AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON February 16, 1996.
File Nos.
33-23493
811-5583
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. (X)
Post-Effective Amendment No. 18
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19
FRANKLIN VALUEMARK FUNDS
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:(415) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(2)
[XX] 75 days after filing pursuant to paragraph (a)(1)
[XX] on May 1, 1996 pursuant to paragraph (2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
DECLARATION PURSUANT TO RULE 24F-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24(f)(2) under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
issuer's most recent fiscal year was filed on February 25, 1995.
FRANKLIN VALUEMARK FUNDS
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Introduction"; "General Investment
Consideration"; "Fund Investment
Objectives and Policies";
"Highlighted Risk Considerations";
"Common Investment Methods and
Risks"; "Investment Restrictions";
"General Information"
5. Management of the Fund "Management"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "Income Dividends and Capital Gains
Securities Distributions Distributions"; "Tax
Considerations"; "General
Information"
7. Purchase of Securities "Purchase, Redemption, and Exchange
Being Offered of Shares"; "Determination of Net
Asset Value"
8. Redemption or Repurchase "Purchase, Redemption, and Exchange
of Shares"; "Performance Information";
"General Information"
9. Pending Legal Proceedings Not Applicable
FRANKLIN VALUEMARK FUNDS
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
STATEMENT OF ADDITIONAL INFORMATION
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information "Information About The Trust, (See
and History also "Introduction"; and "General
Information" in the Prospectus)";
"Additional Information"
13. Fund Investment "Fund Investment Objectives and
Objectives and Policies" (See also "Fund Investment
Policies Objectives and Policies" in the
Prospectus); "Highlighted Risk
Considerations"; Common Investment
Methods and Risks"; "Fundamental
Investment Restrictions"; (See also
"Highlighted Risk Considerations";
"Common Investment Methods and Risks"
in the Prospectus)
14. Management of the Fund "Officers and Trustees"
15. Control Persons and "Officers and Trustees"
Principal Holders of
Securities
16. Investment Advisory "Investment Management and Other
and Other Services Services", (See also "Management" in
the Prospectus)"; "Additional
Information"
17. Brokerage Allocation "Policies Regarding Brokers Used on
Securities Transactions"
18. Capital Stock and "About The Trust"; (See also
Other Securities "Introduction" and "General
Information" in the Prospectus)
19. Purchase, Redemption "Additional Information Regarding
and Pricing of Valuation and Redemption of Shares of
Securities Being the Funds"; (See also "Purchase
Offered Redemption and Exchange of Shares" and
"Determination of Net Asset Value" in
the Prospectus)
20. Tax Status "Additional Information" (See also
"Tax Considerations" in the
Prospectus)
21. Underwriters Not Applicable
22. Calculation of Not Applicable
Performance Data
23. Financial Statements Not Applicable
FRANKLIN
VALUEMARK
FUNDS
PROSPECTUS MAY 1, 1996
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/342-3863
Franklin Valuemark Funds (the "Trust") is an investment company, organized as a
Massachusetts business trust, and consisting of twenty-three separate investment
portfolios or funds (the "Fund" or "Funds"), each of which has different
investment objectives. Shares of the Funds are sold only to insurance company
separate accounts to fund the benefits of variable life insurance policies or
variable annuity contracts owned by their respective policyholders or
contractholders. Certain Funds may not be available in connection with a
particular policy or contract or in a particular state. Investors should consult
the separate account prospectus of the specific insurance product that
accompanies this Trust prospectus for information on any applicable restrictions
or limitations with respect to a separate account's investments in the Funds.
This Prospectus briefly describes the information that investors should know
before investing in these Funds, including the risks associated with investing
in each Fund. Investors should read and retain this prospectus for future
reference. A Statement of Additional Information dated May 1, 1996, as may be
amended from time to time, has been filed with the Securities and Exchange
Commission. It contains additional and more detailed information about the
activities and operations of the Funds. A copy is available without charge from
the Trust, 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777 or by calling 1-800/342-3863. The Statement of Additional Information
is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS UNAUTHORIZED. NO SALES REPRESENTATIVE, DEALER OR
OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
SUMMARY OF FUND OBJECTIVES
FUND SEEKING STABILITY
OF PRINCIPAL AND INCOME
MONEY MARKET FUND ("Money Fund")1 seeks high current income, consistent with
capital preservation and liquidity. The Fund will pursue its objective by
investing exclusively in high quality money market instruments. AN INVESTMENT IN
THE MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE,
ALTHOUGH NO ASSURANCES CAN BE GIVEN THAT THE FUND WILL BE ABLE TO DO SO.
FUNDS SEEKING CURRENT INCOME
ADJUSTABLE U.S. GOVERNMENT FUND ("Adjustable Fund") seeks a high level of
current income, consistent with lower volatility of principal, by investing
primarily in adjustable rate securities which are issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
HIGH INCOME FUND2 seeks a high level of current income, with capital
appreciation as a secondary objective, by investing in debt obligations and
dividend-paying common and preferred stocks. Debt obligations include high
yield, high risk, lower rated obligations (commonly referred to as "junk bonds")
which involve increased risks related to the creditworthiness of their issuers.
INVESTMENT GRADE INTERMEDIATE BOND FUND ("Intermediate Bond Fund")1 seeks
current income, consistent with preservation of capital, primarily through
investment in intermediate-term, investment grade corporate obligations and U.S.
government securities.
TEMPLETON GLOBAL INCOME SECURITIES FUND1 (formerly the "Global Income Fund" and
referenced herein as such) seeks a high level of current income, consistent with
preservation of capital, with capital appreciation as a secondary consideration,
through investing in foreign and domestic debt obligations, including up to 25%
in high yield, high risk, lower rated debt obligations (commonly referred to as
"junk bonds"), and related currency transactions. Investing in a non-diversified
fund of global securities including those of developing markets issuers,
involves increased susceptibility to the special risks associated with foreign
investing.
THE U.S. GOVERNMENT SECURITIES FUND ("Government Fund") seeks current income and
safety of capital by investing exclusively in obligations issued or guaranteed
by the U.S. government or its agencies or instrumentalities.
ZERO COUPON FUNDS, 2000, 2005, 2010, seek a high investment return consistent
with the preservation of capital, by investing primarily in zero coupon
securities. In response to interest rate changes, these securities may
experience greater fluctuations in market value than interest-paying securities
of similar maturities. The Funds may not be appropriate for short-term investors
or those who intend to withdraw money before the maturity date.
FUNDS SEEKING GROWTH AND INCOME
GROWTH AND INCOME FUND seeks capital appreciation, with current income return as
a secondary objective, by investing primarily in U.S. common stocks, securities
convertible into common stocks, preferred stocks, and debt securities.
INCOME SECURITIES FUND1,2 seeks to maximize income while maintaining prospects
for capital appreciation by investing in a diversified portfolio of domestic and
foreign, including developing markets, debt obligations and/or equity
securities. Debt obligations include high yield, high risk, lower rated
obligations (commonly referred to as "junk bonds") which involve increased risks
related to the creditworthiness of their issuers.
REAL ESTATE SECURITIES FUND ("Real Estate Fund") seeks capital appreciation,
with current income return as a secondary objective, by concentrating its
investments in publicly traded securities of U.S. companies in the real estate
industry.
RISING DIVIDENDS FUND seeks capital appreciation, primarily through investment
in the equity securities of companies that have paid consistently rising
dividends over the past ten years. Preservation of capital is also an important
consideration. The Fund seeks current income incidental to capital appreciation.
TEMPLETON GLOBAL ASSET ALLOCATION FUND ("Asset Allocation Fund")1 seeks a high
level of total return through a flexible policy of investing in equity
securities, debt obligations, and money market instruments of issuers in any
nation, including developing markets nations. The mix of investments among the
three market segments will be adjusted in an attempt to capitalize on the total
return potential produced by changing economic conditions throughout the world.
Foreign investing involves special risks.
UTILITY EQUITY FUND ("Utility Fund")1 seeks both capital appreciation and
current income by investing in securities of domestic and foreign, including
developing markets, issuers engaged in the public utilities industry.
FUNDS SEEKING CAPITAL GROWTH
CAPITAL GROWTH FUND ("GROWTH FUND") seeks capital appreciation, with current
income as a secondary consideration. The Fund invests primarily in equity
securities, including common stocks and securities convertible into common
stocks.
PRECIOUS METALS FUND ("METALS FUND")1 seeks capital appreciation, with current
income return as a secondary objective, by concentrating its investments in
securities of U.S. and foreign companies, including those in developing markets,
engaged in mining, processing or dealing in gold and other precious metals.
SMALL CAP FUND1 seeks long-term capital growth. The Fund seeks to accomplish its
objective by investing primarily in equity securities of small capitalization
growth companies. The Fund may also invest in foreign securities, including
those of developing markets issuers. Because of the Fund's investments in small
capitalization companies, an investment in the Fund may involve greater risks
and higher volatility and should not be considered a complete investment
program.
TEMPLETON DEVELOPING MARKETS EQUITY FUND ("Developing Markets Fund")1 seeks
long-term capital appreciation. The Fund seeks to achieve this objective by
investing primarily in equities of issuers in countries having developing
markets. The Fund is subject to the heightened foreign securities investment
risks that accompany foreign developing markets and an investment in the Fund
may be considered speculative.
TEMPLETON GLOBAL GROWTH FUND ("Global Growth Fund")1 seeks long-term capital
growth. The Fund hopes to achieve its objective through a flexible policy of
investing in stocks and debt obligations of companies and governments of any
nation, including developing markets. The realization of income, if any, is only
incidental to accomplishment of the Fund's objective of long-term capital
growth. Foreign investing involves special risks.
TEMPLETON INTERNATIONAL EQUITY FUND ("International Equity Fund")1 seeks
long-term growth of capital. Under normal conditions, the International Equity
Fund will invest at least 65% of its total assets in an internationally mixed
portfolio of foreign equity securities which trade on markets in countries other
than the U.S., including developing markets, and are (i) issued by companies
domiciled in countries other than the U.S., or (ii) issued by companies that
derive at least 50% of either their revenues or pre-tax income from activities
outside of the U.S. Foreign investing involves special risks.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND1 ("International Smaller
Companies Fund") seeks long-term capital appreciation. The Fund seeks to achieve
this objective by investing primarily in equity securities of smaller companies
outside the U.S., including developing markets. Foreign investing involves
special risks and smaller company investments may involve higher volatility. An
investment in the Fund should not be considered a complete investment program.
TEMPLETON PACIFIC GROWTH FUND ("Pacific Fund")1 seeks long-term growth of
capital, primarily through investing at least 65% of its total assets in equity
securities which trade on markets in the Pacific Rim, including developing
markets, and are (i) issued by companies domiciled in the Pacific Rim or (ii)
issued by companies that derive at least 50% of either their revenues or pre-tax
income from activities in the Pacific Rim. Investing in a portfolio of
geographically concentrated foreign securities, including developing markets,
involves increased susceptibility to the special risks of foreign investing and
an investment in the Fund may be considered speculative.
