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BARR ROSENBERG SERIES TRUST
BARR ROSENBERG MARKET NEUTRAL FUND
BARR ROSENBERG DOUBLE ALPHA MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 9, 1997
REVISED FEBRUARY 2, 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 December 9, 1997 (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 or 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 or sale of Investor Shares.
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TABLE OF CONTENTS
PAGE
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INVESTMENT OBJECTIVES AND POLICIES.................................... 3
MISCELLANEOUS INVESTMENT PRACTICES.................................... 5
INVESTMENT RESTRICTIONS............................................... 5
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS........................ 7
MANAGEMENT OF THE TRUST............................................... 9
INVESTMENT ADVISORY AND OTHER SERVICES................................ 11
PORTFOLIO TRANSACTIONS................................................ 13
TOTAL RETURN CALCULATIONS............................................. 14
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES...................... 16
DETERMINATION OF NET ASSET VALUE...................................... 18
PURCHASE AND REDEMPTION OF SHARES..................................... 18
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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
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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 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.
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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.
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. 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.
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(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
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 Restrictions 1, 2, 3 and 9 above,
the Funds have no current intention of (a) borrowing money or (b) 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.
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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 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
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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 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.
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MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
<TABLE>
<S> <C>
Kenneth Reid* (47) General Partner and Director of Research, Rosenberg Institutional
President, Trustee Equity Management, June, 1986 to present.
Marlis S. Fritz* (47) General Partner and Director of Marketing, Rosenberg Institutional
Vice President, Trustee Equity Management, April, 1985 to present.
Nils H. Hakansson (60) Sylvan C. Coleman Professor of Finance and Accounting, Haas School
Trustee 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 Officer, Rosenberg
Trustee Institutional Equity Management, January, 1985 to present.
William F. Sharpe (63) STANCO 25 Professor of Finance, Stanford University. Chairman,
Trustee Financial Engines Incorporated, Los Altos, California (electronic
investment advice), March 1996 to present.
Po-Len Hew (31) Accounting Manager, Rosenberg Institutional Equity Management,
Treasurer October, 1989 to present.
Carolyn Demler (53) Administrative Coordinator, Rosenberg Institutional Equity
Clerk Management, December, 1988 to present.
Edward H. Lyman (53) Executive Vice President, Barr Rosenberg Investment Management,
Vice President Inc., and General Counsel to the Rosenberg Group of companies,
1990 to present.
Richard L. Saalfeld President and Chief Executive Officer of mutual fund unit of
(54) Rosenberg Institutional Equity Management from June, 1996 to
Vice President 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 L.P., 1984 to present.
Vice President
F. William Jump, Jr. Portfolio engineer, Rosenberg Institutional Equity Management,
(42) August, 1990 to present.
Vice President
</TABLE>
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<TABLE>
<S> <C>
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
</TABLE>
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* 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, 1997.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM
AGGREGATE REGISTRANT AND
COMPENSATION PENSION OR RETIREMENT ESTIMATED ANNUAL FUND COMPLEX
NAME OF PERSON FROM BENEFITS ACCRUED AS BENEFITS UPON PAID TO
POSITION REGISTRANT PART OF FUND EXPENSES RETIREMENT DIRECTORS
- ----------------------------------------------- -------------- --------------------- --------------------- --------------
<S> <C> <C> <C> <C>
Nils H. Hakansson.............................. $ 33,000 $ 0 $ 0 $ 33,000
Trustee
William F. Sharpe.............................. $ 33,000 $ 0 $ 0 $ 33,000
Trustee
</TABLE>
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.
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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.
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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.
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. 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 $30,000 for each Fund. 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 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
12
<PAGE>
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.
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.
13
<PAGE>
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 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.
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
14
<PAGE>
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
The calculation of average annual total return assumes that any dividends
and distributions are reinvested immediately, rather than paid to the investor
in cash. The ending redeemable value (variable "ERV" in the 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.
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
15
<PAGE>
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
16
<PAGE>
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
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.
17
<PAGE>
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.
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.
