting industry exposures: part of the Long Position in
trucking, freight is offset by the Short position in railroads, transit.
A-19
<PAGE>
ACTIVE EXPOSURE TO RISK INDEXES
<TABLE>
<CAPTION>
ACTIVE EXPOSURE
<S> <C>
Variability in Markets - 0.14
Success 0.79
Size 0.13
Trading Activity - 0.07
Growth - 0.43
Earnings/Price 0.88
Book/Price 0.52
Earnings Variation - 0.19
Financial Leverage - 0.35
Foreign Income 0.20
Labor Intensity 0.34
Yield - 0.01
</TABLE>
A-20
<PAGE>
ACTIVE EXPOSURE TO RISK INDEXES NOTES
Risk Indexes, also called common factors of Risk, are Risks that are common
to a group of stocks, but not the overall market. This chart uses 12 of the
widely used BARRA Risk factors (see below for definitions). Since the
components of the Risk factors are measured in different units, one must use
a standardized measure to allow the components to be aggregated into a single
Risk factor measure. This standardized measure is the Standard Deviation of
the individual components measured relative to a universe of large
capitalization stocks. The active exposures shown in this chart represent
the number of Standard Deviation units by which the Rosenberg Market Neutral
Strategy's exposures to Risk factors differs from zero. For a given Risk
factor, if the bar is to the right (left), Rosenberg has an exposure greater
(less) than zero. The chart displays the active exposure to Risk factors as
of December 31, 1997 for Rosenberg Market Neutral Strategy.
Definitions of Risk Indexes (13): (See page A-93 for descriptors used in Risk
Indexes)
VARIABILITY IN MARKETS: The Risk of a company as perceived by the market. If
the market was completely efficient, then all information on the state of the
company would be reflected in the stock price. In this measure historical
prices and other market variables are used in an attempt to reconstruct the
state of the company. The descriptors include historical measures of Beta
and residual Risk and various liquidity measures.
SUCCESS: How successful has the company been, and how does the market value
the company? If investors are optimistic about future prospects and the
company has been successful in the past, then the implication is that the
firm is sound and that future Risk is likely to be lower. The descriptors of
success include: relative strength, historical Alpha, recent earnings change,
IBES earnings increase, dividend cuts (five years), growth in earnings per
share.
SIZE: A size index based on assets and capitalization. The descriptors of
size include: capitalization, total assets and indicators of earnings history.
TRADING ACTIVITY: Indicators of share turnover. The descriptors include:
share turnover for several time periods, common stock price, number of IBES
analysts covering the company and trading volume/Variance.
GROWTH: To the extent that a company attempts to provide returns to
stockholders by an aggressive growth strategy requiring the initiation of new
projects with uncertain cash flows (rather than the more stable cash flows
from existing operations) the company is likely to be more Risky. The
descriptors of growth include: growth in assets, payout and dividend policy,
earnings-to-price ratio and earnings and capital structure change.
EARNINGS/PRICE: The current, trailing five-year, and IBES analysts forecasted
earnings-to-price ratio.
BOOK/PRICE: The current book-to-price ratio.
EARNINGS VARIATION: A measure of the unpredictable variation in earnings over
time. The descriptors include: Variance of earnings and cash flows, Standard
Deviation of IBES earnings forecasts divided by price and extraordinary items.
- ---------------------
(13) Rudd, Andrew and Clasing Jr., Henry K., MODERN PORTFOLIO THEORY: THE
PRINCIPLES OF INVESTMENT MANAGEMENT, pp. 112-113, 1988.
Rosenberg, Barr, Kenneth Reid and Ronald Lanstein, "Persuasive Evidence of
Market Inefficiency," The Journal of Portfolio Management, Spring 1985, pp.
9-16.
BARRA literature
A-21
<PAGE>
FINANCIAL LEVERAGE: The more highly leveraged the financial structure, the
greater the Risk to common shareholders. The descriptors include:
debt-to-asset ratio, book value of leverage, interest rate sensitivity.
FOREIGN INCOME: A measure of the dependency of a company to exports as
indicated by the level of foreign operating income.
LABOR INTENSITY: A measure of the mix of capital and labor used by a company.
The descriptors include: net plant and equipment, inflation adjusted plant
and equipment and labor share.
YIELD: A prediction of a company's common stock dividend Yield.
A-22
<PAGE>
ROSENBERG MARKET NEUTRAL STRATEGY RISK (14)
ANNUAL STANDARD DEVIATION
<TABLE>
<CAPTION>
<S> <C>
From Inception (3/89 - 12/97) = 5.27%
Last Five Years (12/92 - 12/97) = 5.70%
Last Three Years (12/94 - 12/97) = 6.57%
</TABLE>
RANGE OF TOTAL RETURN OVER MOVING 12-MONTH PERIODS
<TABLE>
<CAPTION>
ROSENBERG T-BILL DATE RANGE
<S> <C> <C> <C>
Lowest -2.87% 8.03% Sept 89 - Aug 90
Highest 28.10% 5.14% Jan 96 - Dec 96
</TABLE>
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
- ---------------------
(14) The two measures of the Risk of Rosenberg's Market Neutral Strategy used
in this exhibit are the Standard Deviation of the monthly total returns of
the Rosenberg Market Neutral Strategy and the range of total return measured
over moving 12-month periods. First, the annual Standard Deviation of the
monthly total return of Rosenberg's Market Neutral Strategy is shown for the
period from the inception of the Strategy in March 1989 through December 1997
and for the three- and five-year periods ending December 1997. In addition,
the lowest and highest total returns of the Rosenberg Market Neutral Strategy
in any moving 12-month period from the inception of the Strategy in March
1989 through December 1997 is shown along with the T-bill return for the
corresponding periods.
A-23
<PAGE>
RISKS OF SHORT SELLING
PROBLEMS
/ / No supply for a particular stock
/ / Short Execution hindered by chaotic market
/ / Short Squeeze
SOLUTIONS
/ / Have many stock positions and no large single positions. Restrict Shorts
to those stocks where the Prime Broker is confident that they are
available.
/ / Have a well-diversified Short portfolio already in place. Use an
Optimization process which permits flexibility in substituting stocks for
the Short portfolio, depending on what is available. Be able to respond
real time.
/ / Monitor supply of stock available and outstanding Short sales.
A-24
<PAGE>
ROSENBERG EXPERIENCE (15)
/ / Stocks with ample supply: average list of Short candidates from Rosenberg's
Prime Broker is over 4,000 stocks (16)
/ / Rosenberg's largest Short position: about 1.1% of Short portfolio
(17)
/ / Rosenberg's typical Short position: 1/4 of 1% of Short portfolio
(18)
/ / In almost 9 years of Rosenberg managing market neutral portfolios, the
largest percentage appreciation of any Short position was 406% relative to
the market. This position represented less than 0.18% of the portfolio's
net asset value. The negative impact to total return was less than 0.75%.
- ---------------------
(15) Based on Rosenberg Market Neutral Strategy.
(16) As of 12/31/97.
(17) As of 12/31/97.
(18) As of 12/31/97.
A-25
<PAGE>
RISK OF MIS-MEASUREMENT OF BETA
/ / Beta is an estimate or measure of Systematic Risk or market-related Risk.
/ / Systematic Risk for an individual stock is usually about 30% of the stock's
total Risk. Beta only measures this 30% of the Risk.
/ / 70% of the Risk of an individual stock is Residual Specific Risk and
Residual Common Factor Risk, which can be diversified away. To the extent
that Risk is diversified away, Beta will typically measure over 90% of the
Risk of a portfolio.
/ / Because the measurement of Beta is only an estimate, there will be
differences in the quality - and hence the accuracy - of estimates of Beta.
A-26
<PAGE>
MEASURING A STOCK'S EX ANTE BETA
TYPICAL METHOD:
/ / Regression based on most recent 60 months of returns.
ROSENBERG METHOD:
/ / Based on the company's current composition across various industries.
/ / Use 13 Risk measures (E.G., book/price, financial leverage, foreign
income) and 38 industries to calculate each factor's contribution to
the stock's expected Beta.
A-27
<PAGE>
ROSENBERG RESULTS
/ / Rosenberg's Market Neutral Strategy has had an (ex post) Beta relative to
the S&P 500 from inception (3/89) through 12/97 of -0.09.
/ / Average Beta relative to the S&P 500 measured over rolling 24-month periods
is -0.08 with a Standard Deviation of 0.15.
A-28
<PAGE>
ROSENBERG RESULTS NOTES
Beta is a measure of the changes in an asset's return in relation to
changes in the return of a broad portfolio of assets or the "market." In
this exhibit, the Beta of Rosenberg's Market Neutral Strategy is measured
relative to the S&P 500 Index. The historical Beta of the Rosenberg Market
Neutral Strategy from its inception in March 1989 through December 1997 was
measured. In addition, the Beta of the Rosenberg Market Neutral Strategy
over rolling 24-month periods was measured. In both cases, the measured Beta
was not statistically different from zero, indicating that the Rosenberg
Market Neutral Strategy has historically had almost no exposure to the equity
market (as measured by the S&P 500.) For a strategy to have a Beta of zero
indicates that the return of the market, either positive or negative, has no
impact on the returns of that strategy.
A-29
<PAGE>
RISK OF POOR STOCK SELECTION
PROBLEMS
/ / Failure to distinguish between overvalued and undervalued stocks.
/ / Worse still, what if the Longs don't appreciate as much as the Shorts? Or
the longs decrease in value more than the shorts?
/ / Does the size of Short portfolios under management justify a comparable
effort to the Long portfolios under management given the relative assets of
each? Are Shorts a natural by-product of manager's analysis? (See footnote
48)
SOLUTION
/ / Analysis of manager's investment process and logic as well as empirical
evidence to validate it.
A-30
<PAGE>
BATTING AVERAGE BY ALPHA BUCKET
<TABLE>
<CAPTION>
SHORT AND LONG POSITIONS GROUPED BY ALPHA PERCENT CORRECT
<S> <C>
Most Negative 69.7%
63.1%
57.5%
53.7%
52.1%
50.8%
53.4%
55.6%
57.6%
60.9%
Most Positive 66.6%
Overall Batting Average: 57.3%
</TABLE>
A-31
<PAGE>
BATTING AVERAGE BY ALPHA BUCKET NOTES
The batting average methodology is designed to evaluate the predictive
power of the Rosenberg models. The idea is to determine whether securities
that Rosenberg predicted would outperform actually outperformed over the
subsequent 12 months and whether securities that Rosenberg predicted would
underperform actually underperformed over the subsequent 12 months. A
correct classification in each of these cases is considered a hit. For each
month since April 1, 1993, Rosenberg computed the percent of predictions that
were hits. The average of this percentage for the period April 1, 1993
through December 31, 1997 is then computed and presented in the batting
average exhibit.
In order to do this analysis, Rosenberg divided securities into 5
capitalization groups. The following analysis was performed for each
capitalization group. Rosenberg ranked securities according to the output of
the models from those Rosenberg expected to perform the best to those
Rosenberg expected to perform the worst. Then, the securities in the top
half of this ranked list were compared to the ranked list of subsequent
returns for each security. If a security fell in the top half of both the
predicted list and subsequent return list, then it was a hit. If a security
fell in the bottom half of each list, then it was also a hit. Rosenberg
included in the analysis all securities for which there was data as of the
beginning of the month to produce results that were free of Survivorship Bias.
A-32
<PAGE>
SOURCES OF RETURN OF MARKET NEUTRAL
PORTFOLIO + T-BILLS = TOTAL RETURN
Gain when market Interest return
goes up
Long Component Short Component + T-Bills on Short = TOTAL RETURN
(Undervalued (Overvalued Proceeds
Stock Selection) Stock Selection)
Gains when market Interest return
Goes down
A-33
<PAGE>
ROSENBERG MARKET NEUTRAL STRATEGY PERFORMANCE SUMMARY
AVERAGE ANNUAL RETURNS FOR THE PERIODS ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
ONE THREE FIVE 5YEAR
YEAR YEARS YEARS TRACKING ERROR(19)
<S> <C> <C> <C> <C>
Rosenberg (20) 13.76% 17.05% 13.75%
90 Day T-bill 5.28% 5.33% 4.61%
Alpha or Value Added (21) 8.56% 11.71% 9.14% 5.7%
</TABLE>
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
- ---------------------
(19) Tracking Error is a measure of the volatility of the Alpha or value
added. Specifically, it is the annual standard deviation of the Alpha or
value added for the 5-year period ending December 31, 1997.
(20) The Rosenberg Market Neutral Strategy.
(21) Alpha, or value added is the difference between the Rosenberg Market
Neutral Strategy's performance and the return on a 90-day T-bill for the
specified time period.
A-34
<PAGE>
MARKET PERFORMANCE - UP AND DOWN MONTHS
ROSENBERG MARKET MARKET
NEUTRAL STRATEGY RETURN (22) RETURN
/ / Average Monthly Return in Up Markets .64% 3.23%
(3/89 - 12/97)
/ / Average Monthly Return in Down Markets .77% -2.67%
(3/89 - 12/97)
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
- ---------------------
(22) The exhibit reports the average monthly performance of Rosenberg's
Market Neutral Strategy. Months where the return on the S&P 500 Index was
greater than zero are up markets and months where the return on the S&P 500
Index was less than zero are down markets. The period covers March 1989 to
December 31, 1997. Out of the 106 months in this time period there were 74
"up" months and 32 "down" months.
A-35
<PAGE>
WHAT HAPPENED TO THE ROSENBERG MARKET NEUTRAL
STRATEGY IN OCTOBER 1997?
/ / On October 27, 1997
- S&P 500 was down: -6.9%
- Russell 2000 (23)was down: -6.1%
- Rosenberg Market Neutral Strategy was up: +0.29%
/ / Between October 22, 1997 - October 27, 1997
- S&P 500 was down: -9.8%
- Russell 2000 was down: -8.4%
- Rosenberg Market Neutral Strategy was up: +0.91%
/ / Between October 1, 1997 - October 31, 1997
- S&P 500 was down: -3.3%
- Russell 2000 was down: -4.4%
- Rosenberg Market Neutral Strategy was up: +2.0%
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
- ---------------------
(23) The Russell 2000 is an index that measures the performance of the
2,000 smallest companies in the Russell 3000 Index, and which represents
approximately 10% of the total market capitalization of the Russell 3000
Index.