1THE ASSET ALLOCATION, DEVELOPING MARKETS, GLOBAL GROWTH, GLOBAL INCOME, INCOME
SECURITIES, INTERMEDIATE BOND, INTERNATIONAL EQUITY, INTERNATIONAL SMALLER
COMPANIES, MONEY MARKET, PACIFIC, PRECIOUS METALS, SMALL CAP, AND UTILITY FUNDS
MAY INVEST MORE THAN 10% OF THEIR TOTAL NET ASSETS IN FOREIGN SECURITIES WHICH
ARE SUBJECT TO SPECIAL AND ADDITIONAL RISKS RELATED TO CURRENCY FLUCTUATIONS,
MARKET VOLATILITY, AND ECONOMIC, SOCIAL, AND POLITICAL UNCERTAINTY; INVESTING IN
DEVELOPING MARKETS INVOLVES SIMILAR BUT HEIGHTENED RISKS RELATED TO THE
RELATIVELY SMALL SIZE AND LESSER LIQUIDITY OF THESE MARKETS. SEE "HIGHLIGHTED
RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
2THE HIGH INCOME AND INCOME SECURITIES FUNDS MAY INVEST UP TO 100% OF THEIR
RESPECTIVE NET ASSETS IN DEBT OBLIGATIONS RATED BELOW INVESTMENT GRADE, COMMONLY
KNOWN AS "JUNK BONDS," OR IN OBLIGATIONS WHICH HAVE NOT BEEN RATED BY ANY RATING
AGENCY. INVESTMENTS RATED BELOW INVESTMENT GRADE INVOLVE GREATER RISKS,
INCLUDING PRICE VOLATILITY AND RISK OF DEFAULT THAN INVESTMENTS IN HIGHER RATED
OBLIGATIONS. INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THESE FUNDS IN LIGHT OF THE SECURITIES IN WHICH THEY INVEST. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS."
TABLE OF CONTENTS
CONTENTS PAGE
FINANCIAL HIGHLIGHTS
INTRODUCTION
GENERAL INVESTMENT
CONSIDERATIONS
FUND INVESTMENT OBJECTIVES
AND POLICIES
STABILITY OF PRINCIPAL AND INCOME
Money Market Fund
CURRENT INCOME
Adjustable U.S. Government Fund
High Income Fund
Investment Grade Intermediate Bond Fund
Templeton Global Income Securities Fund (formerly ("Global Income Fund")
U.S. Government Securities Fund
Zero Coupon Funds, 2000, 2005, 2010
GROWTH AND INCOME
Growth and Income Fund
Income Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
Utility Equity Fund
CAPITAL GROWTH
Capital Growth Fund
Precious Metals Fund
Small Cap Fund
Templeton Developing Markets
Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton International Smaller Companies Fund
Templeton Pacific Growth Fund
HIGHLIGHTED RISK CONSIDERATIONS
Foreign Transactions
General Considerations
Investments in Developing Markets
Certain Restrictions
Currency Risks and their Management
Interest Rate and Currency Swaps
Investments in Depository Receipts
Lower Rated Debt Obligations
The Funds' Portfolios
Asset Composition Table
COMMON INVESTMENT METHODS AND RISKS
Borrowing
Concentration
Convertible Securities
Convertible Securities
Enhanced Convertible Securities
Synthetic Convertible Securities
Debt Obligations
Corporate Debt Obligations
Money Market Instruments
Mortgage-Backed and
Asset-Backed Securities
Stripped Mortgage-Backed Securities
Municipal Securities
U.S. Government Securities
Zero Coupon Securities
Derivatives
Diversification
Loan Participations
Loans of Portfolio Securities
Options and Futures Contracts
Portfolio Turnover
Repurchase and Reverse
Repurchase Agreements
Repurchase Agreements
Reverse Repurchase Agreements
Restricted and Illiquid Securities
"Rolls"
Small Capitalization Issuers
Structured Notes
Temporary Investments
Trade Claims
Warrants
"When-Issued" and "Delayed
Delivery Transactions
INVESTMENT RESTRICTIONS
MANAGEMENT
Trustees and Officers
Managers
Management Fees
Operating Expenses
Broker/Dealer Selection
Subadvisors
Business Manager
Portfolio Operations
Biographical Information
PURCHASE, REDEMPTION, AND
EXCHANGE OF SHARES
INCOME DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS
DETERMINATION OF
NET ASSET VALUE
TAX CONSIDERATIONS
PERFORMANCE INFORMATION
GENERAL INFORMATION
Custody of Assets
Distribution Plans
Reports
Transfer Agent
Voting Privileges and Other Rights
APPENDIX
Description of Bond Ratings
Description of Commercial Paper Ratings
FINANCIAL HIGHLIGHTS
(Financial Highlights to be added in a later filing)
INTRODUCTION
Franklin Valuemark Funds (the "Trust") is an open-end management investment
company, or mutual fund, organized as a Massachusetts business trust on April
26, 1988 and registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 (the "1940 Act"). The Trust currently
consists of the twenty-three separate investment portfolios or funds listed on
the cover (the "Funds" or a "Fund"), each of which is, in effect, a separate
mutual fund. The Trust issues a separate series of shares of beneficial interest
for each Fund. An investor, by investing in a Fund, becomes entitled to a pro
rata share of all dividends and distributions arising from the net income and
capital gains on the investments of that Fund. Likewise, an investor shares pro
rata in any losses on the investments of that Fund.
Shares of the Trust are currently sold only to separate accounts (the "Variable
Accounts") of the Allianz Life Insurance Company of North America and its
affiliates ("Allianz Life") to fund the benefits under variable life insurance
policies and variable annuity contracts (collectively the "Policies") issued by
Allianz Life. The Variable Accounts are divided into sub-accounts (the
"Sub-Accounts"), each of which will invest in one of the Funds, as directed
within the limitations described in the appropriate Policies by the owners of
the respective Policies issued by Allianz Life (collectively the
"Policyholders"). Some of the current Funds in the Trust may not be available in
connection with a particular Policy or in a particular state. Policyholders
should consult the accompanying prospectus describing the specific Policy or
Allianz Life for information on available Funds and any applicable limitations.
GENERAL INVESTMENT CONSIDERATIONS
Each Fund has one or more investment objectives and related investment policies
and uses various investment techniques to pursue these objectives and policies.
There can be no assurance that any Fund will achieve its investment objective or
objectives. THE INVESTMENT OBJECTIVE OR OBJECTIVES OF EACH FUND ARE "FUNDAMENTAL
POLICIES" WHICH MEANS THEY MAY NOT BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
Certain investment restrictions described here or in the Statement of Additional
Information ("SAI") may also be identified as "fundamental." The investment
strategies, policies, and restrictions designed to realize the stated
objectives, however, are typically not fundamental and may be changed by the
Trust's Board of Trustees without shareholder approval.
Investors should not consider any one Fund alone to be a complete investment
program and should evaluate each Fund in relation to their personal financial
situation, goals, and tolerance for risk. All of the Funds are subject to the
risk of changing economic conditions, as well as the risk related to the ability
of the Managers to make changes in the portfolio composition of the Fund in
anticipation of changes in economic, business, and financial conditions. As with
any security, a risk of loss of all or a portion of the principal amount
invested accompanies an investment in the shares of any of the Funds.
The different types of securities, investments, and investment techniques used
by each Fund all have attendant risks of varying degrees and are described in
the pages that follow. As an overview, investors should bear in mind with
respect to equity securities, there can be no assurance of capital appreciation
and there is a substantial risk of decline. With respect to debt obligations,
there exists the risk that the issuer of a security may not be able to meet its
obligations on interest or principal payments at the time required by the
instrument or at all. In addition, the value of debt obligations generally rises
and falls inversely with prevailing current interest rates. Increased rates of
interest which frequently accompany higher inflation and/or a growing economy
are likely to have a negative effect on the value of shares of Funds which
invest in debt obligations. In addition to the factors which affect the value of
individual securities, a Policyholder may anticipate that the value of the
shares of a Fund will fluctuate with movements in the broader equity and bond
markets as well. A decline in the stock market of any country in which a Fund is
invested or changes in currency valuations may also affect the price of shares
of a Fund. History reflects both increases and decreases in interest rates,
worldwide stock markets, and currency valuations, and these may reoccur
unpredictably in the future.
AS STATED IN THE DESCRIPTIONS OF THE INDIVIDUAL FUNDS BELOW, AN INVESTMENT IN
CERTAIN OF THE FUNDS INVOLVES SPECIAL ADDITIONAL RISKS AS A RESULT OF THEIR
ABILITY TO INVEST A SUBSTANTIAL PORTION OF THEIR ASSETS IN HIGH YIELD, HIGH
RISK, LOWER RATED DEBT OBLIGATIONS, FOREIGN INVESTMENTS INCLUDING THOSE OF
"DEVELOPING MARKET" ISSUERS LOCATED IN EMERGING NATIONS AS DEFINED BY THE WORLD
BANK, SPECIALIZED INDUSTRY SECTORS, DERIVATIVE INSTRUMENTS OR COMPLEX
SECURITIES. These and other types of investments and investment techniques
common to more than one Fund are described in greater detail, including the
risks of each and any limitations, in "Highlighted Risk Considerations," "Common
Investment Methods and Risks," and the SAI. ALL POLICIES AND PERCENTAGE
LIMITATIONS ARE CONSIDERED AT THE TIME OF PURCHASE. Each of the Funds will not
necessarily use the strategies described to the full extent permitted unless the
Managers believe that doing so will help a Fund reach its objectives, and not
all instruments or strategies will be used at all times.
FUND INVESTMENT OBJECTIVES AND POLICIES
FUND SEEKING
STABILITY OF PRINCIPAL AND INCOME
MONEY MARKET FUND
The investment objective of the Money Market Fund is to obtain as high a level
of current income (in the context of the type of investments available to the
Fund) as is consistent with capital preservation and liquidity. The Fund will
seek to maintain a $1 per share net asset value, but there is no guarantee that
it will be successful in doing so.
The Fund will pursue this objective by investing, in accordance with procedures
adopted under Rule 2a-7 under the 1940 Act, only in U.S. dollar denominated
instruments which the Board of Trustees determines present minimal credit risks
and which are, as required by federal securities laws, rated in one of the two
highest rating categories as determined by nationally recognized statistical
rating organizations ("NRSROs"), or which if unrated are of comparable quality,
with remaining maturities of 397 calendar days or less ("Eligible Securities").
Because the Fund will limit its investments to high quality securities, it will
experience generally lower yields than if the Fund purchased securities of lower
quality and correspondingly greater risk.
Eligible Securities include the following:
1. securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities ("U.S.
Government Securities");
2. obligations issued or guaranteed by U.S. banks with assets of at least one
billion dollars, foreign branches of U.S. banks ("Eurodollar Investment"),
U.S. branches of foreign banks ("Yankee Dollar Investments"), and foreign
branches of foreign banks (including certificates of deposit, bank notes,
loan participation interests, commercial paper, unsecured promissory notes,
time deposits, and bankers' acceptances), provided that where the
obligation is issued by a branch, the parent bank has more than five
billion dollars in total assets at the time of purchase ("Bank
Obligations");
3. commercial paper (unsecured promissory notes including variable amount
master demand notes) issued by domestic or foreign issuers;
4. other short-term obligations issued or guaranteed by U.S. corporations, or
obligations issued by foreign entities ("Corporate Obligations");
5. taxable municipal securities, the interest on which is not exempt from
Federal income tax, issued by or on behalf of states, territories, and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies, and instrumentalities, up to 10% of the Fund's
assets;
6. unrated notes, paper, obligations or other instruments that the Manager
determines to be of comparable high quality; and
7. repurchase agreements with respect to any of the foregoing obligations.