18
<PAGE>
Appendix I
THE FOLLOWING INFORMATION ON PAGES A-1 THROUGH A-94 PERTAINS PRIMARILY TO THE
PERFORMANCE OF PRIVATE ACCOUNTS MANAGED BY ROSENBERG INSTITUTIONAL EQUITY
MANAGEMENT, THE TRUST'S INVESTMENT ADVISOR, 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 of
Annualized Return (%) Annualized 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.
Performance calculations meet AIMR standards.
Past performance is no guarantee of future performance.
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.
Past performance is no guarantee of future performance.
A-10
<PAGE>
Return vs. Risk for Selected Investment Alternatives
(1993 - 1997)
Standard Deviation of
Annualized Annualized
Return (%) Return (%)
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
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-11
<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-12
<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-13
<PAGE>
Selected Risks
- - Mis-matching Long/Short components
- - Short selling
- - Mis-measurement of Beta
- - Poor stock selection
A-14
<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-15
<PAGE>
Industry Diversification: Shorts vs. Longs
Rosenberg Market Neutral Strategy Portfolio
<TABLE>
<CAPTION>
Short Position Long Position Net Exposure*
% of portfolio value % of portfolio value
<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
A-16
<PAGE>
Telephone, Telegraph 2.92 1.48 -1.44
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
</TABLE>
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
A-17
<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-18
<PAGE>
Active Exposure to Risk Indexes
Active Exposure
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
A-19
<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.
- -------------------
(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-20
<PAGE>
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.
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-21
<PAGE>
Rosenberg Market Neutral Strategy Risk (14)
ANNUAL STANDARD DEVIATION
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%
RANGE OF TOTAL RETURN OVER MOVING 12-MONTH PERIODS
Rosenberg T-bill Date Range
--------- ------ ----------
LOWEST -2.87% 8.03% Sept 89 - Aug 90
HIGHEST 28.10% 5.14% Jan 96 - Dec 96
- ---------------
(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.
Performance calculations meet AIMR standards.
Past performance is no guarantee of future performance.
A-22
<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-23
<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-24
<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-25
<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-26
<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.
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-27
<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-28
<PAGE>
Batting Average by Alpha Bucket
Short and Long Positions Grouped by Alpha Percent Correct
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%
A-29
<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-30
<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-31
<PAGE>
Rosenberg Market Neutral Strategy Performance Summary
Average Annual Returns for the Periods Ending December 31, 1997
One Three Five 5 Year
Year Years Years Tracking Error (19)
---- ----- ----- -------------------
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%
- --------------------------------
(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.
Performance calculations meet AIMR standards.
Past performance is no guarantee of future performance.
A-32
<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)
- --------------------------------
(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.
Performance calculations meet AIMR standards.
Past performance is no guarantee of future performance.
A-33
<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%
- ----------------------------------
(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.
Performance calculations meet AIMR standards.
Past performance is no guarantee of future performance.
A-34
<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-35
<PAGE>
Rosenberg Market Neutral Strategy Profile
December 31, 1997
<TABLE>
<CAPTION>
ASSET CLASS BENCHMARK COMPARISONS: Standard Sharpe
Performance(24) Deviation Ratio(25)
1 yr. 3 yr. 5 yr.
----- ----- -----
<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)
</TABLE>
Barr Rosenberg Market Neutral Fund
MORNINGSTAR ASSET CLASSIFICATION(30): Domestic Hybrid
DESIGNATED BENCHMARK: 90 Day T-bills
EXPENSE RATIO (SEE PROSPECTUS FOR MORE DETAIL): 2.00% (Institutional Shares)
- --------------------------------
(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%.
Past performance is no guarantee of future performance.
A-36
<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-37
<PAGE>
INTRODUCTION TO MARKET NEUTRAL INVESTING
A-38
<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-39
<PAGE>
Example
Assumptions: $100 million invested in portfolio
Long component outperforms Short component by 10%(31)
- - Market up 15%
<TABLE>
<CAPTION>
<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 component = $100 million - 10% x $100 million = $ 90 million
Value of Short component (liability) = $100 million - 20% x $100 million = $ - 80 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-40
<PAGE>
Market Neutral Example (32)
<TABLE>
<CAPTION>
<S> <C> <C>
Basic Investment Strategy In an Up Market In a Down Market
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
OVERvalued stocks
+ + +
Invest the $1 million Money market return Money market return
from the Short sales from Short sale from Short sale
in money market proceeds proceeds
instruments
BASIC INVESTMENT UP MARKET SUMMARY DOWN MARKET SUMMARY STRATEGY
- - 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-41
<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.