A-36
<PAGE>
WHY IS ROSENBERG QUALIFIED TO MANAGE MARKET NEUTRAL?
/ / Risk control capability
/ / Stock selection skill
- Both overvalued and undervalued stocks
/ / Ability to Short
/ / Experience
/ / Capacity
A-37
<PAGE>
ROSENBERG MARKET NEUTRAL STRATEGY PROFILE
DECEMBER 31, 1997
ASSET CLASS BENCHMARK COMPARISONS:
<TABLE>
<CAPTION>
PERFORMANCE (24) STANDARD SHARPE
1 YR. 3 YR. 5 YR. DEVIATIO RATIO (25)
<S> <C> <C> <C> <C> <C>
ROSENBERG MARKET NEUTRAL STRATEGY 13.76 17.05 13.75 5.7 (26) 1.60
INTERMEDIATE-TERM GOVERNMENT BONDS 8.38 8.93 6.40 8.5 (27) 0.21
90-DAY T-BILL 5.28 5.33 4.61 1.1 (28) NA
Beta -0.09 (29)
Morningstar Asset Classification (30): Domestic Hybrid
Designated Benchmark: 90 Day T-bills
Expense Ratio 2.00% (Institutional Shares)
(SEE PROSPECTUS FOR MORE DETAIL):
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
- ---------------------
(24) See page A-32.
(25) The Sharpe Ratio is the difference between an investment portfolio's
return and the risk free return divided by the standard deviation of the
investment portfolio's returns. This is for the period 1993 - 1997.
(26) See page A-22.
(27) For the period 1993 - 1997. See page A-42 for detail.
(28) For the period 1993 - 1997. See page A-42 for detail.
(29) See page A-27.
(30) Morningstar Asset Classification: A Mutual fund rating and information
service. The classification of "domestic Hybrid" is defined by Morningstar
as a portfolio which has stock holdings comprising more than 20% of the
portfolio's value but less than 70%.
A-38
<PAGE>
POTENTIAL BENEFITS OF ROSENBERG MARKET NEUTRAL
- - Returns do not depend on the systematic returns of the underlying asset
class
- Potential to provide positive excess return even during down markets
- - More flexibility for plan sponsor/client
- Pay only for active decisions not diversification or general market
appreciation
- Insights of overvaluation can be exploited as well as insights of
undervaluation
- Can Equitize to create custom systematic exposure (Portable Alpha)
- - Large selection universe allows for more effective Risk control
- Ability to identify Long and Short stocks is natural result of
Rosenberg valuation process
- - Potential for superior risk/return trade-off
- Substantial Sharpe Ratio and negligible Correlation with other asset
classes
- May improve portfolio risk/return profile (all Risk is diversifiable
Risk)
- - Significant capacity
- Large number of issues held
- Capitalization-graduated investment weightings
- Accommodative Trading
A-39
<PAGE>
INTRODUCTION TO MARKET NEUTRAL INVESTING
A-40
<PAGE>
FOUR CONCEPTS
1. Short Sale: Borrow a stock with the agreement to return it in the
future, thereby creating a liability. Sell the borrowed stock now, expecting
to buy it back to return to the lender at a lower price in the future. The
liability is the cost of buying the stock to return it to the lender. Thus
the amount of the liability fluctuates with the price of the stock.
2. Beta: A measure of the volatility of a stock or portfolio relative to
the movements in the overall market as measured by some index (E.G., S&P 500).
3. Alpha: The excess return earned on a stock or portfolio above the return
one would have expected given the level of Risk of the stock or portfolio.
It is a measure of how much value, if any, a portfolio manager has added due
to his skill.
4. Risk: A common measure of Risk is Variance. The larger the range of
possible outcomes, the larger will be the value of the Variance. An
investment with a zero Variance will have no Risk - there is only one
possible outcome. The Standard Deviation is the square root of the Variance.
It is a useful measure because 2/3 of the outcomes should fall within
plus/minus one Standard Deviation. 95% of the outcomes should fall within
plus/minus two Standard Deviations.
A-41
<PAGE>
EXAMPLE
Assumptions: $100 million invested in portfolio Long component outperforms
Short component by 10%(31)
<TABLE>
<CAPTION>
- Market up 15%
<S> <C>
Because of skill, manager's Long component outperforms market and is up by 20%
Because of skill, manager's Short component underperforms market and is up only 10%
Value of Long portfolio = $100 million + 20% x $100 million = $ 120 million
Value of Short portfolio (liability) = $100 million + 10% x $100 million = $- 110 million
$ 10 million
increase in
net portfolio
value
(plus net
interest on
cash)
- Market down 15%
Because of skill, manager's Long component outperforms market and is down only 10%
Because of skill, manager's Short component underperforms market and is down 20%
Value of Long portfolio = $100 million - 10% x $100 million = $ 120 million
Value of Short portfolio (liability) = $100 million - 20% x $100 million = $- 10 million
$ 10 million
increase
in net
portfolio
value
(plus net interest
on cash)
</TABLE>
- ---------------------
(31) This example shows the results if the manager has stock selection skill
so that the Long component outperforms the Short component by 10%. However,
if the manager did not have skill so that his Short component outperformed
his Long component by 10%, the portfolio in this example would lose $10
million in value (less the interest on cash).
A-42
<PAGE>
MARKET NEUTRAL EXAMPLE (32)
<TABLE>
<CAPTION>
BASIC INVESTMENT STRATEGY IN AN UP MARKET IN A DOWN MARKET
<S> <C> <C>
Invest $1 million in a "Longs" Make Money "Longs" Lose Money
diversified portfolio of
UNDERvalued stocks
Sell Short a $1 million "Shorts" Lose Money "Shorts" Make Money
diversified portfolio of
OVER-valued stocks
Invest the $1 million from the Money market return from Money market return from
Short sales in money market Short sale proceeds Short sale proceeds
instruments
BASIC INVESTMENT STRATEGY UP MARKET SUMMARY DOWN MARKET SUMMARY
-1) Gain/Loss on Longs + 1) Gain from Longs - 1) Loss on Longs
-2) Gain/Loss on Shorts - 2) Loss on Shorts + 2) Gain on Shorts
+3) Money Market Return + 3) Money Market Return + 3) Money Market Return
= Total Return = Total Return in Up Market = Total Return in a Down Market
</TABLE>
- ---------------------
(32) Gregory, Ken, Editor, NO LOAD FUND ANALYST, December 1997
A-43
<PAGE>
STANDARD DEVIATION
A common measure of Risk is the Standard Deviation of return around an
average annual return. This measure is calculated so that two-thirds of the
outcomes are likely to fall within one Standard Deviation; 95% of the
outcomes are likely to fall within 2 Standard Deviations; and 99% of the
outcomes are likely to fall within 3 Standard Deviations.
<TABLE>
<CAPTION>
LONG-TERM ANNUAL STANDARD
ANNUAL STANDARD DEVIATION FROM
ASSET DEVIATION INCEPTION OF STRATEGY
(3/89-12/31/97)
<S> <C> <C>
S&P 500 19% 12.2%
T-bills 3% 1.9%
Intermediate-Term Government Bonds 6% 7.3%
Rosenberg Market Neutral Strategy NA 5.3%(33)
</TABLE>
- ---------------------
(33) Standard Deviations of the annual total returns for the S&P 500 Index,
T-bills, and Intermediate-Term Government Bonds based on data for the period
1926 through 1997. See notes on page A-10 for a detailed description of this
data. Long-term annual Standard Deviation covers the period from 1926 to
1997. For Rosenberg Market Neutral Strategy for the period from inception
(March 1989) through December 1997, the Standard Deviation was 5.3%. For the
period 12/92 -12/97, the Standard Deviation was 5.7%. For the period 12/94 -
12/97, the Standard Deviation was 6.6%.
A-44
<PAGE>
SUBSTITUTING ROSENBERG MARKET NEUTRAL STRATEGY
IN A U.S. CORE PORTFOLIO CAN REDUCE RISK
<TABLE>
<CAPTION>
COMBINED PORTFOLIO COMBINED PORTFOLIO
PERCENT INVESTED ANNUAL STANDARD ANNUAL STANDARD
IN ROSENBERG'S DEVIATION (S&P 500 DEVIATION (S&P
MARKET NEUTRAL STRATEGY AND ROSENBERG'S 500 AND STANDARD
OR INTERMEDIATE-TERM MARKET NEUTRAL INTERMEDIATE-TERM DEVIATION OF
GOVERNMENT BONDS STRATEGY) GOVERNMENT BONDS) S&P 500
<S> <C> <C> <C>
0 12.24 12.24 12.24
1 12.11 12.14 12.24
2 11.98 12.04 12.24
3 11.86 11.94 12.24
4 11.73 11.83 12.24
5 11.60 11.73 12.24
6 11.47 11.63 12.24
7 11.34 11.53 12.24
8 11.22 11.43 12.24
9 11.09 11.33 12.24
10 10.96 11.23 12.24
11 10.84 11.13 12.24
12 10.71 11.03 12.24
13 10.58 10.93 12.24
14 10.46 10.83 12.24
15 10.33 10.73 12.24
16 10.21 10.63 12.24
17 10.08 10.53 12.24
18 9.96 10.43 12.24
19 9.84 10.33 12.24
20 9.71 10.23 12.24
21 9.59 10.13 12.24
22 9.47 10.03 12.24
23 9.35 9.94 12.24
24 9.23 9.84 12.24
25 9.11 9.74 12.24
26 8.99 9.64 12.24
27 8.87 9.55 12.24
28 8.75 9.45 12.24
29 8.63 9.35 12.24
30 8.51 9.26 12.24
31 8.39 9.16 12.24
32 8.28 9.07 12.24
33 8.16 8.97 12.24
34 8.05 8.88 12.24
35 7.93 8.78 12.24
36 7.82 8.69 12.24
37 7.70 8.60 12.24
38 7.59 8.50 12.24
39 7.48 8.41 12.24
40 7.37 8.32 12.24
</TABLE>
A-45
<PAGE>
<TABLE>
<S> <C> <C> <C>
41 7.26 8.22 12.24
42 7.16 8.13 12.24
43 7.05 8.04 12.24
44 6.94 7.95 12.24
45 6.84 7.86 12.24
46 6.74 7.77 12.24
47 6.63 7.68 12.24
48 6.53 7.59 12.24
49 6.43 7.51 12.24
50 6.34 7.42 12.24
51 6.24 7.33 12.24
52 6.15 7.25 12.24
53 6.05 7.16 12.24
54 5.96 7.08 12.24
55 5.87 6.99 12.24
56 5.79 6.91 12.24
57 5.70 6.83 12.24
58 5.62 6.74 12.24
59 5.54 6.66 12.24
60 5.46 6.58 12.24
61 5.38 6.50 12.24
62 5.31 6.42 12.24
63 5.24 6.35 12.24
64 5.17 6.27 12.24
65 5.11 6.19 12.24
66 5.05 6.12 12.24
67 4.99 6.05 12.24
68 4.93 5.97 12.24
69 4.88 5.90 12.24
70 4.83 5.83 12.24
71 4.79 5.77 12.24
72 4.74 5.70 12.24
73 4.71 5.63 12.24
74 4.67 5.57 12.24
75 4.64 5.50 12.24
76 4.62 5.44 12.24
77 4.60 5.38 12.24
78 4.58 5.32 12.24
79 4.56 5.27 12.24
80 4.55 5.21 12.24
81 4.55 5.16 12.24
82 4.55 5.11 12.24
83 4.55 5.06 12.24
84 4.56 5.01 12.24
85 4.57 4.96 12.24
86 4.59 4.92 12.24
87 4.61 4.88 12.24
88 4.63 4.84 12.24
89 4.66 4.80 12.24
90 4.69 4.76 12.24
91 4.73 4.73 12.24
</TABLE>
A-46
<PAGE>
<TABLE>
<S> <C> <C> <C>
92 4.77 4.70 12.24
93 4.81 4.67 12.24
94 4.86 4.65 12.24
95 4.91 4.62 12.24
96 4.96 4.60 12.24
97 5.02 4.58 12.24
98 5.08 4.57 12.24
99 5.15 4.56 12.24
100 5.21 4.55 12.24
</TABLE>
A-47
<PAGE>
SUBSTITUTING ROSENBERG MARKET NEUTRAL STRATEGY
IN A U.S. CORE PORTFOLIO CAN REDUCE RISK NOTES
Standard Deviation of combined portfolio: The annualized Standard Deviations
of the portfolio combining U.S. Large Stocks (as represented by the S&P 500)
with various percentages of Rosenberg's Market Neutral Strategy or
Intermediate-Term Government Bonds (see data series descriptions on page
A-10.) The Variance of the portfolio is given by the formula:
(WEIGHT 2 large stocks * VARIANCElarge stocks) +
(WEIGHT 2 Rosenberg or intermediate bonds * VARIANCE Rosenberg or
intermediate bonds) +
(2 * WEIGHTlarge stocks * WEIGHT Rosenberg or intermediate bonds *
COVARIANCE large stocks and Rosenberg or intermediate bonds)
The Standard Deviation of the portfolio is the square root of this Variance.
The Standard Deviation of a portfolio can decrease as assets that have
negative Correlation with the initial asset class are added to the portfolio.
This chart demonstrates that portfolio Risk has been reduced faster by
adding Rosenberg's Market Neutral Strategy to a U.S. Large Stock portfolio
than by adding Intermediate-Term Government Bonds. However past performance
is no guarantee of future performance.
Legend for chart:
U.S. Large Stocks represented by the S&P 500 Index.
U.S. Intermediate-Term Government Bond data
Notes on chart:
Period under study: March 1989 through December 1997.
For example, the annual Standard Deviation of a portfolio invested 50% in
large stocks and 50% in intermediate-term government bonds is about 7.5%.
For example, the annual Standard Deviation of a portfolio invested 50% in
large stocks and 50% in Rosenberg's Market Neutral Strategy is about 6.4%.