U.S. Government Securities, Bank and Corporate Obligations may have fixed,
floating, or variable interest rates. NRSROs include Standard & Poor's
Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, Inc., Duff and Phelps, Inc., IBCA Limited and its affiliate
IBCA Inc., and Thompson BankWatch. See Appendix for an explanation of ratings by
S&P and Moody's.
PORTFOLIO MATURITY. All Fund portfolio instruments will mature within 397
calendar days or less of the time that they are acquired. The average maturity
of the Fund's portfolio securities based on their dollar value will not exceed
90 days at the time of each investment. If the disposition of a portfolio
security results in a dollar-weighted average portfolio maturity in excess of 90
days, the Fund will invest its available cash in such manner as to reduce its
dollar-weighted average portfolio maturity to 90 days or less as soon as is
reasonably practicable.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its assets in obligations
of foreign branches of U.S. or foreign banks. The Fund's investments in foreign
obligations, although always dollar denominated, involve risks related to market
volatility, economic, social, and political uncertainty, that are different from
investments in similar obligations of domestic entities. INVESTMENT IN FOREIGN
SECURITIES INVOLVES SPECIAL AND ADDITIONAL RISKS. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS" AND THE SAI.
OTHER INVESTMENT POLICIES. Investments in obligations of U.S. branches of
foreign banks, which are considered domestic banks, may only be made if such
branches have a federal or state charter to do business in the U.S. and are
subject to U.S. regulatory authorities. The Fund may invest up to 10% of its
assets in time deposits with maturities in excess of seven calendar days. (Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate.)
The Fund will not invest more than 5% of its total assets in Eligible Securities
of a single issuer, other than U.S. Government Securities, rated in the highest
category by the requisite number of rating agencies, except that the Fund may
exceed that limit as permitted by SEC rules for a period of up to three business
days; and the Fund will not invest (a) the greater of 1% of the Fund's total
assets or one million dollars in Eligible Securities issued by a single issuer
rated in the second highest category, or (b) more than 5% of its total assets in
Eligible Securities of all issuers rated in the second highest category.
Under the policies discussed in "Common Investment Methods and Risks" and in the
SAI, the Fund may acquire U. S. Government Securities on a when-issued or
delayed delivery basis, lend portfolio securities, enter into repurchase
agreements, and engage in other activities specifically identified for this
fund.
FUNDS SEEKING CURRENT INCOME
ADJUSTABLE U.S. GOVERNMENT FUND
The investment objective of the Adjustable U.S. Government Fund is to seek a
high level of current income, consistent with lower volatility of principal. The
Fund pursues its investment objective by investing primarily (at least 65% of
its total assets) in adjustable rate securities with interest rates that reset
at periodic intervals and which are issued or guaranteed by the U.S. government,
its agencies or instrumentalities. The above stated investment policies are
fundamental and may not be changed without shareholder approval.
The Fund currently consists primarily of adjustable rate mortgage securities or
other securities collateralized by or representing an interest in mortgages
(collectively "mortgage securities"), but this is not a fundamental policy and
may be changed as the nature of the adjustable rate securities market changes.
In addition to these mortgage securities, the Fund may invest up to 35% of its
total assets in (i) U.S. Government Securities and repurchase agreements
collateralized by such obligations and (ii) Money Market Instruments.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage
securities which are collateralized by mortgages with adjustable rather than
fixed interest rates. The ARMS in which the Fund invests are issued primarily by
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage Corporation
("FHLMC"), and are actively traded in the secondary market. The underlying
mortgages which collateralize ARMS issued by GNMA are fully guaranteed by the
Federal Housing Administration ("FHA") or the Veterans Administration ("VA"),
while those collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to standard underwriting size and
maturity constraints.
Most mortgage securities which are issued or guaranteed by the U.S. government,
its agencies or instrumentalities represent an interest in pools of fixed-rate
mortgages. The Fund believes, however, that by investing primarily in mortgage
securities which will have variable rates of interest, it will achieve a more
consistent and less volatile net asset value than is characteristic of mutual
funds that invest primarily in mortgage securities paying a fixed rate of
interest.
Unlike fixed-rate mortgages, which generally decline in value during periods of
rising interest rates, adjustable rate mortgage securities allow the Fund to
participate in increases in interest rates through periodic adjustments in the
coupon rates of the underlying mortgages, resulting in both higher current
yields and lower price fluctuations. Furthermore, if prepayments of principal
are made on the underlying mortgages during periods of rising interest rates,
the Fund generally will be able to reinvest such amounts in securities with a
higher current rate of return. The Fund will not, however, benefit from
increases in interest rates to the extent that interest rates rise to the point
where they cause the current coupon of adjustable rate mortgages held as
investments to exceed the maximum allowable annual or lifetime reset limits (or
"cap rates") for a particular mortgage. Also, as described below, the Fund's net
asset value could vary to the extent that current yields on mortgage-backed
securities are different than market yields during interim periods between
coupon reset dates.
The adjustable interest rate feature of the underlying mortgages generally will
act as a buffer to reduce sharp changes in the Fund's net asset value in
response to normal interest rate fluctuations. As the coupon rates on the
mortgages underlying the Fund's investments are reset periodically, yields of
portfolio securities will gradually align themselves to reflect changes in
market rates and should cause the net asset value of the Fund to fluctuate less
dramatically than it would if the Fund invested in more traditional long-term,
fixed-rate debt obligations. During periods of rising interest rates, however,
changes in the coupon rate lag behind changes in the market rate, resulting in a
lower net asset value until the coupon resets to market rates. Thus, investors
could suffer principal loss if they sold their shares of the Fund before the
coupon rates on the underlying mortgages are adjusted to reflect current market
rates. During periods of extreme fluctuations in interest rates, the Fund's net
asset value will fluctuate as well. Since most mortgage securities in the Fund's
portfolio will generally have annual reset caps of 100 to 200 basis points,
fluctuation in interest rates above these levels could cause such mortgage
securities to "cap out" and to behave more like long-term, fixed-rate debt
obligations.
The mortgage securities in which the Fund principally invests, ARMS, differ from
conventional bonds in that principal is paid back over the life of the ARMS
rather than at maturity. As a result, the holder of the ARMS (i.e., the
Adjustable Fund) receives monthly scheduled payments of principal and interest,
and may receive unscheduled principal payments representing prepayments on the
underlying mortgages. When the holder reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest which is
lower than the rate on the existing ARMS. For this reason, ARMS may be less
effective than other types of U.S. Government Securities as a means of "locking
in" long-term interest rates.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). The Fund may invest in CMOs, which
are bonds collateralized by pools of mortgage loans and created by commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers, and other U.S. issuers. Timely payment of interest and
principal (but not the market value) of these pools is supported by various
forms of insurance or guarantees issued by U.S. government agencies, private
issuers, and mortgage poolers; the obligation itself, however, is not
guaranteed. All CMOs purchased by the Fund will be either issued by a U.S.
government agency or rated in the highest category by a NRSRO.
RESETS. The interest rates paid on the ARMS and CMOs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are several main categories of
indices: those based on U.S. Treasury securities, those based on the London
Interbank Offer Rate ("LIBOR"), and those derived from a calculated measure such
as a cost of funds index or a moving average of mortgage rates.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS and CMOs
in which the Fund invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may change up
or down (1) per reset or adjustment interval and (2) over the life of the loan.
Some residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments rather than
limiting interest rate changes. These payment caps may result in negative
amortization (that is, an increase in the principal due). In periods of rising
interest rates, certain coupons may be temporarily "capped out" resulting in
declines in the prices of those securities and, therefore, a negative effect on
share price. Conversely, in periods of declining interest rates, certain coupons
may be temporarily "floored out" resulting in an increase in the prices of those
securities and therefore, a positive effect on the Fund's share price.
STRIPPED MORTGAGE SECURITIES. The Fund may also invest in stripped mortgage
securities, which are derivative multiclass mortgage securities. Stripped
mortgage securities may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans.
Stripped mortgage securities have greater market volatility than other types of
mortgage securities in which the Fund invests. Stripped mortgage securities are
usually structured with two classes that receive different proportions of the
interest and principal distributions on a pool of mortgage assets. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). These securities are extremely volatile and the
Fund may fail to fully recoup its initial investment in these securities even if
the securities are rated in the highest rating categories, AAA or Aaa, by S&P or
Moody's, respectively.
Some of these securities may generally be illiquid. At present, all such
securities will be treated as illiquid, and to such extent, together with any
other illiquid investments, will not exceed 10% of the Fund's net assets. The
Trust's Board of Trustees may in the future adopt procedures under which
government-issued IOs and POs backed by fixed-rate mortgages would be deemed to
be liquid and the Fund would, therefore, treat such securities as liquid without
notice to shareholders.
OTHER POLICIES. The Fund may also invest up to 5% of its assets in inverse
floaters. Inverse floaters are derivative instruments with floating or variable
interest rates that move in the opposite direction, at an accelerated speed, to
short-term interest rates and may be considered predominantly speculative.
Under the policies discussed in "Common Investment Methods and Risks" and in the
SAI, the Fund may also enter into covered mortgage "dollar rolls," invest in
zero coupon securities, including FICO STRIPs, engage in repurchase,
"when-issued," and delayed-delivery transactions, loan its portfolio securities,
and other activities specifically identified for this Fund.
HIGH INCOME FUND
The principal investment objective of the High Income Fund is to earn a high
level of current return. As a secondary objective, the Fund seeks capital
appreciation to the extent consistent with its principal objective.
SELECTION OF PORTFOLIO SECURITIES. The Fund may invest in both debt obligations
and dividend-paying common or preferred stocks, including high risk securities,
and will seek to invest in whatever type of investment is offering the highest
yield and expected total return without excessive risk at the time of purchase.
Current yield is the primary criterion used by the Fund in selecting securities
for investment, although potential for capital appreciation may also be
considered.
In the event of a corporate restructuring or bankruptcy reorganization of an
issuer whose securities are owned by the Fund, the Fund may receive securities
different from those originally purchased, e.g., common stock that is not
dividend paying, bonds with a lower coupon or more junior status, or convertible
securities. The Fund is not obligated to sell such securities immediately, if
the Manager believes, based on its own analysis, that the longer term outlook is
favorable and there is the potential for a higher total return by holding such
investments.
The Fund may also invest in lower rated zero-coupon, deferred interest and
pay-in-kind obligations, which may involve special risk considerations. See
"Common Investment Methods and Risks."
CREDIT QUALITY. When purchasing debt obligations, the Fund may invest in
obligations in any rating category (including obligations in the lowest rating
categories) or unrated obligations, depending upon prevailing market and
economic conditions. BECAUSE OF THE FUND'S POLICY OF INVESTING IN HIGHER
YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE FUND IS ACCOMPANIED
BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED,
LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE FUND SHOULD
EVALUATE THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK.
It is the Fund's current intention not to purchase debt obligations, including
convertible bonds, rated below Caa by Moody's or CCC by S&P; or, if unrated,
comparable obligations in the view of the Manager. The lower rated obligations
in which the Fund may invest (sometimes referred to as "junk bonds") are
considered by S&P and Moody's, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and therefore entail special risks.
The Fund will not purchase issues that are in default. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS OBLIGATIONS," "COMMON INVESTMENT
METHODS AND RISKS," AND THE SAI FOR ADDITIONAL INFORMATION, THE APPENDIX FOR A
DISCUSSION OF THE RATING CATEGORIES, AND THE "ASSET COMPOSITION TABLE" FOR THE
RATINGS OF THE DEBT OBLIGATIONS IN THE FUND AS OF DECEMBER 31, 1995.