Long-Term Annual Standard
Annual Standard Deviation From
Asset Deviation Inception of Strategy
(3/89 -12/31/97)
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)
- ---------------
(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-42
<PAGE>
<TABLE>
<CAPTION>
SUBSTITUTING ROSENBERG MARKET NEUTRAL STRATEGY
IN A U.S. CORE PORTFOLIO CAN REDUCE RISK
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
A-43
<PAGE>
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
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
A-44
<PAGE>
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
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>
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:
2
(WEIGHT large stocks * VARIANCElarge stocks) +
2
(WEIGHT Rosenberg or intermediate bonds * VARIANCERosenberg or intermediate
bonds) +
(2* WEIGHTlarge stocks * WEIGHTRosenberg or intermediate bonds
*COVARIANCElarge 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.
A-45
<PAGE>
U.S. Intermediate-Term Government Bond data
Period under study: March 1989 through December 1997.
Notes on chart:
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-46
<PAGE>
CORRELATIONS (34) OF ROSENBERG MARKET NEUTRAL STRATEGY
INTERMEDIATE-TERM
ROSENBERG MARKET GOVERNMENT BOND
ASSET CLASS NEUTRAL CORRELATIONS CORRELATIONS
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
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-47
<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-48
<PAGE>
ON A RISK/RETURN BASIS, MARKET NEUTRAL CAN BE AN ATTRACTIVE INVESTMENT
ALTERNATIVE
- - Increased opportunity from Shorting
- - Risk
- - Return
A-49
<PAGE>
INCREASED OPPORTUNITY FROM SHORTING
A-50
<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-51
<PAGE>
Actual vs. Forecast Earnings Changes
(IBES) Earnings Forecast
Earnings Change Divided by Initial Price
----------------------------------------
IBES Forecast Actual
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
Actual vs. Forecast Earnings Changes 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-52
<PAGE>
IBES Surprise By Capitalization
Example of a Quarterly Surprise
Average Absolute
Percentage
Group Earnings Surprise
Largest Companies 1 10%
2 16%
3 19%
4 25%
5 33%
6 37%
7 35%
8 39%
9 51%
10 62%
11 83%
Smallest Companies 12 85%
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-53
<PAGE>
IBES Coverage Of Quarterly Estimates
Percent of Companies Covered by IBES
Group 1 Analyst 2 Analysts 3 or More Analysts
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%
IBES Coverage Of Quarterly Estimates 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-54
<PAGE>
PERFORMANCE
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.
A-55
<PAGE>
Rosenberg Market Neutral Strategy Performance Summary
ROSENBERG (38) 90-DAY T-BILLS ALPHA
-------------- -------------- -----
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
- ---------------
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.
Performance calculations meet AIMR standards.
A-56
<PAGE>
Monthly Performance
Rosenberg Market Neutral Strategy
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
Performance calculations meet AIMR standards.
Past performance is no guarantee of future performance. (Negative return months
are in red.)
A-57
<PAGE>
ROSENBERG MARKET NEUTRAL STRATEGY PERFORMANCE RECORD (39)
1. Annualized Returns (Net of fees)
Rosenberg 90 Day T-bills Value Added
--------- -------------- -----------
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
2. Range of Rosenberg Total Return Over Moving 12-Month Periods (3/89 - 12/97)
Rosenberg T-bill Date Range
Lowest Rosenberg Return -2.87% 8.03% Sep 89 - Aug 90
Highest Rosenberg Return 28.10% 5.14% Jan 96 - Dec 96
3. Average monthly return in up vs. down markets (S&P 500) (3/89 - 12/97)
Rosenberg Market Return
(S&P 500)
Average monthly return in up markets 0.64% 3.23%
Average monthly return in down markets 0.77% -2.67%
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>
- -------------------
(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.