A-48
<PAGE>
CORRELATIONS (34) OF ROSENBERG MARKET NEUTRAL STRATEGY
<TABLE>
<CAPTION>
INTERMEDIATE-TERM
ROSENBERG MARKET GOVERNMENT BOND
ASSET CLASS NEUTRAL CORRELATIONS CORRELATIONS
<S> <C> <C>
U.S. Treasury Bills -0.12 0.18
Intermediate-Term Government Bonds -0.02 NA
Long-Term Government Bonds 0.01 0.92
Long-Term Corporate Bonds -0.02 0.92
U.S. Large Company Stocks -0.14 0.44
U.S. Small Company Stocks -0.18 0.07
</TABLE>
CORRELATIONS OF ROSENBERG MARKET NEUTRAL STRATEGY NOTES
The exhibit reports the Correlation of the total returns of the Rosenberg
Market Neutral Strategy and Intermediate-Term Government Bonds with the total
returns of other asset classes for the period 3/89 - 12/97. The descriptions
of these asset classes are reported in the notes on page A-10.
- ---------------------
(34) See Glossary.
A-49
<PAGE>
ROSENBERG MARKET NEUTRAL STRATEGY RETURNS
VS.
INTERMEDIATE-TERM GOVERNMENT BOND RETURNS
MARCH 1989 THROUGH DECEMBER 1997
<TABLE>
<CAPTION>
PERIOD LOWEST RETURN HIGHEST RETURN
INTERMEDIATE- ROSENBERG INTERMEDIATE- ROSENBERG
TERM MARKET NEUTRAL TERM MARKET NEUTRAL
GOVT. BONDS STRATEGY GOVT. BONDS STRATEGY
<S> <C> <C> <C> <C>
Any 3 months -6.08% -2.88% 7.90% 10.46%
Any 6 months -5.37% -2.64% 11.72% 16.75%
Any 12 months -5.51% -2.87% 16.80% 28.10%
</TABLE>
See notes to page A-10 for a description of Intermediate-Term Government Bonds.
Period covers inception of Rosenberg's Market Neutral Strategy in March 1989
through December 1997. The lowest (highest) returns are the lowest (highest)
total returns achieved for Intermediate-Term Government Bonds and Rosenberg
Market Neutral Strategy for rolling 3-month, 6-month, and 12-month periods
beginning March 1989 and ending December 1997.
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
A-50
<PAGE>
ON A RISK/RETURN BASIS, MARKET NEUTRAL CAN BE AN
ATTRACTIVE INVESTMENT ALTERNATIVE
/ / Increased opportunity from Shorting
/ / Risk
/ / Return
A-51
<PAGE>
INCREASED OPPORTUNITY FROM SHORTING
A-52
<PAGE>
INCREASED OPPORTUNITY FROM SHORTING:
OPPORTUNITIES TO EXPLOIT OVERVALUATION
/ / For companies in the top decile of forecasted earnings growth, 85/90% will
have their growth forecasts revised downward by those same analysts
(35)
/ / Within the group of companies that professional analysts forecast to have
the best increase in earnings, it turns out that on average the analysts'
forecasts are more than four times more optimistic than actual results (36)
/ / Five year investment returns are lowest for portfolios of high ROE (return
on equity) companies (37)
- ---------------------
(35) From a study done by Rosenberg Institutional Equity Management based on
IBES data for the period 1985-1995 on capitalization-weighted and
Equal-weighted bases, respectively. Deciles are based on a ranking of 12
month earnings change.
(36) From a study done by Rosenberg Institutional Equity Management based on
IBES data for the period 1976-1995. Quintiles are based on a ranking of
forecasted twelve-month earnings change over initial price. This ranking is
a moving quarterly average for each quintile.
(37) From a study done by Rosenberg Institutional Equity Management based on
data from 1973-1995.
A-53
<PAGE>
ACTUAL VS. FORECAST EARNINGS CHANGES
(IBES) EARNINGS FORECAST
<TABLE>
<CAPTION>
EARNINGS CHANGE DIVIDED BY INITIAL PRICE
IBES FORECAST ACTUAL
<S> <C> <C>
Bottom Quintile -0.020 -0.025
Fourth Quintile 0.003 0.001
Third Quintile 0.007 0.003
Second Quintile 0.016 0.003
Top Quintile 0.109 0.026
</TABLE>
A-54
<PAGE>
ACTUAL VS. FORECAST EARNINGS CHANGES
(IBES) EARNINGS FORECAST NOTES
IBES (Institutional Broker Estimate Service) is an organization that
collects and publishes corporate earnings forecasts from institutional
analysts.
Earnings Change/Initial Price, also called earnings Yield, measures the
one year change in earnings for a company divided by the price of the
company's stock at the start of the period. It is a measure which compares
the growth in earnings across companies. This chart divides all U.S.
companies into five groups (quintiles) based on earnings change divided by
initial price as forecast by IBES analysts. The bottom quintile contains the
companies with the lowest IBES forecast earnings change/initial price, the
fourth quintile contains the companies with the next lowest IBES forecast
earnings change/initial price, and so on. The chart compares the IBES
forecast earnings change/initial price with actual reported earnings. The
chart covers the period from 1976 to September 1996.
A-55
<PAGE>
IBES SURPRISE BY CAPITALIZATION
EXAMPLE OF A QUARTERLY SURPRISE
<TABLE>
<CAPTION>
AVERAGE ABSOLUTE
PERCENTAGE
GROUP EARNINGS SURPRISE
<S> <C> <C>
Largest Companies 110%
216%
319%
425%
533%
637%
735%
839%
951%
10 62%
11 83%
Smallest Companies 12 85%
</TABLE>
A-56
<PAGE>
IBES SURPRISE BY CAPITALIZATION
EXAMPLE OF A QUARTERLY SURPRISE NOTES
IBES (Institutional Broker Estimate Service) is an organization that collects
and publishes corporate earnings forecasts from institutional analysts.
The vertical axis measures the average absolute percentage earnings surprise
as given by the formula in the footnote to the chart. Earnings surprises are
differences between estimated earnings and actual reported earnings. The
absolute value of earnings surprises are used so as to treat positive and
negative differences between estimated and actual earnings similarly. The
average of these absolute earnings surprises is used to limit the effects of
unusually large earnings surprises. The earnings surprises are measured
based on the quarterly earnings forecast immediately prior to the reported
third quarter 1996 earnings. The capitalization buckets are groups of
companies sorted by the capitalization of the company (a measure of the size
of the company.) The horizontal axis groups companies into groups of 500
companies, from the largest U.S. companies on the left to the smallest U.S.
companies on the right.
Footnote to chart:
To limit the effect of outliers, percentage surprise is defined as: 100 *
(Actual Earnings - Estimated Earnings)/.5*(absolute value of (Actual Earnings
- -Estimated Earnings))
A-57
<PAGE>
IBES COVERAGE OF QUARTERLY ESTIMATES
PERCENT OF COMPANIES COVERED BY IBES
<TABLE>
<CAPTION>
GROUP 1 ANALYST 2 ANALYSTS 3 OR MORE ANALYSTS
<S> <C> <C> <C> <C>
Largest Companies 1 1% 1% 97%
2 4% 6% 84%
3 8% 12% 68%
4 14% 15% 54%
5 18% 17% 41%
6 21% 17% 34%
7 22% 18% 24%
8 21% 17% 15%
9 24% 13% 7%
10 19% 6% 3%
11 10% 4% 1%
Smallest Companies 12 4% 1% 0%
</TABLE>
A-58
<PAGE>
IBES COVERAGE OF QUARTERLY ESTIMATES
PERCENT OF COMPANIES COVERED BY IBES NOTES
IBES (Institutional Broker Estimate Service) is an organization that collects
and publishes corporate earnings forecasts from institutional analysts. This
chart reports on IBES analyst coverage as of August 1996.
The vertical axis on the chart measures the percentage of companies for which
quarterly earnings forecasts were made by 1, 2, or 3 or more IBES analysts.
The percentage coverage by IBES analysts is broken down by the capitalization
of the company (a measure of the size of the company.) The horizontal axis
groups companies into groups of 500 companies, from the largest U.S.
companies on the left to the smallest U.S. companies on the right. IBES
analyst coverage declines steadily as company size, measured by
capitalization, decreases. Since smaller companies have fewer analysts
covering them, there may be more opportunities to identify possible
overpriced stocks which would be candidates for Short selling.
A-59
<PAGE>
PERFORMANCE
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
A-60
<PAGE>
ROSENBERG MARKET NEUTRAL STRATEGY PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
ROSENBERG (38) 90-DAY T-BILLS ALPHA
<S> <C> <C> <C>
SINCE INCEPTION
3/1/89 - 12/31/97 8.33% 5.34% 2.99%
YEARS TO DATE
1997 13.76 5.20 8.56
1996 28.10 5.14 22.96
1995 10.04 5.66 4.38
1994 6.48 4.03 2.45
1993 11.53 3.04 8.49
1992 2.80 3.53 -0.73
1991 0.61 5.66 -5.06
1990 -0.31 7.77 -8.08
PARTIAL YEAR 1989
3/1/89 - 12/31/89 3.26 7.21 -3.95
</TABLE>
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
- ---------------------
(38) Rosenberg is the Rosenberg Market Neutral Strategy as previously
defined. (See Glossary.) Partial year 1989 begins at inception of
Rosenberg's Market Neutral Strategy on March 1, 1989. Past performance is no
guarantee of future performance. Alpha, or value added is the difference
between the Rosenberg Market Neutral Strategy's performance and the return on
a 90-day Treasury Bill for the specified time period. All returns are
expressed as annual rates.
A-61
<PAGE>
MONTHLY PERFORMANCE
ROSENBERG MARKET NEUTRAL STRATEGY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1989 Mar 2.15 Mar 1.06 Mar 0.88
Apr 0.38 Apr -0.20 Apr 2.06
May -0.67 May 0.08 May -0.47
Jun 1.16 Jun -0.67 Jun 0.17
Jul 0.07 Jul 1.19 Jul 1.99
Aug 1.94 Aug -1.18 Aug -1.04
Sep 0.20 Sep 2.01 Sep 0.64
Oct -1.37 Oct -2.15 Oct 4.29
Nov -0.57 Nov 0.58 Nov 0.28
Dec 0.00 Dec 2.25 Dec 1.10
1990 Jan 0.22 1993 Jan 2.56 1996
Jan 1.33 Feb -0.23 Feb 3.30
Feb 1.49 Mar 0.27 Mar 1.10
Mar 2.08 Apr -0.52 Apr 1.65
Apr 0.77 May -1.35 May -0.84
May 0.03 Jun -1.03 Jun 1.93
Jun 4.70 Jul 1.39 Jul 0.81
Jul 3.76 Aug 0.13 Aug 0.17
Aug 1.68 Sep 0.48 Sep 0.59
Sep 0.50 Oct -1.20 Oct -0.59
Oct 4.78 Nov 1.20 Nov -0.40
Nov 0.37 Dec 0.40 Dec 0.77
Dec 3.70
1991 Jan 1.59 1994 Jan -0.04 1997 Jan -1.23
Feb -0.56 Feb 1.28 Feb 1.35
Mar 0.72 Mar 0.08 Mar 4.14
Apr -0.05 Apr -0.63 Apr 0.95
May -2.29 May 0.09 May -3.94
Jun 0.26 Jun 1.58 Jun 4.63
Jul 1.36 Jul 0.46 Jul 1.81
Aug -1.32 Aug -0.25 Aug 1.85
Sep 1.06 Sep 0.71 Sep -0.16
Oct 1.60 Oct -0.11 Oct 1.96
Nov -1.54 Nov 0.42 Nov 1.75
Dec -0.14 Dec 2.75 Dec 0.16
1992 Jan -0.17 1995 Jan -1.33
Feb 0.05 Feb 1.17
</TABLE>
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
(NEGATIVE RETURN MONTHS ARE IN RED.)
A-62
<PAGE>
ROSENBERG MARKET NEUTRAL STRATEGY PERFORMANCE RECORD (39)
1. Annualized Returns (Net of fees)
<TABLE>
<CAPTION>
ROSENBERG 90 DAY T-BILLS VALUE ADDED
<S> <C> <C> <C>
Quarter 9/30/97 -12/31/97 3.90% 1.26% 2.64%
One year 12/31/96 -12/31/97 13.76 5.20 8.56
3 years 12/31/94 -12/31/97 17.05 5.33 11.71
5 years 12/31/92 -12/31/97 13.75 4.61 9.14
From inception 3/1/89 -12/31/97 8.33 5.34 2.99
</TABLE>
2. Range of Rosenberg Total Return Over Moving 12-Month Periods (3/89 - 12/97)
<TABLE>
<CAPTION>
ROSENBERG T-BILL DATE RANGE
<S> <C> <C> <C>
Lowest Rosenberg Return -2.87% 8.03% Sep 89 -Aug 90
Highest Rosenberg Return 28.10% 5.14% Jan 96 -Dec 96
</TABLE>
3. Average monthly return in up vs. down markets (S&P 500) (3/89 - 12/97)
<TABLE>
<CAPTION>
ROSENBERG MARKET RETURN
(S&P 500)
<S> <C> <C>
Average monthly return in up markets 0.64% 3.23%
Average monthly return in down markets 0.77% -2.67%
</TABLE>
4. Comparison with Intermediate-Term Government Bond Returns (3/89 - 12/97)
<TABLE>
<CAPTION>
LOWEST RETURN HIGHEST RETURN
ROSENBERG ROSENBERG
INTERMEDIATE-TERM MARKET NEUTRAL INTERMEDIATE-TERM MARKET NEUTRAL
PERIOD GOVT. BONDS (40) STRATEGY GOVT. BONDS STRATEGY
<S> <C> <C> <C> <C>
Any 3 months -6.08% -2.88% 7.90% 10.46%
Any 6 months -5.37% -2.64% 11.72% 16.75%
Any 12 months -5.51% -2.87% 16.80% 28.10%
</TABLE>
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
- ---------------------
(39) Rosenberg performance covers the period from the inception of the
Rosenberg Market Neutral Strategy in March 1989 through December 1997.
Performance calculations meet AIMR standards. This exhibit is a compilation
of data and documentation from previous exhibits. Past performance is no
guarantee of future performance.
(40) Returns for intermediate-term government bonds from Ibbotson
Associates. This exhibit is a compilation of data and documentation from
previous exhibits. Past performance is no guarantee of future performance.