These ratings, which represent the opinions of the rating services, do not
reflect the risk of market fluctuations nor are they absolute credit standards.
Ratings will be considered but will not be a determining or limiting factor.
Rather than relying principally on the ratings assigned by rating services, the
Manager conducts its own investment analysis based on such factors as:
anticipated cash flow; interest or dividend coverage; asset coverage; earnings
prospects; the experience and managerial strength of the issuer; responsiveness
to changes in interest rates and business conditions; debt obligations maturity
schedules and borrowing requirements; and the issuer's changing financial
condition and public recognition thereof.
In the event the rating on an issue held in the Fund's portfolio is changed by
the ratings service or the obligation goes into default, such event will be
considered by the Fund in its evaluation of the overall investment merits of
that security but will not necessarily result in an automatic sale of the
security.
Certain of the high yield obligations in which the Fund may invest may be
purchased at a discount. Such investments, when held to maturity or retired, may
include an element of gain (which may be treated as ordinary income or capital
gain for tax purposes). The Fund does not intend to hold obligations for the
purpose of achieving such gains, but generally will hold them as long as current
yields on these investments remain attractive. Capital losses may be realized
when obligations purchased at a premium are held to maturity or are called or
redeemed at a price lower than their purchase price. Capital gains or losses
also may be realized upon the sale of obligations.
Because a substantial portion of this Fund's investments at any particular time
may consist of lower rated debt obligations, changes in the level of interest
rates, among other things, will likely have an increased effect on the value of
the Fund's holdings and thus the value of the Fund's shares.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Common Investment
Methods and Risks," "Highlighted Risk Considerations," and the SAI, the Fund may
acquire loan participations, purchase debt obligations on a "when-issued" basis,
write covered call options, loan its portfolio securities, enter into repurchase
transactions and forward currency exchange contracts, participate in interest
rate swaps, invest in foreign securities including developing markets, and
engage in other activities specifically identified for this Fund.
INVESTMENT GRADE INTERMEDIATE BOND FUND
The investment objective of the Investment Grade Intermediate Bond Fund is to
provide current income, consistent with preservation of capital, primarily
through investment in intermediate-term, investment grade corporate obligations
and U.S. government securities.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund seeks to meet its objective by
investing at least 65% of its assets in a diversified portfolio of:
(1) U.S. dollar-denominated, debt obligations such as bonds, notes and
debentures, which are issued by domestic or foreign corporations and rated
at the time of purchase Baa or better by Moody's or BBB or better by S&P
or, if unrated, deemed to be of comparable quality by the Manager;
(2) securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities, including
mortgage-backed securities; and
(3) cash and Money Market Instruments.
The Fund may invest in all types of U.S. Government Securities, including U.S.
Treasury bills, notes, and bonds with varying interest rates, maturities and
dates of issuance and obligations issued or guaranteed by U.S. government
agencies and instrumentalities. Some of these investments are supported by the
full faith and credit pledge of the U.S. government, while others are supported
principally by the issuing agency.
The Fund may also invest in collateralized obligations (sometimes referred to as
"asset-backed securities"), which generally are bonds issued by single purpose,
stand-alone finance subsidiaries or trusts of financial institutions, government
agencies, investment bankers or other similar institutions, such as
Collateralized Automobile Receivables ("CARs") and CMOs. All such collateralized
obligations will either be issued by a U.S. government agency or rated in the
highest category by an NRSRO.
CREDIT QUALITY. The Fund will only invest in debt obligations that are
investment grade, i.e., within the four highest bond ratings of either Moody's
or S&P, or if unrated, deemed to be of comparable quality by the Manager. These
are issues rated at least Baa by Moody's or BBB by S&P (see Appendix). While
bonds carrying the fourth highest bond rating are viewed to have adequate
capacity for payment of principal and interest, investments in such securities
involve a higher degree of risk than those in the higher rating categories and
such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well. It is currently anticipated that a minimum
of 50% of the Fund's investments will be rated in the top three categories,
i.e., at least A by Moody's or by S&P or, if unrated, will be judged to be at
least of comparable quality as determined by the Fund's Manager, but this is not
a fundamental policy of the Fund and may be changed without notice to
shareholders.
Rather than relying principally on the ratings assigned by rating services,
however, the Manager performs its own internal investment analysis of debt
obligations being considered for the Fund's portfolio. Investments will also be
evaluated in the context of economic and political conditions in the issuer's
domicile. In the event the rating on an issue held in the Fund's portfolio is
changed by the ratings service, such change will be considered by the Fund in
its evaluation of the overall investment merits of that security but will not
necessarily result in an automatic sale of the security.
DOMESTIC AND FOREIGN ISSUERS. The Fund's investments may be in both domestic and
foreign issuers. While 65% of the Fund's total assets will be invested in U.S.
dollar denominated debt obligations, the remaining 35% may be invested in bonds,
to the extent available and permissible, issued by foreign governments
(including Canadian provinces and their instrumentalities), or by supranational
entities, domestic or foreign equities, debt obligations which are denominated
in foreign currencies, and currency deposits or equivalents. A supranational
entity is an entity designated or supported by the national government of one or
more countries to promote economic reconstruction or development, e.g., the
World Bank. The Fund is further authorized to invest in Semi-Governmental
Securities. Although the Fund may, typically it does not, invest in developing
markets.
The Fund may invest in securities issued in any currency and may hold foreign
currency to the extent consistent with its objectives and policies described
above. Securities of issuers within a given country may be denominated in the
currency of that or another country, or in multinational currency units. The
Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
INVESTMENT IN FOREIGN SECURITIES AND IN DEVELOPING MARKETS INVOLVE SPECIAL AND
ADDITIONAL RISKS.
SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" AND THE SAI.
MATURITY OF PORTFOLIO INVESTMENTS. Under normal economic conditions, the Fund
will invest at least 65% of its assets in intermediate term obligations.
Intermediate term obligations typically will have effective remaining maturities
of between two and ten years at the time of purchase. The remaining 35% may be
invested in obligations, to the extent available and permissible, which have
remaining maturities of less than two years or more than ten years at the time
of purchase.
When purchasing "putable" bonds (obligations which entitle each holder to
require the obligor to redeem the securities at the holder's option on a date or
dates prior to the final stated maturity), the Fund may consider the optional
redemption date or dates as the effective maturity of the obligations. When
purchasing obligations which require the obligor to prepay periodically portions
of the obligation prior to the stated final maturity (whether by operation of a
fixed, known, pro rata sinking fund or, as in collateralized securities, by the
periodic passing through of variable payments made to the issuer on the
underlying collateral), the expected average life or average term of the
investment may also be deemed to be its effective maturity.
At times, particularly during periods when interest rates on short term
obligations are significantly lower than those on intermediate or longer term
obligations, the Fund's strategy is designed to seek a higher yield than that
available from a money market fund, while attempting to avoid the potential
risks to principal often associated with both non-investment grade securities
and longer-term instruments.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Common Investment
Methods and Risks," "Highlighted Risk Considerations," and in the SAI, the Fund
may enter into "U.S. Treasury Rolls" and repurchase transactions, and may also
write covered call options, purchase put options, enter into contracts for the
purchase or sale for future delivery of U.S. Treasury or foreign securities, or
contracts based upon financial indices, loan its portfolio securities, and
engage in other activities specifically identified for this Fund.
TEMPLETON GLOBAL INCOME SECURITIES FUND
(formerly, "Global Income Fund")
The investment objective of the Templeton Global Income Securities Fund is to
provide high current income, consistent with preservation of capital, with
capital appreciation as a secondary consideration.
Portfolio Investments. The Fund will pursue its objectives by investing at least
65% of its net assets in both domestic and foreign debt obligations including
those in developing markets and related foreign currency transactions.
Investments will be selected to provide a high current yield and currency
stability, or a combination of yield, capital appreciation, or currency
appreciation consistent with the Fund's objectives. As a global fund, the Fund
may invest in securities issued in any currency and may hold foreign currencies.
The Manager intends to manage the Fund's exposure to various currencies, and may
from time to time make extensive use of forward currency exchange contracts or
options on currencies for hedging purposes. INVESTORS SHOULD CONSIDER CAREFULLY
THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT
ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS."
The Fund may invest in debt obligations or equity securities of any type of
issuer, including domestic and foreign corporations, domestic and foreign banks
(with assets in excess of one billion dollars), and other business
organizations, domestic and foreign governments and their political
subdivisions, including the U.S. government, its agencies, and authorities or
instrumentalities, and supranational organizations.
Under normal market conditions, the Fund will have at least 25% of its total
assets invested in debt obligations issued or guaranteed by foreign governments.
Securities issued by central banks which are guaranteed by their national
governments are considered to be government securities. Bonds of foreign
governments or their agencies which may be purchased by the Fund may be less
secure than those of U.S. government issuers.
The Fund is also authorized to invest in debt obligations of supranational
entities. A supranational entity is an entity designated or supported by the
national government of one or more countries to promote economic reconstruction
or development. Examples of supranational entities include, among others, the
World Bank, the European Investment Bank and the Asian Development Bank. The
Fund is further authorized to invest in "Semi-Governmental Securities," which
are debt obligations issued by entities owned by either a national, state or
equivalent government or are obligations of one of such government jurisdictions
which are not backed by its full faith and credit and general taxing powers.
Other debt obligations of both domestic and foreign issuers in which the Fund
may invest include all types of long-term or short-term debt obligations, such
as bonds, debentures, notes, convertible debt obligations, and commercial paper.
These debt obligations may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
obligations and common stock are offered as a unit).
CREDIT QUALITY. The Fund may invest in high yield, high risk, lower rated debt
obligations, including convertible bonds, that are rated at least B by Moody's
or S&P or, if unrated, are at least of comparable quality as determined by the
Manager. Many debt obligations of foreign issuers, and especially developing
markets issuers, are not rated by U.S. rating agencies and their selection
depends on the Manager's internal analysis. Securities rated BB or lower
(sometimes referred to as "junk bonds") are regarded as predominately
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and therefore involve
special risks; investments in such securities will not exceed 25% of the Fund's
net assets. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS,"
"COMMON INVESTMENT METHODS AND RISKS," AND THE SAI FOR ADDITIONAL INFORMATION,
THE APPENDIX FOR A DISCUSSION OF THE RATING CATEGORIES, AND THE "ASSET
COMPOSITION TABLE" FOR THE RATINGS OF THE DEBT OBLIGATIONS IN THE FUND AS OF
DECEMBER 31, 1995.
COUNTRIES OF PRINCIPAL INVESTMENT. Under normal circumstances, at least 65% of
the Fund's assets will be invested in the securities of issuers located in at
least three countries, one of which may be the U.S. Securities of issuers within
a given country may be denominated in the currency of that or another country,
or in multinational currency units such as the European Currency Unit ("ECU").
The Fund will allocate its assets among securities of various issuers,
geographic regions, and currencies in a manner which is consistent with its
objectives, based upon relative interest rates among currencies, the outlook for
changes in interest rates, and anticipated changes in worldwide exchange rates.
In considering these factors, a country's economic and political conditions,
such as inflation rate, growth prospects, global trade patterns and government
policies will be evaluated.
It is currently anticipated that the Fund's assets will be invested principally
within Australia, Canada, Japan, New Zealand, the U.S., Scandinavia, and Western
Europe, and in securities denominated in the currencies of these countries or
denominated in multinational currency units such as the ECU. The Fund may also
acquire securities and currency in less developed countries as well as in
developing countries. Investments in foreign securities, especially developing
markets, involve special and additional risks related to currency fluctuations,
market volatility and economic, social, and political uncertainty that are
different from investments in similar obligations of domestic entities. See
"Highlighted Risk Considerations, Foreign Transactions" and the SAI.