Performance calculations meet AIMR standards.
A-58
<PAGE>
5. Risk: Annual Standard Deviation of Total Return
3 years 12/94 - 12/97 6.57%
5 years 12/92 - 12/97 5.70%
From inception 12/89 - 12/97 5.27%
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-59
<PAGE>
Rosenberg Market Neutral Strategy Performance
Chart:
Rosenberg Market
Neutral Strategy 90-Day T-Bill
Total Return Total Return
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
- ---------------
(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.
Performance calculations meet AIMR standards.
Past performance is no guarantee of future performance.
A-60
<PAGE>
Performance Decomposition
Representative Rosenberg Market Neutral Portfolio
(After Deduction of 2% Annual Fees)
% Return % Return % Return
on on on % Total
Longs Shorts Short Stock Rebate Return
----- ------ ------------------ ------
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
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-61
<PAGE>
Performance Decomposition
Alpha Decompositions Using Factor Model for Benchmark
Representative Rosenberg Market Neutral Portfolio
(after deduction of 2% annual fees)
Alpha from Longs Alpha from Shorts
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
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-62
<PAGE>
ROSENBERG INVESTMENT PROCESS
A-63
<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.
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
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.
- --------------------
(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 OF EXPERTISE: PROSPECT AND LIMITS, K. Anders Ericsson
and Jacqui Smith (Eds.) Cambridge University Press, 1991, pp. 195-217.
A-64
<PAGE>
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.
- --------------------------------------------------------------------------------
CONTINUATION OF FOOTNOTE 42: 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.
A-65
<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
Key Investment Models Notes
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:
MAXCO INC. ZURN INDUSTRIES NACCO INDUSTRIES
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
- 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
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
LATEST CURRENT CONTRIBUTION TO
VALUATION REPORTED MARKET TOTAL COMPANY
ELEMENT $/SHARE APPRAISAL FAIR VALUE
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
- - 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
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
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
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<PAGE>
Market Appraisals of Selected Valuation Element Notes
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.
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<PAGE>
Buying Future Earnings at a Discount:
Portfolio Earnings Yield 2 Years After Purchase
Earnings per Dollar of Initial Cost:
Market Rosenberg
------ ---------
Reported Earnings 0.068 0.075
Earnings from Continuing Operations 0.079 0.092
Buying Future Earnings at a Discount:
Portfolio Earnings Yield 2 Years After Purchase Notes
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
Rrosenberg Information Elements of Stock Selection
---------------------- ---------------------------
Market Appraisals Company Valuation
Forces Affecting Company Earnings
Profitability Change
Quality and Opinion Investor Sentiment
Measures Towards Company
|
|
Predicted Company
Returns
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.
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<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
Portfolio Optimization: Avoid Unintended Bets
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
A-76
<PAGE>
Investment Process
<TABLE>
<CAPTION>
<S><C>
RESEARCH PORTFOLIO MANAGEMENT
DATA ANALYSIS OPTIMIZATION TRADING
Market --- > Investor Sentiment --- > Trading---- ---------- Trading Cost Monitoring ----------
Data --- > Analysis Alphas | | |
| | |
--- > Market Response | | |
| | |
| | |
Opinion Data --- > Projection of | V |
--- > 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-78
<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.
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<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-81
<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.
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<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
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<PAGE>
Equitized Market Neutral
Sources of Alpha and Return
INVESTMENT VALUE BETA SOURCE OF ALPHA SOURCE OF RETURN
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
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<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%.
- - 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%
<TABLE>
<CAPTION>
<S><C>
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)
</TABLE>
- - 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%
<TABLE>
<CAPTION>
<S><C>
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%.
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<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.
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<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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<PAGE>
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?
A-88
<PAGE>
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.
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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.
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.
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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.
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
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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.
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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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 earning per share
- Capital structure change
- Earnings/price, normalized
- Recent earnings change
- Dividend Yield, last five years
- IBES earnings increase
- Dividend Yield prediction
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- 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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