A-63
<PAGE>
5. Risk: Annual Standard Deviation of Total Return
<TABLE>
<CAPTION>
<S> <C> <C>
3 years 12/94 -12/97 6.57%
5 years 12/92 -12/97 5.70%
From inception 12/89 -12/97 5.27%
</TABLE>
6. Risk: Beta (relative to S&P 500)
From inception 3/89 -12/97 -0.09
Average Beta measured over rolling 24-month periods -0.08
Standard Deviation of 24-month Betas 0.15
A-64
<PAGE>
ROSENBERG MARKET NEUTRAL STRATEGY PERFORMANCE
CHART:
<TABLE>
<CAPTION>
ROSENBERG MARKET
NEUTRAL STRATEGY 90-DAY T-BILL
TOTAL RETURN TOTAL RETURN
------------ ------------
<S> <C> <C>
Mar. 1989 to Dec. 1990 (annualized) 1.60 8.20
1991 0.61 5.66
1992 2.80 3.53
1993 11.53 3.04
1994 6.48 4.03
1995 10.04 5.66
1996 28.10 5.14
1997 13.76 5.20
DATA IN BOX:
Annualized Total Returns
Periods Ending December 1997
1-Year 13.76
3-Year 17.05
5-Year 13.75
Tracking Error (41)
5-Year 5.7
</TABLE>
PERFORMANCE CALCULATIONS MEET AIMR STANDARDS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
- ---------------------
(41) Tracking Error is a measure of the volatility of the Alpha, or value
added of the strategy. Specifically, it is the annual standard deviation of
the Alpha, or value added, of the strategy for the 5-year period ending
December 31, 1997.
A-65
<PAGE>
PERFORMANCE DECOMPOSITION
REPRESENTATIVE ROSENBERG MARKET NEUTRAL PORTFOLIO
(AFTER DEDUCTION OF 2% ANNUAL FEES)
<TABLE>
<CAPTION>
% RETURN % RETURN % RETURN
ON ON ON % TOTAL
LONGS SHORTS SHORT STOCK REBATE RETURN
<S> <C> <C> <C> <C>
3/1/89 -12/31/89 21.09 23.83 6.95 4.21
1990 -14.09 -6.62 7.65 0.18
1991 31.22 34.60 5.33 1.95
1992 11.91 13.10 3.17 1.98
1993 15.50 7.41 2.56 10.64
1994 1.37 -0.76 3.77 5.90
1995 34.11 29.29 5.71 10.53
1996 23.18 -0.08 5.56 28.83
1997 27.97 20.97 5.17 12.17
</TABLE>
PERFORMANCE DECOMPOSITION NOTES
In this chart, the total return of a representative Market Neutral portfolio
(one of the 9 accounts that comprise the Rosenberg Market Neutral Strategy
Portfolio) managed by Rosenberg is "decomposed" into the return achieved by
the portfolio of Long Positions, the return from the portfolio of Short
positions and the return from the "Short Stock Rebate." The Short Stock
Rebate is the return generated by investing the cash generated by the Short
positions and is generally equal to the federal funds rate less a small fee,
charged by the Prime Broker. The total return of this representative
portfolio equals the return of the Long portfolio component plus the Short
Stock Rebate less the return on the Short portfolio component.
A-66
<PAGE>
PERFORMANCE DECOMPOSITION
ALPHA DECOMPOSITIONS USING FACTOR MODEL FOR BENCHMARK
REPRESENTATIVE ROSENBERG MARKET NEUTRAL PORTFOLIO
(AFTER DEDUCTION OF 2% ANNUAL FEES)
<TABLE>
<CAPTION>
ALPHA FROM LONGS ALPHA FROM SHORTS
<S> <C> <C>
3/1/89 -12/31/89 1.87% -4.61%
1990 -1.95 -5.52
1991 -2.39 0.01
1992 -1.71 0.52
1993 4.66 3.42
1994 1.01 1.12
1995 5.03 -0.21
1996 8.46 14.81
1997 11.41 -4.40
</TABLE>
A-67
<PAGE>
PERFORMANCE DECOMPOSITION NOTES
In order to analyze the source of Alpha or added value of a Market Neutral
strategy, there has to be a Benchmark against which to compare the Long
holdings and the Short holdings. For Rosenberg's Market Neutral Strategy,
there is no external Benchmark against which to compare the Longs and Shorts.
Rosenberg's Long holdings are not constructed to match an external Benchmark
but to match the characteristics of the Shorts. Similarly, Rosenberg's Short
holdings are not constructed to match an external Benchmark, but to match the
characteristics of the Longs. In essence, the Longs and Shorts are each
other's Benchmark.
In order to have as accurate a Benchmark as possible, a factor model was used
for the Benchmark that included 11 Risk Index factors and 38 industry
factors. At the beginning of each month, the average exposure of the Longs
and Shorts to each of these factors was computed. For example, if the
portfolio was 8% Long in an industry and 4% Short, the average Benchmark
exposure to that industry was 6%. The factor returns (an estimate of the
return that could be specifically attributed to a given exposure to that
factor) were then computed for that month using standard Regression
techniques. Finally, the Benchmark exposure to a factor was multiplied by
the factor return and summed to produce the overall Benchmark return for the
month. The return from the Longs and Shorts are then compared to this factor
Benchmark return to determine the value added from the Longs and Shorts.
A-68
<PAGE>
ROSENBERG INVESTMENT PROCESS
A-69
<PAGE>
INVESTMENT PHILOSOPHY
/ / Stock prices imperfectly reflect "fundamental value."
/ / Rigorous analysis of financial data on individual companies can
successfully identify mispriced stocks.
/ / Models that duplicate the decision factors of an expert can produce
better forecasts.
/ / The lack of some details is more than offset by the consistency the
models bring.
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<PAGE>
At heart, Rosenberg is a fundamental investor. Rosenberg believes
that stock prices imperfectly reflect the present value of the expected
future earnings of companies, their "fundamental value." Since market prices
will converge towards fundamental value over time, Rosenberg believes that
any investor who can accurately determine fundamental value, and who applies
a disciplined investment process to select those stocks that are currently
misvalued, will outperform the market over time.
The premise of Rosenberg's investment philosophy is that there is a
link between the price of a stock and the underlying financial
characteristics of the company. In other words, the price reflects the
market's assessment of how well the company is positioned to generate future
earnings and/or future cash flow. Rosenberg tries to identify and purchase
those stocks which are undervalued -- they are cheaper than similar stocks
with the same financial characteristics. Also Rosenberg engages in Short
sales with respect to those stocks which it believes are overvalued -- they
are more expensive than similar stocks with the same financial
characteristics. Rosenberg believes that the market will recognize the
"better value" and move to correct the mispricing by purchasing or selling
the stock, as the case may be.
Rosenberg's determination of the "average" valuation for a stock is
based upon a comparison of similar companies. Rosenberg knows that in any
group of similar companies, there are usually some that are overvalued, some
that are undervalued, and some that are fairly-valued relative to the average
valuation for the group. These valuation errors are usually present in every
sector of the market and can be identified through rigorous Quantitative
analysis of fundamental data.
Rosenberg seeks to add value as an active equity manager through
stock selection, and usually not by predicting the performance of Risk
factors, industries, or the overall market.
Even if investors looked at all the relevant data and processed that
data correctly, there is still the possibility that they might not apply the
conclusions consistently across all stocks. In order to ensure consistency one
must simultaneously look at all the same factors (hopefully with detailed and
accurate measures) across all similar stocks, and apply consistent valuation
rules. Yet how likely is it that people can do that? There have been many
studies in different fields that address the issue of inconsistent application.
The situations studied were as diverse as admissions to graduate school,
loan-granting, prescribing a course of medical treatment, and predicting returns
on stocks. In almost all the studies, it has been shown that simple models
which duplicate the decision factors that an
A-71
<PAGE>
expert/judge/forecaster uses produce better forecasts than the original
experts being modeled.(42) How can that be? After all, there is some
information that can't be quantified and some intuition that can't be
captured in a model.
It is possible for models to be superior because the lack of some
details is more than offset by the consistency the models bring. Often human
experts apply their judgments inconsistently. As humans, their moods vary,
and at times they are preoccupied with an unrelated idea. Sometimes they do
not employ exactly the same standards they use in judging a stock today that
they used yesterday. In addition, humans tend to ignore subtle distinctions
in information. They may not respond at all unless the distinctions are
obvious, and then they may overreact. After all they are not machines! And
that is exactly the point. The more cases an expert has to consider, the
more likely it is that inconsistencies in thinking will arise.
- ---------------------
(42) Camerer, Colin F. and Johnson, Eric J. , "The Process-Performance
Paradox in Expert Judgment: How Can Experts Know So Much and Predict So
Badly." In TOWARD A GENERAL THEORY OFF EXPERTISE: PROSPECT AND LIMITS, K.
Anders Ericsson and Jacqui Smith (Eds.) Cambridge University Press, 1991,
pp. 195-217.
_______________
Dawes, Robyn M. "The robust beauty of improper linear models in decision
making," in JUDGMENT UNDER UNCERTAINTY: HEURISTICS AND BIASES, edited by
Kahneman, D., Slovic, P. and Tversky, A. pp. 391-399. Cambridge University
Press, 1990.
Faust, David, THE LIMITS OF SCIENTIFIC REASONING, University of Minnesota
Press, 1984.
Hogarth, Robin, JUDGMENT AND CHOICE, pp. 194-95. John Wiley & Sons, 1987.
Kleinmuntz, Don "Decomposition and the Control of Error in Decision-Analytic
Models." In INSIGHTS IN DECISION MAKING, Hogarth, Robin (Ed.) The
University of Chicago Press, 1990, pp. 114-115.
Russo, J. Edward and Schoemaker, Paul H.J., DECISION TRAPS, pp. 136-137.
Doubleday, 1989.
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<PAGE>
KEY INVESTMENT MODELS
/ / Appraisal Model
- Estimates company fair value based on the company's
potential to produce future earnings
/ / Earnings Change Model
- Identifies companies that are expected to realize (or fail
to realize in case of Shorts) their earnings potential
- Forecasts company earnings 4 quarters ahead
/ / Investor Sentiment Model
- Screens out bargain stocks that will remain bargains because
investors are likely to shun them
- Measures Short-term market enthusiasm for individual stocks
/ / Risk Model
- Identifies common sources of Risk used in portfolio
Optimization process
Rosenberg utilizes three stock models: An Appraisal Model, an Earnings Change
Model, and an Investor Sentiment Model. The insights gained from these three
models are combined to produce a predicted return for each stock in
Rosenberg's selection universe. Rosenberg then uses their Risk Model to form
portfolios that they believe represent the optimal tradeoff between the
returns predicted by their stock selection models and the common sources of
Risks for these stocks.
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<PAGE>
THE APPRAISAL MODEL
/ / Purpose: estimate of each company's fair value based on its potential
to produce future earnings
/ / Process:
- collect detailed financial data on each company (over 5,000
in US)
- value operating businesses according to average market
appraisal of similar businesses
/ / EXAMPLE:
<TABLE>
<CAPTION>
MAXCO INC. ZURN INDUSTRIES NACCO INDUSTRIES
<S> <C> <C>
METAL PRODUCTS METAL PRODUCTS Coal
Plastic, Rubber Products Machinery, General Machinery, General
Auto Parts HOUSEHOLD ITEMS HOUSEHOLD ITEMS
Wholesale Trade - Other Electric Utilities Retail - Specialty Stores
Development, Subdivision
</TABLE>
- adjust valuation for objective differences between companies
(cash, debt, etc.)
- integrate valuations and adjustments to produce total
company valuation (total company appraisal)
/ / Proprietary information: market and total company appraisals
A-74
<PAGE>
THE APPRAISAL MODEL NOTES
Appraisal Model
Fundamental valuation of stocks is key to Rosenberg's investment
process, and the heart of their valuation process lies in the Appraisal
Model. An important feature of the Appraisal Model is the classification of
U.S. -based companies into any of 166 groups of "similar" businesses.
Rosenberg decomposes each company into its individual business segments, and
compares each segment with similar business operations of other companies.
Rosenberg appraises the company's assets, operating earnings, and sales
within each business segment by applying the market's own average appraisal
of assets, operating earnings and sales for those same business segments.
Rosenberg then combines the segment appraisals to arrive at total balance
sheet, income statement, and sales appraisals for the entire company.
Rosenberg simultaneously adjusts the segment appraisals to include the
appraisals for factors which are declared only for the total company, such as
taxes, capital structure, and pension funding. In total Rosenberg uses over
190 valuation factors to characterize the income statement, balance sheet,
and sales elements. The result is a single valuation for each of over 5,000
companies that Rosenberg follows in the U.S.
The difference between ROSENBERG'S valuation and the market price
reflects an opportunity for profit. Rosenberg develops "appraisal Alphas" -
the expected rate of extraordinary return - by adjusting for the rate at
which the market has corrected for such misvaluations in the past.
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<PAGE>
HOW APPRAISALS ARE USED:
COMPANY XYZ
<TABLE>
<CAPTION>
LATEST CURRENT CONTRIBUTION TO
VALUATION REPORTED MARKET TOTAL COMPANY
ELEMENT $/SHARE APPRAISAL FAIR VALUE
<S> <C> <C> <C> <C>
Machinery assets $10.00 1.75 $17.50
Metal products assets 5.50 1.95 10.73
Receivables 1.30 -0.20 -0.26
Long-term debt 8.00 -1.10 -8.80
Pension surplus 2.00 0.45 0.90
TOTAL $20.07
CURRENT PRICE $18.50
</TABLE>
Shown are only a few of the valuation factors Rosenberg analyzes
Sample company is currently a bargain
Market appraisals, total company appraisal and price are changing continuously
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<PAGE>
HOW APPRAISALS ARE USED:
COMPANY XYZ NOTES
As an illustration of how the Appraisal Model is used, consider a
simplified example of a mythical machinery and metal products company,
Company XYZ. For most companies Rosenberg would have over 190 fundamental
valuation elements, but for the sake of simplicity this example shows just
five items. On their financial statements, Company XYZ reports $10 per share
of machinery assets and $5.50 per share of metal products assets; $1.30 per
share of receivables; $8.00 per share of long-term debt; and, from the
footnotes to the financial statements, $2.00 per share in pension surplus.
Using the Appraisal Model, Rosenberg determines how much the market currently
values each of these valuation elements. For example, the Appraisal Model
finds that, on average, the market currently values a dollar of machinery
assets at $1.75. By multiplying the reported dollars per share of each
valuation element by the current market appraisal for that element, Rosenberg
determines the contribution to total company fair value for each fundamental
valuation element. Summing up all of these contributions to fair value gives
Rosenberg the total fair value for Company XYZ. According to Rosenberg's
Appraisal Model, Company XYZ is currently a bargain, and a candidate for
purchase, since Rosenberg's estimated fair value is $20.07 and the market
price is $18.50. Rosenberg re-estimates the market and total company
appraisals continuously throughout the trading day.