PORTFOLIO MATURITY. The Fund may invest in debt obligations with varying
maturities. Under current market conditions, it is expected that the
dollar-weighted average maturity of the Fund's debt obligations investments will
not exceed 15 years. Generally, the average maturity of the Fund's debt
obligations portfolio will be shorter when interest rates worldwide or in a
particular country are expected to rise, and longer when interest rates are
expected to fall.
OTHER INVESTMENT POLICIES. With respect to currency risk, the Fund may, but is
not required to, use currency forwards, futures contracts, and interest rate
swaps, to hedge income or capital. Under the policies discussed in "Common
Investment Methods and Risks," "Highlighted Risk Considerations," and in the
SAI, the Fund may also; acquire loan participations; loan its portfolio
securities; enter into repurchase, reverse repurchase, and "when-issued"
transactions; invest in preferred stock; invest in structured notes; purchase
and sell call and put options on U.S. or foreign securities, enter into futures
contracts for the purchase or sale of U.S. Treasury or foreign securities or
based upon financial indices, and engage in other activities specifically
identified for this Fund.
RISKS AND OTHER CONSIDERATIONS RELATED TO NON-DIVERSIFICATION. As a
non-diversified fund under the 1940 Act, the Fund is permitted to invest all of
its assets in the obligations of a single issuer or relatively few issuers. Of
course, the more flexible and less restrictive diversification standards for
non-diversified funds under the 1940 Act may at times be important to the Fund's
investment strategy since the number of issuers of foreign debt obligations is
limited and foreign government securities are not considered "government
securities" for 1940 Act diversification purposes. Since the Fund is permitted
to invest a greater proportion of its assets in the obligations of a smaller
number of foreign issuers, however, changes in the value of a single issuer's
securities or interest rate fluctuations, may have a greater effect on the
Fund's investments and its share price. The risks of investing in foreign
securities could also be magnified. The Fund will still be subject to the
diversification requirements under the federal tax code and the 25% limit on
concentration of investments in a single industry which will have a somewhat
mitigating effect. See "Common Investment Methods and Risks."
NAME CHANGE. The Board of Trustees approved a change in the Fund's name to
"Templeton Global Income Securities Fund" from the "Global Income Fund,"
effective May 1, 1996, to reflect that the Fund is subadvised by Templeton
Investment Counsel, Inc. Its objectives and policies are not affected by the
name change.
U.S. GOVERNMENT SECURITIES FUND
The investment objective of the U.S. Government Securities Fund is to earn
income through investments in a portfolio limited to securities which are
obligations of the U.S. government, its agencies or instrumentalities.
The Fund pursues its objective by investing in all types of U.S. Government
Securities, including obligations issued or guaranteed by U.S. government
agencies and instrumentalities. These obligations may also include fixed-rate or
adjustable-rate mortgage-backed securities. (See "Common Investment Methods and
Risks--Debt Obligations.") Some of these investments are supported by the full
faith and credit of the U.S. government, while others are supported principally
by the issuing agency and may not permit recourse against the U.S. Treasury if
the issuing agency does not meet its commitments. The Fund anticipates that a
significant portion of its portfolio will consist of Government National
Mortgage Association ("Association") mortgage-backed certificates ("GNMAs").
GNMAs are mortgage-backed securities representing part ownership of a pool of
mortgage loans. GNMAs differ from other bonds in that principal may be paid back
on an unscheduled basis rather than returned in a lump sum at maturity. The Fund
purchases GNMAs for which principal and interest are guaranteed.
THE ASSOCIATION'S GUARANTEE OF PAYMENT OF PRINCIPAL AND INTEREST ON GNMAS IS
BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT. THE
ASSOCIATION MAY BORROW U.S. TREASURY FUNDS TO THE EXTENT NEEDED TO MAKE PAYMENTS
UNDER ITS GUARANTEE. OF COURSE, THIS GUARANTEE DOES NOT EXTEND TO THE MARKET
VALUE OR YIELD OF THE GMNAS OR THE NET ASSET VALUE OR PERFORMANCE OF THE FUND,
WHICH WILL FLUCTUATE DAILY WITH MARKET CONDITIONS.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment which represents a return of principal will be reinvested by the
Fund in securities which may bear interest at a rate higher or lower than the
obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, such principal payments are passed through to the GNMA
holders, such as the Fund. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of such variation in prepayment rates, it is not
possible to accurately predict the life of a particular GMNA.
GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. Government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. In a period of declining interest rates, however,
it is more likely that mortgages contained in GNMA pools will be prepaid thus
reducing the effective yield. This potential for prepayment during periods of
declining interest rates may reduce the general upward price increases of GNMAs
as compared to noncallable debt securities over the same periods. Moreover, any
premium paid on the purchase of a GNMA will be lost if the obligation is
prepaid. Of course, price changes of GNMAs and other securities held by the Fund
will have a direct impact on the net asset value per share of the Fund.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Common Investment
Methods and Risks" and in the SAI, the Fund may enter into covered mortgage
"dollar rolls," loan portfolio securities, engage in repurchase agreements, and
engage in other activities specifically identified for this Fund.
ZERO COUPON FUNDS:
MATURING IN DECEMBER
OF 2000, 2005, 2010
The objective of each of the three Zero Coupon Funds is to provide as high an
investment return as is consistent with the preservation of capital.
Each Fund seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific target date in the future
by investing primarily in zero coupon securities that pay no cash income but are
acquired by the Fund at substantial discounts from their value at maturity.
These securities may experience greater fluctuations in market value in response
to interest rate changes than interest-paying securities of similar maturities.
If shares of a Zero Coupon Fund are redeemed prior to the maturity of the Fund,
an investor may experience a significantly different investment return than was
anticipated at the time of purchase. THEREFORE, THE ZERO COUPON FUNDS MAY NOT BE
APPROPRIATE FOR POLICYHOLDERS WHO DO NOT PLAN TO HAVE THEIR PREMIUMS INVESTED IN
SHARES OF THE FUND FOR THE LONG-TERM OR UNTIL MATURITY.
PORTFOLIO INVESTMENTS. Under normal circumstances, each Zero Coupon Fund will
invest at least 65% of its net assets in "Stripped Securities," a term used
collectively for Stripped Treasury Securities, Stripped Government Securities,
Stripped Corporate Securities and Stripped Eurodollar Obligations, all described
below. The Stripped Securities in which each Fund will invest consist of:
1) zero coupon securities issued by the U.S. Treasury, including treasury
bills, debt obligations issued by the U.S. Treasury which have been
stripped of their unmatured interest coupons or which were issued without
interest coupons, interest coupons that have been stripped from debt
obligations issued by the U.S. Treasury, and receipts and certificates for
stripped debt obligations and stripped coupons, including U.S. government
trust certificates (collectively, "Stripped Treasury Securities")
(currently not anticipated to be in excess of 55% of the Funds' assets);
2) other zero coupon securities issued by the U.S. government and its agencies
and instrumentalities, by a variety of tax-exempt issuers such as state and
local governments and their agencies and instrumentalities and by
"mixed-ownership government corporations" (collectively, "Stripped
Government Securities");
3) zero coupon securities issued by domestic corporations which consist of
corporate debt obligations without interest coupons, and, if available,
interest coupons that have been stripped from corporate debt obligations,
and receipts and certificates for such stripped debt obligations and
stripped coupons (collectively, "Stripped Corporate Securities");
4) stripped Eurodollar obligations, which are debt obligations denominated in
U.S. dollars that are issued by foreign issuers, often subsidiaries of
domestic corporations ("Stripped Eurodollar Obligations").
RISKS OF INVESTING IN STRIPPED SECURITIES. Stripped Securities investments, like
other investments in debt obligations, are subject to certain risks, including
credit and market risks. To the extent the Zero Coupon Funds invest in Stripped
Securities other than Stripped Treasury Securities, such investments will be
rated at least A by nationally recognized statistical rating agencies, or if
unrated, are determined by the Manager to be of comparable quality. Such
securities are regarded as having an adequate capacity to pay principal and
interest but with greater vulnerability to adverse economic conditions and have
some speculative characteristics. The Zero Coupon Funds will also attempt to
minimize the impact of individual credit risks by diversifying their portfolio
investments.
Stripped Securities do not make any periodic payments of interest prior to
maturity and the stripping of the interest coupons causes the Stripped
Securities to be offered at a substantial or "deep" discount from their face
amounts. The market value of Stripped Securities and, therefore, of the shares
of the Zero Coupon Funds, will fluctuate with changes in interest rates and
other factors and are generally subject to greater fluctuations in response to
changing interest rates than would a fund consisting of debt obligations of
comparable quality and maturities that pay interest currently. The amount of
fluctuation increases with a longer period to maturity.
SPECIAL RISKS RELATING TO MATURITY. The Trust currently offers three separate
Zero Coupon Funds, each maturing on the third Friday of December of its specific
maturity year (the "Target Date"): 2000, 2005 and 2010. On each Fund's Target
Date, the Fund will be converted to cash and an investor may invest in another
of the Trust's Funds. At least 30 days prior to maturity, policy owners will be
notified and given an opportunity to select another investment option. IF AN
INVESTOR DOES NOT COMPLETE AN INSTRUCTION FORM DIRECTING WHAT SHOULD BE DONE
WITH LIQUIDATION PROCEEDS, THE PROCEEDS WILL BE AUTOMATICALLY INVESTED IN THE
MONEY FUND AND THE POLICYHOLDER WILL BE NOTIFIED OF SUCH EVENT.
Because each Fund will be primarily invested in zero coupon securities,
investors whose premiums are invested in shares held to maturity, including
those obtained through reinvestment of dividends and distributions, will
experience a return consisting primarily of the amortization of discount on the
underlying securities in the Fund. However, the net asset value of a Fund's
shares increases or decreases with changes in the market value of that Fund's
investments.
Because they do not pay interest, zero coupon securities tend to be subject to
greater fluctuation of market value in response to changes in interest rates
than interest-paying securities of similar maturities. Investors can expect more
appreciation from a Zero Coupon Fund during periods of declining interest rates
than from interest-paying securities of similar maturity. Conversely, when
interest rates rise, a Fund will normally decline more in price than
interest-paying securities of similar maturity. Price fluctuations are expected
to be greatest in the longer-maturity Funds and are expected to diminish as a
Fund approaches its maturity date. Interest rates can change suddenly and
unpredictably. If shares of a Zero Coupon Fund are redeemed prior to the
maturity of the Fund, an investor may experience a significantly different
investment return than was anticipated at the time of purchase.
The Funds' Manager will attempt to maintain the average duration of each Fund to
within twelve months of the Fund's Target Date. Duration is a measure of the
length of an investment which takes into account, through present value
analysis, the timing and amount of any interest payments as well as the amount
of the principal repayment. Duration is commonly used by professional managers
to help identify and control "reinvestment risk" that is, the risk that interest
rates will be lower when the fund seeks to invest the proceeds from a matured
obligation. Since each Fund will not be invested entirely in zero coupon
securities maturing on the Target Date, there will be some unknown reinvestment
risk and liquidation costs with respect to those other investments. By balancing
investments with slightly longer and shorter durations, the Manager believes it
can maintain a Fund's average duration within twelve months of the Fund's Target
Date and thereby reduce its unknown reinvestment risk. AS A FUND APPROACHES ITS
TARGET DATE, ITS PORTFOLIO WILL BE COMPRISED OF INCREASINGLY LARGER AMOUNTS OF
REPURCHASE AGREEMENTS, COMMERCIAL PAPER, BANKERS ACCEPTANCES, GOVERNMENT AGENCY
DISCOUNT NOTES, TREASURY BILLS, AND OTHER MONEY MARKET INSTRUMENTS.
FOREIGN PORTFOLIO INVESTMENTS. Although each Zero Coupon Fund reserves the right
to invest up to 25% of its assets in obligations or securities of foreign
issuers, each Fund typically limits such investments to less than 10% of their
respective assets and to dollar denominated obligations. Investments in stripped
Eurodollar obligations where delivery takes place outside the U.S. will be made
in compliance with any applicable U.S. and foreign currency restrictions and
other tax laws and laws limiting the amount and types of foreign investments.
INVESTMENT IN FOREIGN SECURITIES INVOLVES SPECIAL AND ADDITIONAL RISKS. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" AND THE SAI.
STRUCTURED NOTES. Each Fund may invest up to 10% of its assets in certain
structured notes that are comparable to zero coupon bonds in terms of credit
quality, interest rate volatility, and yield when the Manager believes there is
an opportunity for enhanced yield in the future and minimal additional risk.
These notes would have coupon resets that may cause the current coupon to fall
to, but not below, zero. Existing credit quality, duration and liquidity
standards would apply, so that the Fund may not invest in structured notes
unless the Manager believes that the notes pose no greater credit or market risk
than stripped notes; however, these notes may carry risks similar to those of
stripped securities. See "Common Investment Methods and Risks."
OTHER INVESTMENT POLICIES. To provide income for expenses, redemption payments,
and cash dividends, up to 20% of each Fund's assets may be invested in Money
Market Instruments. Under the policies discussed in "Common Investment Methods
and Risks," "Highlighted Risk Considerations," and in the SAI, the Funds may
also lend portfolio securities, enter into repurchase agreements with respect to
securities in which they are permitted to invest, and engage in other activities
specifically identified for these Funds.
TAX CONSIDERATIONS. Under the federal income tax law, a portion of the
difference between the purchase price of the zero coupon securities and their
face value ("original issue discount") is considered to be income to the Zero
Coupon Funds each year, even though such Funds will not receive cash payments
representing the discount from these securities. This original issue discount
will comprise a part of the net taxable investment income of such Funds which
must be "distributed" to the insurance company, as shareholder each year,
whether or not such distributions are paid in cash. To the extent such
distributions are paid in cash, the Fund may have to generate the required cash
from interest earned on non-zero coupon securities or possibly from the
disposition of zero coupon securities.
FUNDS SEEKING GROWTH AND INCOME
GROWTH AND INCOME FUND
The principal investment objective of the Growth and Income Fund is capital
appreciation. The Fund's secondary objective is to provide current income
return.
PORTFOLIO INVESTMENTS. The Fund pursues capital appreciation by investing in
securities the Manager believes have the potential to increase in value. The
Fund will normally invest in the U.S. stock market by investing in a broadly
diversified portfolio of common or preferred stocks and securities convertible
into common stocks which may be traded on a securities exchange or
over-the-counter. Such investments will be made, however, only if the Fund's
Manager believes that the perceived risk is justified by the potential for
capital appreciation.
The Fund seeks current income through the receipt of dividends or interest from
its investments, and the payment of dividends may therefore be a consideration
in purchasing debt obligations or securities for the Fund. In pursuing its
secondary objective of current income, the Fund may also purchase convertible
securities, including bonds or preferred stocks, debt obligations, and Money
Market Instruments.
SELECTION OF PORTFOLIO INVESTMENTS. The investment strategy of the Fund is to
generally invest in undervalued issues believed to have attractive long-term
growth prospects. The Fund's Manager uses relative yield analysis to target
companies that have current relative yields near the upper end of their
historical ranges. In doing so, the Fund's Manager hopes to identify undervalued
stocks, in pursuit of the Fund's primary objective of capital appreciation.
Relative yield, as used here, is a company's stock yield divided by the market
yield (as defined by the S&P 500). In implementing the Fund's relative yield
strategy, the Fund generally restricts its investment to stocks yielding at
least 100% of the yield of the S&P 500, thereby enabling the Manager to pursue
its secondary objective, namely current income. In addition to relative yield
analysis, the fund employs other valuation methods including, but not limited
to, quantitative and fundamental analysis. This strategy generally results in
the Fund investing predominantly in mid- and larger capitalization issuers.
Convertible Securities. The Fund may invest in debt obligations or preferred
stock which provide an opportunity for equity participation. These are
convertible into a certain quantity of the common stock of the same or a
different issuer, at a stated price within a specified period of time and are
generally senior to common stocks in a corporation's capital structure, although
they are usually subordinated to similar nonconvertible debt obligations. The
convertible debt obligations in which the Fund invests are subject to the same
rating criteria and investment policies as the Fund's investments in debt
obligations. Convertible preferred stocks are equity securities, generally carry
a higher degree of market risk than debt obligations, and often may be regarded
as speculative in nature. The Fund may also invest in enhanced convertible
securities which may provide higher dividend income but which may carry
additional risks, including reduced liquidity. See "Highlighted Risk
Considerations" and "Common Investment Methods and Risks."
FOREIGN INVESTMENTS. Although the Fund reserves the right to invest up to 30% of
its assets in foreign securities not publicly traded in the U.S., the Fund's
current investment strategy is to limit such investments to less than 5% of the
Fund's total net assets excluding American Depository Receipts. See "Highlighted
Risk Considerations - Foreign Transactions".
OTHER INVESTMENT POLICIES. The Fund may also invest up to 10% of its assets in
equity real estate investment trusts ("REITs") which are described in the Real
Estate Fund. The Fund will not invest more than 5% of its assets in debt
obligations, including convertible debt obligations, rated Ba or lower by
Moody's or BB or lower by S&P, or unrated securities determined by the Manager
to be of comparable quality. Under the policies discussed in "Common Investment
Methods and Risks" and in the SAI, the Fund may also write covered call and put
options; purchase call and put options on securities and indices of securities;
engage in "forward conversion" transactions; loan its portfolio securities;
enter into repurchase transactions; and engage in other activities specifically
identified for this Fund.
INCOME SECURITIES FUND
The investment objective of the Income Securities Fund is to maximize income
while maintaining prospects for capital appreciation.
Portfolio Investments. The Fund will pursue its objective by investing in a
diversified portfolio of domestic and foreign debt obligations which may include
high yield, high risk, lower rated obligations (commonly referred to as "junk
bonds")as well as equity securities, selected with particular consideration of
current income production along with capital appreciation. The assets of the
Fund may be held in cash or invested in securities traded on any national
securities exchange, Money Market Instruments, or in securities issued by a
corporation, association or similar legal entity having gross assets valued at
not less than $1,000,000 as shown by its latest published annual report. Such
investments may include zero coupon, deferred interest or pay-in-kind bonds, or
preferred stocks. See "Common Investment Methods and Risks." THERE ARE NO
RESTRICTIONS AS TO THE PROPORTION OF INVESTMENTS WHICH MAY BE MADE IN ANY
PARTICULAR TYPES OF SECURITY AND SUCH DETERMINATION IS ENTIRELY WITHIN THE
MANAGER'S DISCRETION. As market conditions change, it is conceivable that all of
the assets of the Fund might be invested in debt obligations or, conversely, in
common stocks. As a fundamental policy, however, the Fund will not concentrate
its investments in a single industry in excess of 25% of its total assets.
Certain of the high yield obligations in which the Fund may invest may be
purchased at a discount. Such investments, when held to maturity or retired, may
include an element of gain (which may be treated as ordinary income or capital
gain for tax purposes). The Fund does not intend to hold obligations for the
purpose of achieving such gains, but generally will hold them as long as current
yields on these investments remain attractive. Capital losses may be realized
when obligations purchased at a premium are held to maturity or are called or
redeemed at a price lower than their purchase price. Capital gains or losses
also may be realized upon the sale of obligations.
CREDIT QUALITY. When purchasing debt obligations, the Fund may invest in
obligations in any rating category (including obligations in the lowest rating
categories) or unrated obligations, depending upon prevailing market and
economic conditions. BECAUSE OF THE FUND'S POLICY OF INVESTING IN HIGHER
YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE FUND IS ACCOMPANIED
BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED,
LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE FUND SHOULD
EVALUATE THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK.
As an operating policy, however, the Fund will generally invest in securities
that are rated at least Caa by Moody's or CCC by S&P, except for defaulted
securities discussed below, or, if unrated, comparable obligations in the view
of the Manager. The lower rated obligations in which the Fund may invest are
considered by S&P and Moody's, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and therefore entail special risks.
SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS OBLIGATIONS,"
"COMMON INVESTMENT METHODS AND RISKS," AND THE SAI FOR ADDITIONAL INFORMATION,
THE APPENDIX FOR A DISCUSSION OF THE RATING CATEGORIES, AND THE "ASSET
COMPOSITION TABLE" FOR THE RATINGS OF THE DEBT OBLIGATIONS IN THE FUND AS OF
DECEMBER 31, 1995.
These ratings, which represent the opinions of the rating services, do not
reflect the risk of market fluctuations nor are they absolute credit standards.
Ratings will be considered but will not be a determining or limiting factor.
Rather than relying principally on the ratings assigned by rating services, the
Manager conducts its own investment analysis.
In the event the rating on an issue held in the Fund's portfolio is changed by
the ratings service or the obligation goes into default, such event will be
considered by the Fund in its evaluation of the overall investment merits of
that security but will not necessarily result in an automatic sale of the
security.
Because a substantial portion of this Fund's investments at any particular time
may consist of lower rated debt obligations, changes in the level of interest
rates, among other things, will likely have an increased effect on the value of
the Fund's holdings and thus the value of the Fund's shares.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest up to 5% of its assets in
defaulted debt obligations which may be considered speculative.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its total net assets in
foreign securities not publicly traded in the U.S., including those of
developing markets issuers. The Fund may also invest in sponsored or unsponsored
American Depository Receipts. The Fund's investments in foreign securities
involve risks related to currency fluctuations, market volatility, and economic,
social, and political uncertainty that are different from investments in similar
obligations of domestic entities. INVESTMENT IN FOREIGN SECURITIES AND IN
DEVELOPING MARKETS INVOLVE SPECIAL AND ADDITIONAL RISKS. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN SECURITIES" AND THE SAI.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Common Investment
Methods and Risks," "Highlighted Risk Considerations," and in the SAI, the Fund
may also invest up to 5% of its assets in loan participations and other related
direct or indirect bank obligations and up to 5% of its assets in trade claims,
both of which carry a high degree of risk; invest up to 5% of its assets in
enhanced convertible securities; loan its portfolio securities; enter into
repurchase transactions; purchase debt obligations on a "when-issued" or
"delayed-delivery" basis; write covered call options on securities; and engage
in other activities specifically identified for this Fund.
REAL ESTATE SECURITIES FUND
The principal objective of the Real Estate Securities Fund is capital
appreciation, with a secondary objective of earning current income on its
investments.
Portfolio Investments. The Fund pursues its principal objective by investing
primarily in securities of companies operating in the real estate industry.