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<PAGE>
MARKET APPRAISALS OF SELECTED VALUATION ELEMENT:
CASH & SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Dec-89 0.2319 Sep-92 0.3508 Jun-95 0.3632
Jan-90 0.3951 Oct-92 0.3295 Jul-95 0.4434
Feb-90 0.3675 Nov-92 0.4270 Aug-95 0.4768
Mar-90 0.4227 Dec-92 0.3255 Sep-95 0.4362
Apr-90 0.3526 Jan-93 0.4551 Oct-95 0.4538
May-90 0.3873 Feb-93 0.5721 Nov-95 0.4357
Jun-90 0.3835 Mar-93 0.6521 Dec-95 0.5353
Jul-90 0.3242 Apr-93 0.5104 Jan-96 0.5612
Aug-90 0.3667 May-93 0.6257 Feb-96 0.6840
Sep-90 0.3604 Jun-93 0.6164 Mar-96 0.6217
Oct-90 0.3498 Jul-93 0.5047 Apr-96 0.7051
Nov-90 0.3644 Aug-93 0.5166 May-96 0.7274
Dec-90 0.3774 Sep-93 0.5436 Jun-96 0.7257
Jan-91 0.5568 Oct-93 0.4295 Jul-96 0.6824
Feb-91 0.7106 Nov-93 0.3880 Aug-96 0.6676
Mar-91 0.6998 Dec-93 0.3908 Sep-96 0.6761
Apr-91 0.4809 Jan-94 0.4759 Oct-96 0.6415
May-91 0.4448 Feb-94 0.5011 Nov-96 0.7841
Jun-91 0.4543 Mar-94 0.5039 Dec-96 0.6883
Jul-91 0.5930 Apr-94 0.4818 Jan-97 0.6464
Aug-91 0.5676 May-94 0.4560 Feb-97 0.4768
Sep-91 0.5308 Jun-94 0.4114 Mar-97 0.5054
Oct-91 0.6290 Jul-94 0.3469 Apr-97 0.4887
Nov-91 0.5280 Aug-94 0.3422 May-97 0.7426
Dec-91 0.5865 Sep-94 0.3620 Jun-97 0.6385
Jan-92 0.5718 Oct-94 0.3401 Jul-97 0.5945
Feb-92 0.7143 Nov-94 0.3323 Aug-97 0.5746
Mar-92 0.7878 Dec-94 0.3194 Sep-97 0.7613
Apr-92 0.6148 Jan-95 0.3576 Oct-97 0.7560
May-92 0.5107 Feb-95 0.3499 Nov-97 0.6467
Jun-92 0.5312 Mar-95 0.4007 Dec-97 0.5886
Jul-92 0.4753 Apr-95 0.3294
Aug-92 0.4154 May-95 0.3557
</TABLE>
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<PAGE>
MARKET APPRAISALS OF SELECTED VALUATION ELEMENT:
CASH & SHORT-TERM INVESTMENTS NOTE
Rosenberg's market appraisals of the fundamental valuation elements
they consider are updated continuously. The chart shows the changing market
appraisal for Cash and Short-Term Investments as determined by Rosenberg's
Appraisal Model. The appraisal of Cash and Short-Term Investments is
multiplied by the company's reported Cash and Short-Term Investments to
determine the adjustment to the overall valuation of the company. The
appraisal for Cash and Short-Term Investments is measured relative to zero,
and thus its continuous valuation above zero indicates that Cash and
Short-Term Investments is a premium item on the balance sheet and always
contributes positively to the overall value of a company.
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<PAGE>
EARNINGS CHANGE MODEL:
Identifies companies that will realize
(or fail to realize, in the case of Shorts)
their potential to produce future earnings
/ / Predicts earnings change over 4 quarter horizon based on
- Measures of company profitability
- Operating ratios
- Sell-side analyst forecasts
/ / Takes into account ROE Reversion
Earnings Change Model: Identifies companies that will realize (or fail to
realize, in the case of Shorts) their potential to
produce future earnings Notes
EARNINGS CHANGE MODEL
Rosenberg's proprietary Earnings Change Model analyzes more than 20
explanatory variables to predict individual company earnings over a one-year
horizon. The variables are fundamental and fall into three categories:
measures of past profitability, measures of company operations and consensus
analyst earnings forecasts. The Earnings Change Model is independent of the
Appraisal Model and projects the change in a company's earnings in
cents/current price. The value of the projected earnings change is converted
to an "earnings change Alpha" by multiplying the projected change by the
market's historical response to changes of that magnitude.
A-80
<PAGE>
BUYING FUTURE EARNINGS AT A DISCOUNT:
PORTFOLIO EARNINGS YIELD 2 YEARS AFTER PURCHASE
EARNINGS PER DOLLAR OF INITIAL COST:
<TABLE>
<CAPTION>
MARKET ROSENBERG
<S> <C> <C>
Reported Earnings 0.0680.075
Earnings from Continuing Operations 0.0790.092
</TABLE>
Under general assumptions, Rosenberg believes that the price of an
individual stock is equal to the present value of the future earnings or cash
flow of the company. Thus, one measure of the success of a strategy in
identifying undervalued stocks is the degree to which it can, over time, buy
more future earnings per dollar of initial investment than the Benchmark
universe. This measure of future earnings per dollar of initial investment
is also called the earnings Yield. This chart shows the level of reported
earnings and earnings from continuing operations (reported earnings before
special and extraordinary items) relative to initial cost after a two year
holding period (the earnings Yield 2 years after purchase) for the stocks
invested in by Rosenberg (43) and the market universe of stocks. After a two
year holding period, the Rosenberg portfolio provides a higher level of
future earnings per dollar invested (a higher earnings Yield) than the market
universe. The analysis covers the period from the inception of Rosenberg
Institutional Equity Management in June 1985 through December 1995 (the last
date for which 2 years of future earnings could be determined as of December
31, 1997.)
- ---------------------
(43) The stocks invested in by Rosenberg represent the value weighted
composite of all stocks held in all of the accounts managed by Rosenberg
Institutional Equity Management which had a broad equity market Benchmark
(E.G., S&P500, Russell 3000.)
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<PAGE>
INVESTOR SENTIMENT MODEL:
AVOID BARGAINS THAT INVESTORS WILL SHUN
Measures investors' current enthusiasm toward individual
companies over a three-month horizon
/ / Perceptions of quality
- Earnings quality
- Market quality
/ / Bandwagon effects
- Estimate revisions
- Broker recommendations
- Earnings surprise
Investor Sentiment Model: Avoid Bargains that Investors will Shun Notes
Investor Sentiment Model
ROSENBERG'S Investor Sentiment Model quantifies investor sentiment about
features of stocks which influence price but which are not captured by the
Appraisal Model or the Earnings Change Model. Rosenberg incorporates
investors' perception of the "quality" of individual companies by looking at
past price patterns (Market Quality) and by calculating the probability that
future earnings will disappoint investors (Earnings Quality.) Rosenberg's
models also capture market enthusiasm towards individual stocks by looking at
the "bandwagon" effects that generally occur following broker
recommendations, revisions in analyst estimates, earnings surprises and
disappointments, and other measures of market sentiment. In addition to
improving their overall prediction of individual stock returns, Rosenberg
uses their Investor Sentiment Model to help them time their trades.
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<PAGE>
PREDICTING RETURNS
<TABLE>
<CAPTION>
ROSENBERG INFORMATION ELEMENTS OF STOCK SELECTION
<S> <C>
Market Appraisals Company Valuation
Forces Affecting Company Earnings
Profitability Change
Quality and Opinion Investor Sentiment
Measures Towards Company
Predicted Company
Returns
</TABLE>
A-83
<PAGE>
PREDICTING RETURNS NOTES
The output of Rosenberg's three stock selection models is predicted
returns for each company in their universe of stocks. The areas covered by
their three models fall into three general categories of stock selection that
most managers rely on to some degree: valuing companies; forecasting earnings
changes; and gauging investor enthusiasm. Rosenberg's models contribute
proprietary information in each of these areas. The market and company
appraisals determined by Rosenberg's Appraisal Model provide company
valuations. Rosenberg's Earnings Change Model considers the competitive
forces affecting company profitability to help improve their company earnings
forecasts. In addition, Rosenberg's quantification of quality and opinion
measures in their Investor Sentiment Model gives them a view of investor
enthusiasm towards individual companies.
Each of Rosenberg's three models produces an overall predicted
relative return, or Alpha, for each company in Rosenberg's stock selection
universe. A company's earnings change Alpha and investor sentiment Alpha is
added to its appraisal Alpha to arrive at a total company Alpha. It is these
predicted returns that are used by Rosenberg's Risk Model and Optimization
process to build a portfolio.
A-84
<PAGE>
PORTFOLIO OPTIMIZATION: AVOID UNINTENDED BETS
Predicted Returns Sources of Risk
All Companies Market
in Industries
Selection Universe Risk Factors
Optimizer
Calculates Best Risk/Return Tradeoff
Recommended Portfolio Holdings
In building portfolios, Rosenberg wants to ensure that they place
their "bets" where they feel most confident in their information. As stock
pickers, their information is about individual stocks. Thus, they want their
portfolios to "bet" on the individual companies identified by their models
and typically not on Risk factors, industries, or the direction of the market
for which they do not have unique insights.
All data is fed into a computer program that uses complex piece-wise linear
functions to approximate a quadratic function and optimize the portfolio's
trade-off between Risk and return. The Optimizer sets "targets" for
portfolio exposure to systematic factors of Risk after analyzing the Risk
characteristics of the Benchmark. For Market Neutral portfolios, the
Benchmark of the Long portfolio will be the Short portfolio (or,
equivalently, the Benchmark of the Short portfolio is the Long portfolio.)
The Optimizer then exploits the information developed by the stock selection
system to maximize return while eliminating unnecessary Risk. It recommends
positions in companies that in the aggregate, constitute the most efficient
portfolio. Data on each executed trade are "looped back" into the Optimizer,
which reassesses the relative portfolio Risk before recommending additional
trades. Trades are recommended only when the net benefit exceeds the
expected transaction cost. Since the Optimizer operates in real time,
Rosenberg is prepared to respond immediately to investment opportunities.
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<PAGE>
OPTIMIZER FUNCTIONS
/ / Efficient risk/reward trade-off
/ / Control of trading cost
/ / Implementation of all restrictions on holdings
- Exposure bands, maximum holding size, restricted stocks
/ / Realtime Optimization
- Incorporates all changes (Alphas, prices, executed trades,
cash targets)
- More current knowledge of opportunities
- Less pressure on traders, no manual adjustments due to
changing prices
- DOES NOT mean increased turnover, prevents unwanted turnover
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<PAGE>
INVESTMENT PROCESS
<TABLE>
<CAPTION>
RESEARCH PORTFOLIO MANAGEMENT
DATA ANALYSIS OPTIMIZATION TRADING
<S> <C> <C> <C>
Market ---> Investor Sentiment ---> Trading Trading Cost Monitoring
Data ---> Analysis Alphas
---> Market Response
Opinion Data ---> Projection of
---> Unanticipated Portfolio Optimization
---> Changes ______________________
---> Market Response
---> When to Trade
---> Recommended ---> Traditional Brokerage
Trades
---> Valuation
Fundamental Data ---> Similars ---> Company --->
Networks
___________ Alphas What to Buy/Sell
Within/Across Markets
And Time Accommodation
Market Response
---> How Much to Hold < --- Confirmed < ---
Package Trades
Trades
V
Settlement/Reconciliation
Client Benchmarks ---> Risk Analysis --->Target V
Exposures Performance Attribution
</TABLE>
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<PAGE>
WHY ROSENBERG EXPECTS ITS INVESTMENT APPROACH TO WORK
/ / Consistent comprehensive processing of relevant data
- all the same factors
- processed at the same time
- across all similar stocks
/ / Consideration of the broader forces at work in competitive economies
/ / Attempts to avoid the errors that naturally arise from qualitative
investment decision processes
- decision short cuts
- overly optimistic forecasts of companies' future earnings
/ / Attempts to buy future earnings at a discount
/ / Track record in identifying both overvalued and undervalued stocks
using a disciplined investment approach. (Past performance is no
guarantee of future performance.)
/ / Barr Rosenberg has over 25 years' experience in analyzing and
measuring the Risk of equity portfolios. This is critical in
controlling Common Factor Risk as well as Systematic Risk in
constructing Long/Short portfolios.
/ / A systematic, Quantitative approach which seeks to identify hundreds
of overvalued and undervalued stocks. This gives Rosenberg the
flexibility to control Risk and minimize trading costs in constructing
a Long/Short portfolio.
A-88
<PAGE>
HISTORICAL HIGHLIGHTS
/ / Broad definition of Market Neutral investing is any zero Beta
investment strategy, I.E., any strategy which is not exposed to the
Systematic Risk in the particular asset class.
/ / 1949 - Concept was first used by A. W. Jones in an investment
partnership.
/ / 1967 - The book BEAT THE MARKET by Edward O. Thorpe outlined a Hedged
approach to stock/warrant trading.
/ / 1973 - The Black/Scholes options-pricing model was published. This
model used the idea of a riskless Hedge between a call option and the
underlying stock.
/ / 1977 - Long Treasuries futures contracts were created which helped
make Market Neutral investing possible in the fixed income markets.
/ / 1987 - Morgan Stanley's Quantitative group engaged in equity pairs
trading. Under the net-capital rules for broker dealers, leverage was
increased beyond the standard 2:1 ratio that typically applies to
customers and pension plans.
/ / 1988 - Internal Revenue Service issued a private letter ruling which
held that Short sales did not result in unrelated business taxable
income.
/ / 1989 - Rosenberg forms a partnership to implement a Market Neutral
strategy.
/ / 1995 - IRS issued revenue ruling (IRB 1995-4, #29) which states that
Long/Short investing does not create UBIT.
/ / 1997 - "Short-Short" rule - Taxpayer Relief Act of 1997 eliminates
this rule making it feasible for mutual funds to engage in significant
Short sales and thus to offer Market Neutral products.