Under normal circumstances, therefore, at least 65% of the Fund's total assets
will be invested in "real estate securities," (defined below), primarily equity
real estate investment trusts ("REITs"). The Fund may also invest in equity
securities issued by home builders and developers and in debt obligations and
convertible securities issued by REITs, home builders, and developers. The Fund
will generally invest in real estate securities of companies listed on a
securities exchange or traded over-the-counter. As used by the Fund, investments
deemed to be "real estate securities" will include equity, debt obligations, and
convertible securities of companies having the following characteristics and
will be subject to the following limitations:
1. Companies qualifying as a REIT for federal income tax purposes. In order
to qualify as a REIT, a company must derive at least 75% of its gross
income from real estate sources (rents, mortgage interest, gains from the
sale of real estate assets), and at least 95% from real estate sources,
plus dividends, interest and gains from the sale of securities. Real
property, mortgage loans, cash and certain securities must comprise 75%
of a company's assets. In order to qualify as a REIT, a company must also
make distributions to shareholders aggregating annually at least 95% of
its REIT taxable income.
2. Companies, such as home builders and developers, having at least 50% of
their assets related to, or deriving at least 50% of their revenues from,
the ownership, construction, management, or sale of residential,
commercial or industrial real estate.
RISKS RELATED TO CONCENTRATION. The Fund may invest more than 25% of its total
assets in any sector of the real estate industry described above. The Fund's
policy of concentrating in the securities of companies in the real estate
industry and the other investment policies referenced above are fundamental
policies that cannot be changed without shareholder approval. Due to the Fund's
concentration in the real estate industry, adverse developments in that industry
will have a greater impact on the Fund, and consequently shareholders, than a
fund with broader diversification. Special considerations to an investment in
the Fund include those risks associated with the direct ownership of real
estate: declines in the value of real estate, risks related to general and local
economic conditions, over-building and increased competition, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to tenants, and increases in interest rates. The value of
securities of companies which service the real estate industry may also be
affected by such risks.
In addition to the risks discussed above, equity REITs may be affected by any
changes in the value of the underlying property owned by such REITs, while
mortgage REITs may be affected by the quality of any credit extended. Equity and
mortgage REITs are dependent on the REITs' management skill, may not be
diversified, and are subject to the risks of financing projects. The Fund could
conceivably own real estate directly as a result of a default on debt
obligations it owns. Changes in prevailing interest rates also may inversely
affect the value of the debt obligations in which the Fund will invest.
The Fund's Manager believes, however, that diversification of the Fund's assets
into different types of real estate investments will help mitigate, although it
cannot eliminate, the inherent risks of such industry concentration.
REAL ESTATE RELATED INVESTMENTS. In addition to the Fund's investments in real
estate securities, as defined above, the Fund may also invest a portion of its
assets in debt obligations or equity securities of issuers engaged in businesses
whose products and services are closely related to the real estate industry, and
publicly traded on an exchange or in the over-the-counter market. Such issuers
may include manufacturers and distributors of building supplies; financial
institutions that issue or service mortgages, such as savings and loan
associations or mortgage bankers; and companies whose principal business is
unrelated to the real estate industry but who have significant real estate
holdings (at least 50% of their respective assets) believed to be undervalued
relative to the price of those companies' securities.
CREDIT QUALITY. As an operating policy, the Fund will not invest more than 10%
of its net assets in convertible debt obligations or debt obligations rated Ba
or lower by Moody's or, if unrated, deemed by the Manager to be of comparable
quality. Generally, however, the Fund will not acquire any investments rated
lower than B by Moody's or, if unrated, deemed to be of comparable quality by
the Manager. Lower rated obligations (commonly referred to as "junk bonds") are
considered by the rating agencies to have increased risks related to the
creditworthiness of their issuers. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER
RATED DEBT OBLIGATIONS" AND THE SAI.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Highlighted Risk
Considerations," "Common Investment Methods and Risks," and in the SAI, the Fund
may also write covered call options, loan its portfolio securities, engage in
repurchase transactions, invest in foreign securities (including Depository
Receipts), invest in enhanced convertible securities, and engage in other
activities specifically identified for this Fund.
RISING DIVIDENDS FUND
The investment objectives of the Rising Dividends Fund are capital appreciation
and current income incidental to capital appreciation. In seeking capital
appreciation, the Fund invests with a long-term investment horizon. Preservation
of capital, while not an objective, is also an important consideration.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund seeks to achieve its investment
objectives by investing, as a fundamental policy, at least 65% of its net assets
in financially sound companies that have paid consistently rising dividends
based on the investment philosophy that the securities of such companies,
because of their dividend record, have a strong potential to increase in value.
Under normal market conditions, the Fund's portfolio is at least 65% invested in
the securities of companies that meet the following specialized criteria at the
time of purchase:
1. consistent dividend increases - a company should have increased its
dividend in at least eight out of the last ten years with no year showing a
decrease;
2. substantial dividend increases - a company must have increased its dividend
at least 100% over the past ten years;
3. reinvested earnings - dividend payout should be less than 65% of current
earnings (except for utility companies);
4. strong balance sheet - long-term debt obligations should be no more than
30% of total capitalization (except for utility companies); and
5. attractive price - the current price should either be in the lower half of
the stock's price/earnings ratio range for the past ten years or less than
the average current market price/earnings ratio of the stocks comprising
the S&P 500 Stock Index.
The remaining 35% of the Fund's assets typically are invested in dividend-paying
equity securities with similar characteristics that may not meet all of the
specialized criteria listed above. The Fund's investments may include common
stocks, convertible securities, or rights or warrants to subscribe for or
purchase common stocks.
The Manager also considers other factors, such as return on shareholder's
equity, rate of earnings growth and anticipated price/earnings ratios, in
selecting investments for the Fund. In addition, because capital preservation is
an important consideration, the Manager generally also reviews a company's
stability and the strength of its balance sheet in selecting among eligible
growth companies.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Common Investment
Methods and Risks," "Highlighted Risk Considerations Foreign Transactions," and
in the SAI, the Fund may also loan its portfolio securities, enter into
repurchase transactions, write covered call options, invest in foreign
securities (including Depository Receipts), and engage in other activities
specifically identified for this Fund.
TEMPLETON GLOBAL ASSET ALLOCATION FUND
The investment objective of the Templeton Global Asset Allocation Fund is to
seek a high level of total return through a flexible policy of investing in the
following market segments: equity securities of issuers in any nation, debt
obligations of companies and governments of any nation, and Money Market
Instruments.
PORTFOLIO INVESTMENTS. The mix of investments among these three market segments
will be adjusted in an attempt to capitalize on total return potential produced
by changing economic conditions throughout the world. There are no minimum or
maximum percentages as to the amount of the Fund's assets which may be invested
in each of the market segments. Except as noted below and under "Investment
Restrictions" in the SAI, THE MANAGER HAS COMPLETE DISCRETION IN DETERMINING THE
AMOUNT OF EQUITY SECURITIES, DEBT OBLIGATIONS, OR MONEY MARKET INSTRUMENTS IN
WHICH THE FUND MAY INVEST.
The Fund seeks to achieve its objective by seeking investment opportunities in
all types of securities issued by companies or governments of any nation,
including developing markets nations. The Fund will normally be invested in at
least three countries, except during defensive periods. INVESTORS SHOULD
CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN
SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
EQUITY SECURITIES. Equity securities in which the Fund may invest consistent
with its investment objective and policies may include common and preferred
stock, securities (bonds or preferred stock) convertible into common stock
("convertible securities"), warrants, and securities representing underlying
international securities such as depository receipts. The Fund may purchase
sponsored or unsponsored depository receipts, such as ADRs, EDRs, and GDRs,
which will be deemed to be investments in the underlying securities for purposes
of the Fund's investment policies. Depository receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted and they involve the risks of other investments in foreign
securities, as discussed in "Highlighted Risk Considerations, Foreign
Transactions."
DEBT OBLIGATIONS. Debt obligations in which the Fund may invest consistent with
its investment objective and policies may include many types of debt obligations
of both domestic and foreign governments or companies, such as bonds,
debentures, notes, commercial paper, collateralized mortgage obligations
("CMOs") and obligations issued or guaranteed by governments or government
agencies or instrumentalities including, specifically, Government National
Mortgage Association ("GNMA") mortgage-backed certificates. The yields provided
by GNMA securities have historically exceeded the yields on other types of U.S.
Government Securities with comparable maturities; unpredictable prepayments of
principal, however, can greatly change realized yields. See "Common Investment
Methods and Risks." The Fund has the flexibility to invest in preferred stocks
and certain debt obligations, rated or unrated, such as convertible bonds and
bonds selling at a discount. Debt obligations can provide the potential for
capital appreciation based on various factors such as changes in interest rates,
economic and market conditions, improvement in an issuer's ability to repay
principal and pay interest, and ratings upgrades.
CREDIT QUALITY. The Fund may invest in medium grade and lower quality debt
obligations that are rated between BBB and as low as CC by S&P, and between Baa
and as low as Ca by Moody's or, if unrated, are of equivalent investment quality
as determined by the Manager. Bonds rated BB or lower are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Issues of bonds rated Ca may often be in default. Higher yields are generally
available from securities in the higher risk, lower rating categories of S&P or
Moody's (commonly referred to as "junk bonds"); however, the values of lower
rated securities generally fluctuate more than those of higher rated securities
and involve greater risk of loss of income and principal. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS" AND "APPENDIX."
As an operating policy established by the Board, however, the Fund will not
invest more than 10% of its total assets in debt obligations rated BBB or lower
by S&P or Baa or lower by Moody's or if unrated, determined by the Manager to be
of comparable quality. Such limit would not include defaulted debt obligations.
Many debt obligations of foreign issuers, and especially developing markets
issuers, are not rated by U.S. rating agencies and their selection depends on
the Manager's internal analysis. The Board may consider an increase in this
operating policy if, in its judgment, economic conditions change such that a
higher level of investment in high risk, lower quality debt obligations would be
consistent with the interests of the Fund and its shareholders.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest up to 10% of its assets in
defaulted debt obligations, which may be considered speculative.
MONEY MARKET INSTRUMENTS. The Fund may invest in Money Market Instruments. In
addition, the Fund may hold cash and time deposits with banks in the currency of
any major nation and invest in certificates of deposit of federally insured
savings and loan associations having total assets in excess of $1 billion. The
Fund may also invest in commercial paper limited to obligations rated Prime-1 or
Prime-2 by Moody's or A-1 or A-2 by S&P or, if not rated by Moody's or S&P,
issued by companies having an outstanding debt issue currently rated Aaa or Aa
by Moody's or AAA or AA by S&P. See the Appendix.
FOREIGN SECURITIES. The Fund has an unlimited right to purchase securities in
any foreign country, developed or underdeveloped, if they are listed on an
exchange, as well as a limited right to purchase such securities if they are
unlisted. The Fund's investments in foreign securities involve risks related to
currency fluctuations, market volatility, and economic, social, and political
uncertainty that are different from investing in similar obligations of domestic
entities. See "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
CURRENCY TECHNIQUES. The Fund may, but with respect to equity securities does
not currently intend, to employ certain active currency hedging techniques. Such
techniques may include investments in foreign currency futures contracts,
forward foreign currency exchange contracts ("forward contracts"), and options
on foreign currencies, all of which involve specialized risks. See "HIGHLIGHTED
RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENT POLICIES. Under the policies discussed in "Common Investment
Methods and Risks," "Highlighted Risk Considerations," and in the SAI, the Fund
may also invest up to 10% of its net assets in illiquid and restricted
securities, purchase securities on a "when-issued" basis, enter into repurchase
transactions, loan its portfolio securities with an aggregate value of up to one
third of its total assets, borrow up to 33 1/3% of the value of its net assets
for temporary or emergency purposes or to increase its holdings of portfolio
securities, and engage in other activities specifically identified for this
Fund.