/ / 1997 - Today, there are many different types of Market Neutral
strategies with widely differing risk/return characteristics and uses
of leverage.
A-89
<PAGE>
HISTORICAL HIGHLIGHTS:
ROSENBERG'S HISTORY OF MARKET NEUTRAL
/ / In 1978, at BARRA Seminars, Barr Rosenberg suggested that some
managers could increase rewards for clients by selling stocks held in
clients' index funds. This would be a practical way of benefiting
from the identification of overvalued stocks without Short selling
them.
/ / In 1988, as soon as the IRS private letter ruling was released,
Rosenberg began to actively pursue Market Neutral opportunities, and
in 1989 Rosenberg became the first Market Neutral client of Bear
Stearns.
/ / 1997 - Rosenberg launches a Market Neutral equity mutual fund.
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<PAGE>
EQUITIZED MARKET NEUTRAL
A-91
<PAGE>
EQUITIZED MARKET NEUTRAL STRATEGY (44)
/ / Invest in Market Neutral
/ / 'Purchase' S&P 500 futures contracts, options on S&P 500 futures, and
S&P 500 swaps
/ / Sources of Return
- S&P 500 futures contracts, options on S&P 500 futures, and
S&P 500 swaps provides S&P 500 Index returns less T-bill
returns
- Market Neutral delivers double Alpha (from identifying both
overvalued and undervalued stocks) plus T-bill returns
- Combined, the return consists of double Alpha from the
Market Neutral Strategy plus S&P 500 Index returns
/ / Risk profile
- Systematic, or general market Risk as evidenced by the Risk
of the S&P 500 Index plus manager's stock selection Risk
from the Market Neutral component
- ---------------------
(44) The Barr Rosenberg Double Alpha Market Fund is an Equitized Market
Neutral fund.
A-92
<PAGE>
EQUITIZED MARKET NEUTRAL
Sources of Alpha and Return
/ / Initial capital of $100
/ / Buy $100 Long stocks
/ / Sell Short $100 stocks
/ / Invest $100 raised by the Short sales in interest-bearing securities
/ / 'Purchase' $100 worth of S&P 500 futures
A-93
<PAGE>
EQUITIZED MARKET NEUTRAL
SOURCES OF ALPHA AND RETURN
<TABLE>
<CAPTION>
INVESTMENT VALUE BETA SOURCE OF ALPHA SOURCE OF RETURN
<S> <C> <C> <C> <C>
LONG +$100 +BL +Long Alpha Long Return
plus
Short Return
SHORT -$100 -BL +Short Alpha
CASH +$100 0.0 + Zero Alpha T-bill Return
FUTURES $0 1.0 Zero Alpha S&P 500 Index
minus
T-bill Return
TOTAL +$100 1.0 Long Alpha S&P 500 Index
+ Short Alpha = + Double Alpha
Double Alpha
</TABLE>
A-94
<PAGE>
WHAT IS EQUITIZED MARKET NEUTRAL?
AN EXAMPLE
/ / Assumptions: $100 million to invest. Manager has stock selection
skill (45) where the Long Positions outperform Short positions by
10%, with the Longs outperforming the market by 5%, and the Shorts
underperforming the market by 5%.
<TABLE>
<CAPTION>
<S> <C> <C>
/ / SCENARIO: Market up 15%
Because of skill, manager's Long Position outperforms market and is up by 20%
Because of skill, manager's Short position underperforms market and is up only 10%
Value of Long portfolio = $100 million + 20% x $100 million = $ 120 million
Value of Short portfolio (liability) = $100 million + 10% x $100 million = - 110 million
Increased value of futures position due to market appreciation = 15 million
$ 25 million increase
in net portfolio value
(plus net interest on cash)
/ / SCENARIO: Market down 15%
Because of skill, manager's Long Position outperforms market and is down by 10%
Because of skill, manager's Short position underperforms market and is down 20%
Value of Long portfolio = $100 million -10% x $100 million = $ 90 million
Value of Short portfolio (liability) =$100 million -20% x $100 million = - 80 million
Decreased value of futures position due to market decline = - 15 million
$ -5 million decrease
in net portfolio value
(plus net interest on cash)
</TABLE>
- ---------------------
(45) This example shows the results if the Long component outperforms the
Short component by 10%. However, if the Short component outperformed the
Long component by 10%, the portfolio in this example would increase by only
$15 million in the scenario where the market is up 15% and would lose $15
million in the scenario where the market is down 15%.
A-95
<PAGE>
DIFFERENT MARKET NEUTRAL STRATEGIES
DISTINGUISHING CHARACTERISTICS
/ / Instruments
- Equities, Bonds, Currencies, Futures, Derivatives
/ / Styles
- Arbitrage, one-sided, two-sided
- Always neutral; on average neutral (46)
/ / Use of leverage
/ / Return versus Risk profiles
- ---------------------
(46) If always neutral the Beta is always zero. "On average neutral" means
that sometimes the Beta can be positive and sometimes negative, but over time
it will average out to zero.
A-96
<PAGE>
DIFFERENT MARKET NEUTRAL STRATEGIES:
THREE TYPES OF INVESTMENT IDEAS GENERATE HEDGED MARKET RISK
/ / ARBITRAGE BETWEEN LINKED SECURITIES: A IS UNDERVALUED RELATIVE TO B
- Buy A and sell Short B; profit from correction of the
misvaluation
- Example: A, the index bundle of stocks is cheaper than B,
the index future
- Hedge may be nearly perfect, because the securities are
linked
- Typically low-reward and low-Risk
/ / ONE-SIDED IDEAS, WHOSE MARKET RISK IS OFFSET BY DERIVATIVE HEDGES
- Reward may be high or low (single Alpha)
- The Hedge incurs a cost (a drain on Alpha)
- The result: Single Alpha minus Hedging cost
- Drawback: there may be no suitable derivative security for
the Hedge
/ / TWO-SIDED RISK-CANCELING IDEAS: A IS UNDERVALUED; B WHICH IS LIKE A IS
OVERVALUED
- Buy A and sell Short B; Profit as the market bids up the
price of A and bids down the price of B.
- Reward on each side may be high or low (double
Alpha)
- The result: Double Alpha, potentially the most
profitable
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SUGGESTED SELECTION CRITERIA FOR MARKET NEUTRAL MANAGERS
/ / Risk control capability
/ / Stock selection skill (47)
- understand biases and market environment impact
- adequate stock selection menu
/ / Ability to Short (48)
- Prime Broker
- fee income justification
- natural result of process
/ / Experience
/ / Capacity
- ---------------------
(47) When evaluating a Market Neutral manager one should determine if the
manager has stock selection skill. Two aspects of this skill are especially
important for implementing a Market Neutral strategy. First is an
understanding as to whether the manager's stock selection skill is limited to
certain types of stocks, E.G. small growth or large value. One should also
examine the possibility that the manager's stock selection skill is more or
less effective in different market environments, E.G. a strong economic
environment. Having done that analysis, one should then consider how broadly
the manager can apply his stock selection skill, E.G. does the skill apply
across all industries and capitalization sectors. The reason this is
important is that, generally speaking, the more narrow the manager's stock
selection skill, the more difficult it is to create an effective Hedge
between the Long and Short portfolio components.
(48) In evaluating a Market Neutral manager's ability to effectively manage
a Short portfolio one should consider three factors. First, is the manager
dealing with an experienced Prime Broker who can produce an adequate supply
of stocks to Short. Second, does the manager have enough assets (and hence
fee income) Shorted so that he can economically devote enough resources to
analyzing Short stocks as well as Long stocks. And third, is the analysis of
overvalued stocks a natural result of the manager's investment process or
does it require different people, process, and resources?
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GLOSSARY
Accommodative Trading: A system which allows institutional buyers and sellers
of stock to electronically present Rosenberg with their "interest" lists each
morning. Any matches between the inventory which the brokers have presented
and Rosenberg's own recommended trades are signaled to Rosenberg's traders.
Since the broker is doing agency business and has a client on the other side
of the trade, Rosenberg expects that the broker will be accommodative in the
price. Rosenberg's objective in using this match system is to execute most
trades so as to minimize market impact.
AIMR Standards: Standards of performance reporting set by the Association for
Investment Management and Research.
Alpha: The "risk-adjusted expected return" or the return in excess of what
would be expected from a diversified portfolio with the same systematic risk.
When applied to stocks, alpha is essentially synonymous with misvaluation: a
stock with a positive alpha is viewed as undervalued relative to other stocks
with the same systematic risk, and a stock with a negative alpha is viewed as
overvalued relative to other stocks with the same systematic risk. When
applied to portfolios, alpha is a description of expected extraordinary
reward due to the skill of the manager. If used in the context of the past
then alpha is interpreted as the difference between the historical
performance for a period and what would have been earned with a diversified
market portfolio at the same level of systematic risk over that period.
BARRA: A consulting firm that provides statistical and risk analyses.
Benchmark: An index or measure of performance with which a particular
portfolio is compared in order to measure relative performance and/or risk
exposures.
Beta: Measures changes in an asset's return in relation to changes in the
return of a broad portfolio of assets or the "market."
Core Portfolio: A portfolio invested primarily in large U.S. stocks.
Correlation: A statistical term giving the strength of the linear
relationship between two random variables. It is a pure number, ranging from
- -1 to +1: +1 is a perfect positive linear relationship; -1 is a perfect
negative linear relationship.
Equal-Weighted: Making equal dollar investments in each of the stocks in a
portfolio.
Equitized: Adding back to a market neutral strategy the risk and return of an
asset class through the use of index futures, options on index futures, and
swaps.
Equitized Market Neutral: An investment strategy which uses equity index
futures, options, swaps, etc. to add back the risk and return from an equity
index to a market neutral portfolio. For example, the Barr Rosenberg Double
Alpha Market Fund will hold S&P 500 Index futures options, swaps, etc. along
with shares of the Barr Rosenberg Market Neutral Fund to provide investors
with the additional risk and return of being invested in the S&P 500 in
addition to any risk and return provided by the Barr Rosenberg Market Neutral
Fund.
IBES - Institutional Broker Estimate Service: A service which collects and
publishes earnings forecasts from institutional analysts.
Hedge: Taking two positions simultaneously in two different assets in order
to reduce risk. Also loosely used to describe any strategy using leverage or
short selling.
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<PAGE>
Long (Portfolio; Positions): Stocks which are purchased for the portfolio
(often with the expectation that they are currently undervalued).
Market Neutral (Equity): An investment strategy which simultaneously buys a
long portfolio and sells a short portfolio in order to neutralize the impact
of the overall (equity) market on the combined (long and short) portfolio's
return.
Normalized Standard Deviation: This term is used to refer to the scaling of
risk indices. It involves setting the zero point and scale of measurement
for the variable. An example might be taken from temperature, where the
centigrade scale is standardized by setting zero at the freezing point of
water and establishing the scale (the centigrade degree), so that there are
100 units between the freezing point of water and the boiling point of water.
Standardization for risk indices sets the zero value at the
capitalization-weighted mean of the companies in the universe, and sets the
scale so that one unit equals one cross-sectional standard deviation of that
variable among our entire universe of stocks.
Optimizer/Optimized/Optimization: A computer program that uses complex
piece-wise linear functions to approximate a quadratic function and optimize
the total portfolio trade-off between risk and return subject to any specific
constraints or targets.
Portable Alpha: An investment technique that applies the excess return or
alpha earned from stock selection to another asset class by using index
futures.
Prime Broker: The broker who facilitates a short sale by arranging for the
borrowing of shares of a stock and being responsible for the regulatory,
accounting and fiduciary requirements involving the short sale.
Quantitative: A term which describes an investment approach which tends to
rely on hard financial data using a disciplined systematic analysis for stock
selection compared to an approach that tends to rely on subjective judgements
and soft information.
Regression: A statistical technique that measures the correlation between two
variables.
Residual Common Factor Risk: That portion of a stock's risk that is related
to a subgroup of the broad asset class. An example would be industry-related
risk.
Residual Specific Risk: That portion of a stock's risk that is unique to that
stock or company. An example would be the risk associated with the quality
of the company's management team.
Risk: The uncertainty of investment outcomes. Technically, the term RISK is
used to define all uncertainty about the mean outcome, including both upside
and downside possibilities. Thus, in contrast to the layperson, who would
think of the downside outcomes as risk and of the upside outcome as
potential, a measure of total variability in both directions is typically
used to summarize risk. The more intuitive concept for risk measurement is
the standard deviation of the distribution, a natural measure of spread.
Variance, the square of the standard deviation, must be used in comparing
independent elements of risk.
Risk Index: A variable computed for each asset, such that the variable
determines the asset's exposure to a common factor. Risk indices include
market variability, earnings variability, low valuation and unsuccess,
immaturity and smallness, growth orientation, and financial risk. In each
case, a higher value of the index implies a company that is more strongly
exposed to the common factor.
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<PAGE>
ROE Reversion: Return on Equity (ROE) is a common measure of company
profitability. Reversion relates to the notion that in competitive economies
there is tremendous pressure on unusually high or low company earnings to
move back in line with the economy-wide average.
Rosenberg: Also referred to as RIEM, Rosenberg Institutional Equity
Management, or the Manager.
Rosenberg Market Neutral Strategy Portfolio: The composite of all U.S.
accounts managed by Rosenberg employing a strategy using offsetting
long/short equity holdings and is weighted by the value of each account. As
of December 31, 1997, there were nine accounts in such composite. This
composite does not include the Barr Rosenberg Market Neutral Fund prior to
December 31, 1997 since the Barr Rosenberg Market Neutral Fund began
operations in December, 1997 and was not fully invested as of December 31,
1997.
Rosenberg (Rosenberg's) Market Neutral Strategy (Composite): Rosenberg's
performance net of 2% annual fees of all U.S. accounts employing a strategy
using offsetting long/short equity holdings and is weighted by the value of
each account. As of December 31, 1997, there were nine accounts in such
composite. This composite does not include the Barr Rosenberg Market Neutral
Fund prior to December 31, 1997 since the Barr Rosenberg Market Neutral Fund
began operations in December, 1997 and was not fully invested as of December
31, 1997. Performance calculations meet AIMR standards.
Sharpe Ratio: A ratio equal to the squared mean excess return divided by the
variance of return. When an investment portfolio is constructed over a wide
range of independent opportunities, the Sharpe ratio for the optimum total
portfolio is the sum of the Sharpe ratios for the separate opportunities.
Thus the Sharpe ratio is a measure of reward per unit of risk.
S&P 500 (Index): An index of 500 (generally larger) companies with the
holdings proportional to the market value of each of the companies in the
Index (capitalization weighted).
Short Executions: The process of implementing a desired short sale. Short
sales can only be executed after there has been a positive change in the
price of the stock to be shorted.
Short (Portfolio; Positions): Stocks which are borrowed and sold with the
expectation that the borrowed shares can be replaced in the future with
shares purchased at a lower price.
Shorting: The act of borrowing (creating a liability) and then selling a
stock with the obligation of returning that stock to the lender some time in
the future.
Short Squeeze: Used to describe the potential risk when a short seller has
borrowed stock and must replace it in the future. However, when the short
seller attempts to buy the stock, there are few sellers relative to the
demand and the price (and potential liability) of the stock shorted increases
significantly.
Short Stock Rebate: Return earned by investing the cash generated by the
short positions and is generally equal to the federal funds rate, less a
small fee charged by the prime broker.
Standard Deviation: A statistical term which measures the spread or
variability of a probability distribution. The standard deviation is the
square root of variance. Its intuitive meaning is best seen in a simple,
symmetrical distribution, such as the normal distribution, where
approximately two thirds of all outcomes fall within (plus or minus) 1
standard deviation of the mean and approximately 95 percent of all outcomes
fall within (plus or minus) 2 standard deviations.
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<PAGE>
Survivorship Bias: A distortion in the results of a statistical analysis that
results from the failure to adequately account for the fact that the sample
at the end of the period does not include those companies that failed or went
bankrupt and are no longer in the sample.
Systematic Risk: That portion of an asset's risk that is related to the risk
of the overall asset class.
T-BILLS: 90 day U.S. government treasury bills.
Tracking Error: The annual standard deviation of the alpha or value added.
It is a measure of how closely the portfolio tracks the benchmark.
Variance: A statistical term for the variability of a random variable about
its mean. The variance is defined as the expected squared deviation of the
random variable from its mean - that is, the average squared distance between
the mean value and the actually observed value of the random variable. When
a portfolio includes several independent elements of risk, the variance of
the total arises as a summation of the variances of the separate components.
Yield: The return on a security or portfolio in the form of cash payments.
Most yield comes from dividends on equities, coupons on bonds, or interest on
mortgages.
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<PAGE>
ANNEX I: DESCRIPTORS USED IN RISK INDEXES
1. Variability in Markets
A. Option sample
- Cumulative range, one year
- H-Beta x H-sigma
- Option-implied Standard Deviation
- Short-term Standard Deviation
B. Listed company sample
- H-Beta x H-sigma
- Cumulative range, one year
- Short-term Standard Deviation
- Trading volume/Variance
- Common stock price (LN)
- Serial dependence
- Share turnover, last twelve months
C. OTC Stock sample
- H-Beta x H-sigma
- Cumulative range, one year
- Share turnover, last twelve months
- Common stock price (LN)
- Serial dependence
2. Success
- Relative strength
- Historical Alpha
- Recent earnings change
- IBES earnings increase
- Dividend cuts: five year
- Growth in EPS
3. Size
- Capitalization (LN)
- Total assets (LN)
- Indicator of earnings history
4. Trading Activity
- Share turnover, last twelve months
- Share turnover, last five calendar years
- Share turnover, quarterly
- Common stock price (LN)
- IBES number of analysts
- Trading volume/Variance
5. Growth
- Payout, last five years
- Growth in earnings per share
- Capital structure change
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<PAGE>
- Earnings/price, normalized
- Recent earnings change
- Dividend Yield, last five years
- IBES earnings increase
- Dividend Yield prediction
- Indicator of zero Yield
- Earnings/price
- IBES earnings/price prediction
- Growth in total assets
6. Earnings/price
- Earnings/price
- Typical E/P, five years
- IBES E/P projection
7. Book/Price
- Book/price
8. Earnings Variation
- Variance of earnings
- IBES Standard Deviation/price
- Earnings covariability
- Concentration
- Variance of cash flow
- Extraordinary items
9. Financial leverage
- Interest rate sensitivity
- Debts/assets
- Leverage at book
- Uncovered fixed charges
10. Foreign Income
- Foreign operating income
11. Labor Intensity
- Net plant/gross plant
- Inflation-adjusted plant/equity
- Labor share
12. Yield
- Dividend Yield prediction
13. LOCAP
- Indicator for membership in the LOCAP universe
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A-105
<PAGE>
PART C
OTHER INFORMATION --
THE BARR ROSENBERG MARKET NEUTRAL FUND AND
THE BARR ROSENBERG DOUBLE ALPHA MARKET FUND ONLY
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
See the section entitled "Financial Highlights" in the Prospectus.
See the section entitled "Financial Statements" in the Statement of
Additional Information.
(b) Exhibits:
1. (a) Form of Second Amended and Restated Agreement and
Declaration of Trust of the Registrant -- incorporated
by reference to Post-Effective Amendment No. 17 to the
Registration Statement filed on December 9, 1997;
1. (b) Form of Amendment No. 1 to Second Amended and Restated
Agreement and Declaration of Trust of the Registrant --
filed herewith;
2. By-Laws of the Registrant -- incorporated by reference to
Post-Effective Amendment No. 17 to the Registration
Statement filed on December 9, 1997;
3. None;
4. Not applicable;
5. (a) Form of Management Contract between the Registrant on
behalf of its Barr Rosenberg Market Neutral Fund and
Rosenberg Institutional Equity Management --
incorporated by reference to Post-Effective Amendment
No. 16 to the Registration Statement filed on
September 16, 1997;
5. (b) Form of Management Contract between the Registrant on
behalf of its Barr Rosenberg Double Alpha Market Fund
and Rosenberg Institutional Equity Management --
incorporated by reference to Post-Effective Amendment
No. 16 to the Registration Statement filed on
September 16, 1997;
6. Form of Amended and Restated Distributor's Contract
between the Registrant and Barr Rosenberg Funds
Distributor, Inc. -- incorporated by reference to
Post-Effective Amendment No. 17 to the Registration
Statement filed on December 9, 1997;
7. None;
8. (a) Form of Custody Agreement between the Registrant and
Custodial Trust Company -- incorporated by reference
to Post-Effective Amendment No. 17 to the Registration
Statement filed on December 9, 1997;
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<PAGE>
(b) Form of Special Custody Account Agreement among the
Registrant, Custodial Trust Company and Bear, Stearns
Securities Corp. -- incorporated by reference to
Post-Effective Amendment No. 17 to the Registration
Statement filed on December 9, 1997;
(c) Schedule of remuneration to Custody Agreement between
the Registrant and Custodial Trust Company -- filed
herewith;
9. (a) Transfer Agency Agreement between the Registant and
BISYS Fund Services, Inc. -- incorporated by reference
to Post-Effective Amendment No. 15 to the Registration
Statement filed on July 18, 1997;
(b) Form of Notification of Expense Limitation by
Rosenberg Institutional Equity Management to the Barr
Rosenberg Market Neutral Fund and the Barr Rosenberg
Double Alpha Market Fund -- incorporated by reference
to Post-Effective Amendment No. 17 to the Registration
Statement filed on December 9, 1997;
(c) Fund Administration Agreement between the Registrant
and BISYS Fund Services Limited Partnership --
incorporated by reference to Post-Effective Amendment
No. 15 to the Registration Statement filed on
July 18, 1997;
(d) Fund Accounting Agreement between the Registrant and
BISYS Fund Services, Inc. -- incorporated by reference
to Post-Effective Amendment No. 15 to the Registration
Statement filed on July 18, 1997;
10. Opinion of Ropes & Gray -- to be filed by amendment;
11. Consent of Price Waterhouse LLP -- to be filed by amendment;
12. None;
13. Investment letter regarding initial capital -- incorporated
by reference to Pre-Effective Amendment No. 3 to the
Registration Statement filed on September 12, 1988;
14. None;
15. Form of Distribution Plan for Investor shares --
incorporated by reference to Post-Effective Amendment
No. 17 to the Registration Statement filed on December 9,
1997;
16. Schedule for Computation of Performance Quotations -- to
be filed by amendement;
17. Financial Data Schedule for Registrant's fiscal year
ended March 31, 1998 -- to be filed by amendment;
18. Form of Amended and Restated Multi-Class Plan --
incorporated by reference to Post-Effective Amendment
No. 17 to the Registration Statement filed on December 9,
1997;
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<PAGE>
19. Powers of Attorney incorporated by reference to Post-
Effective Amendment No. 3 to the Registration Statement
filed on July 28, 1989 and Post-Effective Amendment No. 4
to the Registration Statement filed on July 31, 1990.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
The following table sets forth the number of holders of each class
of securities of the Barr Rosenberg Market Neutral Fund and Barr
Rosenberg Double Alpha Market Fund as of May 27, 1998:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
<S> <C>
Barr Rosenberg Market Neutral Fund
----------------------------------
Institutional Class 129
Investor Class 577
Barr Rosenberg Double Alpha Market Fund
---------------------------------------
Institutional Class 9
Investor Class 14
</TABLE>
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<PAGE>
Item 27. INDEMNIFICATION.
Article VIII of the Registrant's Second Amended and Restated Agreement
and Declaration of Trust reads as follows (referring to the Registrant as the
"Trust"):
ARTICLE VIII
Indemnification
SECTION 1. TRUSTEES, OFFICERS, ETC. The Trust shall indemnify each
of its Trustees and officers (including persons who serve at the Trust's request
as directors, officers or trustees of another organization in which the Trust
has any interest as a shareholder, creditor or otherwise) (hereinafter referred
to as a "Covered Person") against all liabilities and expenses, including but
not limited to amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and counsel fees reasonably incurred by any Covered Person
in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties), shall be paid from time to time by the Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article, provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (provided that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to a
full trial type inquiry) that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Article.
SECTION 2. COMPROMISE PAYMENT. As to any matter disposed of (whether
by a compromise payment, pursuant to a consent decree or otherwise) without an
adjudication by a court, or by any other body before which the proceeding was
brought, that such Covered Person is liable to the Trust or its Shareholders by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, indemnification
shall be provided if (a) approved, after notice that it involves such
indemnification, by at least a majority of the disinterested Trustees acting on
the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available fact (as opposed to a full trial type inquiry) that such Covered
Person is not liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or (b) there has been obtained an
opinion in writing of independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial type inquiry) to the effect that
such indemnification would not protect such Person against any liability to the
Trust to which he would otherwise be subject by reason of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office. Any approval pursuant to this Section shall not prevent
the recovery from any Covered Person of any amount paid to such Covered Person
in accordance with this Section as indemnification if such Covered Person is
subsequently adjudicated by a court of competent
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<PAGE>
jurisdiction to have been liable to the Trust or its Shareholders by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office.
SECTION 3. INDEMNIFICATION NOT EXCLUSIVE. The right of
indemnification hereby provided shall not be exclusive of or affect any other
rights to which such Covered Person may be entitled. As used in this Article
VIII, the term "Covered Person" shall include such person's heirs, executors and
administrators and a "disinterested Trustee" is a Trustee who is not an
"interested person" of the Trust as defined in Section 2(a)(19) of the
Investment Company Act of 1940, as amended, (or who has been exempted from being
an "interested person" by any rule, regulation or order of the Commission) and
against whom none of such actions, suits or other proceedings or another action,
suit or other proceeding on the same or similar grounds is then or has been
pending. Nothing contained in this Article shall affect any rights to
indemnification to which personnel of the Trust, other than Trustees or
officers, and other persons may be entitled by contract or otherwise under law,
nor the power of the Trust to purchase and maintain liability insurance on
behalf of any such person; provided, however, that the Trust shall not purchase
or maintain any such liability insurance in contravention of applicable law,
including without limitation the 1940 Act.
SECTION 4. SHAREHOLDERS. In case any Shareholder or former
Shareholder shall be held to be personally liable solely by reason of his or her
being or having been a Shareholder and not because of his or her acts or
omissions or for some other reason, the Shareholder or former Shareholder (or
his or her heirs, executors, administrators or other legal representatives or in
the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified against
all loss and expense arising from such liability, but only out of the assets of
the particular series of Shares of which he or she is or was a Shareholder."
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Rosenberg Institutional Equity Management (the "Manager") was
organized as a limited partnership under the laws of the State of California in
1985, and is registered as an investment adviser under the Investment Advisers
Act of 1940. The Manager provides investment advisory services to a substantial
number of institutional investors.
Set forth below are the substantial business engagements during at
least the past two fiscal years of each director, officer or partner of the
Manager:
Name and Position Business and
with Manager other connections
- ------------------ -----------------
Barr M. Rosenberg General Partner, Rosenberg Alpha L.P.
Managing General Partner (formerly RBR Partners (limited partner of
and Chief Investment Officer Manager)), 12 El Sueno, Orinda, California,
December, 1984 to present; Chairman of the
Board, Rosenberg Management Company S.A.,
2 Place Winston Churchill, L-1340 Luxembourg,
April 1989 to present; Chairman of the Board,
Rosenberg U.S. Japan Management Company
S.A., 2 Place Winston Churchill, L-1340
Luxembourg, July, 1989 to present. Chairman
of the Board, Rosenberg Global Management
Company, S.A., 2 Place Winston Churchill,
L-1340 Luxemburg, April 1990 to present;
Director and Chairman of the Board, Rosenberg
Nomura Asset Management Company, Ltd.,
Dai-Ichi Edobashi Bldg., 1-11-1 Nihonbashi
Chuo-Ku, Tokyo 103, Japan; Chairman of the
Board and Director of Barr Rosenberg
Investment Management, Inc., 4 Orinda Way,
Orinda, California, February 1990 to
present. Chairman, Barr Rosenberg European
Management, Ltd., 9A Devonshire Square,
London EC2M 4LY, United Kingdom, March 1990 to
present.
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<PAGE>
Marlis S. Fritz Director, Barr Rosenberg European Management
General Partner Ltd., 9A Devonshire Square,
London EC2M 4LY, United Kingdom, May 1990 to
present; Director, Barr Rosenberg Investment
Management, Inc., 4 Orinda Way, Orinda,
California, February 1990 to present.
Kenneth Reid Director, Barr Rosenberg Investment
General Partner Management, Inc., 4 Orinda Way, Orinda,
and Director of Research California, February 1990 to present.
Po-Len Hew Controller, Rosenberg Institutional Equity
Controller Management, October 1989 to present,
Treasurer, Barr Rosenberg Investment
Management, Inc., May 1994 to present.
Item 29. PRINCIPAL UNDERWRITERS:
(a) Barr Rosenberg Funds Distributor, Inc. (the "Distributor") is the
principal underwriter of the Funds' Investor shares. The
Distributor does not act as principal underwriter, depositor
or investment adviser for any other investment company.
(b) Information with respect to the Distributor's directors and
officers is as follows:
Name and Principal Positions and Positions and
Offices with Offices with
Business Address Underwriter Registrant
------------------ ------------- -------------
David J. Huber President None
Lynn J. Mangum Director, Chairman None
Kevin J. Dell Vice President, None
Secretary
Michael D. Burns Vice President, Chief None
Financial Officer
Robert J. McMullan Vice President, Director, None
Treasurer
The business address of all directors and officers of the Distributor is
125 West 55th Street, 11th Floor, New York, NY 10019.
(c) None
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of:
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1) Barr Rosenberg Series Trust
3435 Stelzer Road
Columbus, Ohio 43219
Rule 31a-1 (b)(1),(2),(3), (4), (5), (6), (7), (8), (9), (10), (11)
Rule 31a-2 (a)
2) Rosenberg Institutional Equity Management
Four Orinda Way
Building E
Orinda, CA 94563
Rule 31a-1 (f)
Rule 31a-2 (e)
3) Barr Rosenberg Funds Distributor, Inc.
125 West 55th Street
11th Floor
New York, NY 10019
Rule 31a-1 (d)
Rule 31a-2 (c)
Item 31. MANAGEMENT SERVICES.
None.
Item 32. UNDERTAKINGS.
The Registrant undertakes to comply with the last three paragraphs
of Section 16(c) of the Investment Company Act of 1940 as though such
provisions of the Act were applicable to the Trust.
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<PAGE>
NOTICE
A copy of the Agreement and Declaration of Trust, as amended, of the
Registrant is on file with the Secretary of The Commonwealth of Massachusetts
and notice is hereby given that this instrument is executed on behalf of the
Registrant by an officer of the Registrant as an officer and not individually
and that the obligations of or arising out of this instrument are not binding
for any of the trustees or shareholders individually but are binding only upon
the assets and property of the Registrant.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 18 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Orinda, and the State of California, on the 29th day of May, 1998.
BARR ROSENBERG SERIES TRUST
By /s/Marlis S. Fritz
----------------------
Marlis S. Fritz
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons in
the capacities indicated and on the 29th day of May, 1998.
SIGNATURE TITLE DATE
/s/Marlis S. Fritz Vice President, May 29, 1998
____________________ Trustee
Marlis S. Fritz
Kenneth Reid* President, Trustee May 29, 1998
____________________ (principal executive officer)
Kenneth Reid
Po-Len Hew* Treasurer May 29, 1998
____________________ (principal financial
Po-Len Hew and accounting officer)
Nils H. Hakansson* Trustee May 29, 1998
____________________
Nils H. Hakansson
Barr M. Rosenberg* Trustee May 29, 1998
____________________
Barr M. Rosenberg
William F. Sharpe* Trustee May 29, 1998
____________________
William F. Sharpe
*By: /s/Marlis S. Fritz
__________________
Marlis S. Fritz
Attorney-in-Fact
Date: May 29, 1998
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
99.1 Form of Amendment No. 1 to Second Amended and
Restated Agreement and Declaration of Trust
99.8 Schedule of remuneration to Custody Agreement
between the Registrant and Custodial Trust Company
<PAGE>
EXHIBIT 99.1
BARR ROSENBERG SERIES TRUST
AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
The undersigned, being all of the trustees of Barr Rosenberg Series
Trust, a Massachusetts business trust created and existing under an Agreement
and Declaration of Trust dated April 1, 1988, as amended, a copy of which is
on file in the Office of the Secretary of The Commonwealth of Massachusetts
(the "Trust"), wishing to correct a defective provision in the Second Amended
and Restated Agreement and Declaration of Trust, do hereby direct that this
Amendment No. 1 be filed with the Secretary of The Commonwealth of
Massachusetts and do hereby consent to and adopt the following amendment to
such Second Amended and Restated Agreement and Declaration of Trust:
1. Exhibit 3.6 of the Second Amended and Restated Agreement and
Declaration of Trust is amended to read in its entirety as attached hereto.
The foregoing amendment shall become effective as of the time it is
filed with the Secretary of State of The Commonwealth of Massachusetts.
<PAGE>
IN WITNESS WHEREOF, each of the undersigned Trustees as aforesaid do
hereto set their hands this ____ day of December, 1997.
________________________________
Marlis S. Fritz
________________________________
Nils Hakansson
________________________________
Kenneth Reid
________________________________
Barr M. Rosenberg
________________________________
William F. Sharpe
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<PAGE>
EXHIBIT 3.6
BARR ROSENBERG SERIES TRUST
PLAN PURSUANT TO RULE 18f-3(d) UNDER THE INVESTMENT COMPANY ACT OF 1940
-----------------------------------------------------------------------
Effective August 5, 1996
Amended and Restated December 8, 1997
WHEREAS, the Board of Trustees of Barr Rosenberg Series Trust (the
"TRUST") has considered the following amended and restated multi-class plan
(the "PLAN") under which the Trust may offer multiple classes of shares of
its now existing and hereafter created series pursuant to Rule 18f-3 (the
"RULE") under the Investment Company Act of 1940 (the "1940 ACT"); and
WHEREAS, a majority of the Trustees of the Trust and a majority of the
Trustees who are not interested persons of the Trust have found the Plan, as
proposed, to be in the best interests of each class of shares of each series
of the Trust individually and the Trust as a whole.
NOW, THEREFORE, the Trust hereby approves and adopts the following Plan
pursuant to the Rule.
THE PLAN
Each now existing and hereafter created series ("FUND")(1) of the Trust
may from time to time issue one or more of the following classes of shares:
Institutional shares, Adviser shares, Select shares and Investor shares.
Each class is subject to such investment minimums and other conditions of
eligibility as are set forth in the Trust's prospectuses, each as from time
to time in effect (each, a "PROSPECTUS"). The differences in expenses among
these classes of shares, and the conversion and exchange features of each
class of shares, are set forth below in this Plan, which is subject to
change, to the extent permitted by law and by the Agreement and Declaration
of Trust and By-laws of the Trust, as amended from time to time, by action of
the Board of Trustees of the Trust.
CLASS CHARACTERISTICS
- --------------------------
(1) The current Funds of the Trust are the U.S. Small
Capitalization Series, the International Small Capitalization Series, the
Japan Series, the Barr Rosenberg Market Neutral Fund and the Barr Rosenberg
Double Alpha Market Fund.
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<PAGE>
Institutional, Adviser, Select and Investor shares of a Fund represent
interests in the assets of such Fund and have identical dividend and
liquidation rights. The classes differ materially only with respect to (i)
the level of shareholder service fee ("SERVICE FEE"), if any, borne by each
class, and (ii) the level of distribution fee ("DISTRIBUTION FEE"), if any,
borne by each class. Service Fees are paid for services rendered and expenses
borne in connection with personal services rendered to shareholders of a
class and the maintenance of shareholder accounts. Service Fees are paid
pursuant to Servicing Agreement(s) between the Trust and appropriate
shareholder servicing agent(s) and under related plans (each a "SERVICE
PLAN") for applicable classes. Distribution Fees are paid in connection with
services and expenses primarily intended to result in the sale of shares
pursuant to a Distributor's Contract between the Trust and Barr Rosenberg
Funds Distributor, Inc., the Funds' distributor (the "DISTRIBUTOR"), and
under a separate plan (each a "DISTRIBUTION PLAN") for each applicable class
adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act.
(1) INSTITUTIONAL SHARES are sold without any initial or deferred sales
charges and are not subject to any ongoing Distribution Fees or Service Fees.
(2) ADVISER SHARES are sold without any initial or deferred sales
charges and are not subject to any ongoing Distribution Fees, but are subject
to a Service Fee at an annual rate with respect to a Fund equal to 0.25% of
such Fund's average daily net assets attributable to Adviser shares.
(3) SELECT SHARES are sold without any initial or deferred sales
charges, but are subject to a Service Fee at an annual rate with respect to a
Fund equal to 0.25% of such Fund's average daily net assets attributable to
Select shares. Select shares are also subject to a Distribution Fee. The
Distribution Plan for Select shares permits a Fund to pay the Distributor up
to 0.50% per annum of the Fund's average daily net assets attributable to
Select shares. However, the Distributor's Contract currently provides that
the Distributor will be paid 0.25% per annum of a Fund's average daily net
assets attributable to Select shares.
(4) INVESTOR SHARES are sold without any initial or deferred sales
charges, but are subject to a Service Fee at an annual rate with respect to a
Fund equal to 0.25% of such Fund's average daily net assets attributable to
Investor shares. Investor shares are also subject to a Distribution Fee.
The Distribution Plan for Investor shares permits a Fund to pay the
Distributor up to 0.50% per annum of the Fund's average daily net assets
attributable to Investor shares. However, the Distributor's Contract
currently provide that the Distributor will be paid 0.25% per annum of a
Fund's average daily net assets attributable to Investor shares.
EXPENSE ALLOCATIONS
Institutional, Adviser, Select and Investor shares pay the expenses
associated with their different distribution and/or shareholder servicing
arrangements. Each class may, at the
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<PAGE>
Trustees' discretion, also pay a different share of other expenses, not
including advisory or custodial fees or other expenses related to the
management of the Trust's assets, if these expenses are actually incurred in
a different amount by that class, or if the class receives services of a
different kind or to a different degree than the other classes ("CLASS
EXPENSES"). All other expenses will be allocated to each class on the basis
of the net asset value of that class in relation to the net asset value of a
particular Fund attributable to that class.
EXCHANGE FEATURES / CONVERSIONS
Shares of any particular class of a Fund may be exchanged only for
shares of the same class of another Fund or, if a Fund does not offer the
same class of shares, then the class of shares with the lowest expenses that
a given shareholder is eligible to purchase. There is no sales charge on
exchanges. A shareholder may not exchange shares of a class of one Fund for
shares of the same class of another Fund that is not qualified for sale in
the state of the shareholder's residence. Although the Trust has no current
intention of terminating or modifying the exchange privilege, it reserves the
right to do so at any time. Except as otherwise permitted by regulations of
the Securities and Exchange Commission, the Trust will give 60 days' advance
notice to shareholders of any termination or material modification of the
exchange privilege. All exchanges will be made based on the respective net
asset values next determined following receipt of the request by the Funds.
The Trust does not currently offer any automatic conversion feature
among the classes.
DIVIDENDS/DISTRIBUTIONS
Each Fund intends to pay out as dividends substantially all of its net
investment income (which comes from dividends and any interest it receives
from its investments and net realized short-term capital gains). Each Fund
also intends to distribute substantially all of its net realized long-term
capital gains, if any, after giving effect to any available capital loss
carryover. Dividends paid by the Funds with respect to Institutional,
Adviser, Select and Investor shares, to the extent any dividends are paid,
will be calculated in the same manner, at the same time, and will be in the
same amount, except that any Service Fee or Distribution Fee charged to a
particular class will be borne solely by such class and, if applicable, at
the Trustees discretion, Class Expenses relating to a particular class may be
borne exclusively by that class.
VOTING RIGHTS
Each class of shares of each Fund has identical voting rights except
that each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and has separate voting
rights on any matter submitted to shareholders in which the interests of
-5-
<PAGE>
one class differ from the interests of any other class. Each class of shares
has exclusive voting rights with respect to matters pertaining to any
Distribution Plan or Service Plan applicable to that class. All classes of
shares of a Fund will vote together, except with respect to any Distribution
Plan or Service Plan applicable to a class or when a class vote is required
by the 1940 Act.
RESPONSIBILITIES OF THE TRUSTEES
On an ongoing basis, the Trustees will monitor the Trust for the
existence of any material conflicts among the interests of the classes of
shares. The Trustees shall further monitor on an ongoing basis the use of
waivers or reimbursement of expenses by the Manager to guard against
cross-subsidization between classes. The Trustees, including a majority of
the independent Trustees, shall take such action as is reasonably necessary
to eliminate any such conflict that may develop.
REPORTS TO THE TRUSTEES
The Manager and/or the Administrator will be responsible for reporting
any potential or existing conflicts among the classes of shares to the
Trustees.
-6-
<PAGE>
EXHIBIT 99.8
EXHIBIT E-II
CUSTODY FEES AND TRANSACTION CHARGES
All fees and charges set forth in this Exhibit E shall be calculated and
paid in the manner provided in Article XII above. The Barr Rosenberg Double
Alpha Market Fund shall pay Custodian the following fees for assets maintained
by such Portfolio in the Custody Account and charges for transactions by such
Portfolio, all such fees and charges to be payable monthly:
(1) an annual fee consisting of the total of 0.02% (2 basis points) per
annum of the value of the first $50 million of assets in the Custody Account of
such Portfolio, 0.01% (1 basis points) per annum of the next $150 million of
such assets and 0.005% (1/2 basis point) per annum of the amount of such
assets in excess of $200 million;
(2) a transaction charge for each repurchase transaction in the Custody
Account of such Portfolio which represents a cash sweep investment for such
Portfolio's account, computed at a rate of 0.10% (ten basis points) per annum
on the amount of the purchase price paid by such Portfolio in such repurchase
transaction;
(3) A charge of $10 for each "free" transfer of funds from the
Custody Account of such Portfolio; and
(4) a service charge for each holding of securities or other assets of
such Portfolio that are sold by way of private placement or in such other
manner as to require services by Custodian which in its reasonable judgment
are materially in excess of those ordinarily required for the holding of
publicly traded securities in the United States.
BARR ROSENBERG SERIES TRUST, ON CUSTODIAL TRUST COMPANY
BEHALF OF ITS BARR ROSENBERG DOUBLE
ALPHA MARKET FUND
/s/ Edward H. Lyman /s/ Ronald D. Watson
__________________________________ _____________________________
By: Edward H. Lyman By: Ronald D. Watson
Title: Vice President Title: President
Date: 20 April 1998 Date: 5/5/98