UTILITY EQUITY FUND
The investment objectives of the Utility Equity Fund are to seek both capital
appreciation and current income by concentrating investments in the securities
of public utilities companies.
PORTFOLIO INVESTMENTS. The Fund pursues its objectives by investing, under
normal conditions, at least 65% of the Fund's total assets in securities of
issuers engaged in the public utilities industry, which includes the
manufacture, production, generation, transmission and sale of gas and electric
energy and water. Assets may also be invested in issuers engaged in the
communications field, including entities such as telephone, telegraph,
satellite, microwave and other companies providing communication facilities for
the public benefit, but not those in public broadcasting. The Fund will normally
invest in common stocks which are expected to yield dividends.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its total net assets in
foreign securities, including Depository Receipts and those of developing
markets issuers. The Fund's investments in foreign securities involve risks
related to currency fluctuations, market volatility, and economic, social, and
political uncertainty that are different from investing in similar obligations
of domestic entities. INVESTMENTS IN FOREIGN SECURITIES, AND DEVELOPING MARKETS,
INVOLVE SPECIAL AND ADDITIONAL RISKS. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
FOREIGN SECURITIES" AND THE SAI.
RISKS ASSOCIATED WITH UTILITIES INVESTMENTS. The Fund has substantial
investments in electric public utility companies which have certain
characteristics and risks of which investors should be aware. Such
characteristics include: the difficulty in obtaining adequate returns on
invested capital despite frequent rate increases; the difficulty in financing
large construction programs during inflationary periods; restrictions on
operations and increased costs and delays attributable to environmental
considerations; difficulty of the capital markets in absorbing utility debt and
equity securities; difficulties in obtaining fuel for electric generation at
reasonable prices; difficulty in obtaining natural gas for resale; declines in
the prices of alternative fuels; risks associated with the construction and
operation of nuclear power plants; and general effects of energy conservation.
The Fund's policy of concentrating its investments in utilities may make it more
susceptible to adverse developments than a fund with greater industry
diversification.
In addition, utility stocks may be particularly sensitive to interest rate
movements because investors may value such stocks based upon their yields rather
than their potential growth. Accordingly, utility stocks may behave like bonds,
rising in value during periods of falling interest rates and falling in value
during periods of rising interest rates. Utility stocks may also, however, be
affected by factors which affect equity securities generally.
Notwithstanding these risk factors, gas and electric utility companies have been
favorably affected by lower financing costs, and, in the case of electrical
utilities, the ability to build, operate and maintain power plants outside their
historical territories.
Each of the favorable factors is, of course, subject to change.
OTHER INVESTMENT POLICIES. The Fund may invest up to 5% of its assets in debt
obligations, including convertible bonds issued by public utility issuers,
regardless of their ratings, which means the assets of the Fund may be invested
in securities rated Ba or lower by Moody's or BB or lower by S&P, or unrated
securities determined by the Manager to be of comparable quality. Higher yields
are ordinarily available from lower rated obligations (commonly referred to as
"junk bonds") and reflect their predominantly speculative characteristics. Under
the policies discussed in "Common Investment Methods and Risks," "Highlighted
Risk Considerations," and in the SAI, the Fund may also invest up to 5% of its
assets in preferred stocks or convertible preferred stocks issued by public
utility issuers, write covered call options, loan its portfolio securities,
enter into repurchase transactions, and engage in other activities specifically
identified for this Fund.
FUNDS SEEKING CAPITAL GROWTH
CAPITAL GROWTH FUND
The primary investment objective of the Capital Growth Fund is capital
appreciation. Current income is only a secondary consideration in selecting
portfolio securities.
Under normal market conditions, the Fund will invest primarily (at least 65% of
assets) in equity securities, including common and preferred stocks, or
securities convertible into common stocks, which are believed to offer favorable
possibilities for capital appreciation, but some of which may yield little or no
current income. The Fund's assets may be invested in shares of common or capital
stock traded on any national securities exchange or over-the-counter, in bonds
or preferred stock convertible into shares of common or capital stock listed for
trading on a national securities exchange or, for temporary or defensive
purposes, in cash and Money Market Instruments.
The Manager will generally make long-term investments in equity securities which
have been selected based upon fundamental and quantitative analysis. The Fund
will invest predominantly in equity securities issued by large-cap or mid-cap
U.S. companies, which have market capitalizations of $1 billion or more. It may
also invest in smaller capitalization companies, which may be subject to
different and greater risks, but there is no present intention of investing more
than 20% of the Fund's assets in such securities. See "Common Investment
Objectives and Risks, Smaller Capitalization Issuers." As an operating policy,
the Fund may invest up to 10% of its assets in foreign securities, including
Depository Receipts. See "Highlighted Risk Considerations - Foreign
Transactions."
Convertible Securities. The Fund may invest in debt obligations or preferred
stock which provide an opportunity for equity participation. These are
convertible into a certain quantity of the common stock of the same or a
different issuer, at a stated price within a specified period of time and are
generally senior to common stocks in a corporation's capital structure, although
they are usually subordinated to similar nonconvertible debt obligations. The
convertible debt obligations in which the Fund invests are subject to the same
rating criteria and investment policies as the Fund's investments in debt
obligations. Convertible preferred stocks are equity securities, generally carry
a higher degree of market risk than debt obligations, and often may be regarded
as speculative in nature. See "Highlighted Risk Considerations" and "Common
Investment Methods and Risks."
Other Investments. The Fund will not invest more than 5% of its assets in debt
obligations, including convertible debt obligations, rated Ba or lower by
Moody's or BB or lower by S&P, or unrated securities determined by the Manager
to be of comparable quality. Under the policies discussed in "Common Investment
Methods and Risks" and in the SAI, the Fund may also write covered call options;
purchase put options on securities; loan its portfolio securities; enter into
repurchase transactions; invest in restricted or illiquid securities; and engage
in other activities specifically identified for this Fund.
PRECIOUS METALS FUND
The principal investment objective of the Precious Metals Fund is capital
appreciation through concentration of its investments in securities of issuers
engaged in mining, processing or dealing in gold and other precious metals. The
Fund's secondary objective is to provide current income return through the
receipt of dividends or interest from its investments.
PORTFOLIO INVESTMENTS. The Fund pursues its principal objective by investing,
under normal circumstances, at least 65% of the value of the Fund's total assets
in securities of issuers engaged in mining, processing or dealing in gold and
other precious metals, such as silver, platinum and palladium, securities of
gold mining finance companies, as well as securities of operating companies with
long-life, medium-life, or short-life mines.
The Fund will normally invest in common stocks, and securities convertible into
common stocks, such as convertible preferred shares, convertible debentures,
convertible rights and warrants which may be traded on a securities exchange or
over-the-counter. The payment of dividends may be a consideration in purchasing
securities for the Fund because of its secondary objective of current income.
FOREIGN INVESTMENTS. Because of the Fund's policy of investing primarily in
securities of companies engaged in mining, processing or dealing in gold, a
substantial part of its assets is generally invested in securities of companies
domiciled or operating in one or more foreign countries, which may include
developing market countries. The Fund generally anticipates that it may invest
more than 50% of its total assets in the securities of corporations located
outside the U.S., including South Africa. INVESTMENTS IN SOUTH AFRICAN AND OTHER
FOREIGN SECURITIES, ESPECIALLY DEVELOPING MARKETS, INVOLVE SPECIAL AND
ADDITIONAL RISKS RELATED TO CURRENCY, MARKET, POLITICAL, AND OTHER FACTORS THAT
ARE DIFFERENT FROM INVESTMENTS IN SIMILAR OBLIGATIONS OF DOMESTIC ENTITIES. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS" AND THE SAI.
RISKS OF INVESTING IN PRECIOUS METALS. The value of this Fund's shares
fluctuates and may, in fact, be more volatile than the shares of other Funds
because of the volatility of the underlying portfolio investments. Due to the
Fund's policy of concentrating its investments in gold and precious
metal-related issuers, an investment in the Fund's shares may be subject to
greater risk of adverse developments in those industries than an investment in a
fund with greater industry diversification. Special Fund risks may include:
fluctuations in the price of gold; the potential effect of the concentration of
the sources of supply of gold and over control of the sale of gold; changes in
U.S. or foreign tax or currency laws; and unpredictable monetary policies and
economic and political conditions. For additional discussion of the special
risks of this Fund, see "Highlighted Risk Considerations" in the SAI.
OTHER INVESTMENT POLICIES. The Fund may invest in gold bullion. In seeking
income or appreciation or in times when the Fund's Manager believes a
conservative or defensive investment policy is in order, the Fund may also
purchase preferred stocks and debt obligations, any of which may or may not be
rated securities. In those circumstances, the Fund may also place some of its
cash reserves in Money Market Instruments. Under the policies discussed in
"Common Investment Methods and Risks," "Highlighted Risk Considerations," and in
the SAI, the Fund may also write covered call options, loan its portfolio
securities, enter into repurchase transactions, and engage in other activities
specifically identified for this Fund.
SMALL CAP FUND
The investment objective, of the Small Cap Fund is long-term capital growth. The
Fund seeks to accomplish its objective by investing primarily in equity
securities of small capitalization growth companies. Investments in small
capitalization companies may involve greater risks and greater volatility than
investments in larger and more established companies.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund will invest at
least 65% of its total assets in equity securities of small capitalization
growth companies ("small cap companies"). A small cap company generally has a
market capitalization of less than $1 billion at the time of the Fund's
investment and, in the opinion of the Fund's Manager, is positioned for rapid
growth in revenues, earnings or assets. Market capitalization is defined as the
total market value of a company's outstanding common stock. The securities of
small cap companies are traded on U.S. or foreign stock exchanges and
over-the-counter. As an operating policy the Fund will not invest more than 10%
of its assets in securities issued by companies with less than three years of
continuous operation.
The Fund seeks to invest at least one-third of its assets in equity securities
of companies with market capitalizations of $550 million or less; there is no
assurance, however, that the Fund will always be able to find suitable companies
to include in this one-third portion. The Manager will monitor the availability
of securities suitable for investment by the Fund and recommend appropriate
action to the Board of Trustees of the Trust if it appears that this goal will
not be attainable under the Fund's current objective and other policies.
Equity securities of small cap companies may consist of common stock, preferred
stock, warrants for the purchase of common stock, and convertible securities.
The Fund will not invest more than 10% of its assets in convertible securities,
which are discussed below in "Common Investment Methods and Risks, Convertible
Securities."
SELECTION OF PORTFOLIO INVESTMENTS. The Fund has been designed to provide
investors with potentially greater long-term rewards by investing in securities
of small cap companies which may offer the potential for significant capital
appreciation since they may be overlooked by investors or undervalued in
relation to their earnings power. Small cap companies generally are not as well
known to the investing public and have less of an investor following than larger
companies, and therefore may provide greater opportunities for long-term capital
growth as a result of relative inefficiencies in the marketplace. Such companies
may be undervalued because they are part of an industry that is out of favor
with investors, although the individual companies may have high rates of earning
growth and be financially sound. Selection of small cap company equity
securities for the Fund will be based on characteristics such as the financial
strength of the company, the expertise of management, the growth potential of
the company within its industry and the growth potential of the industry itself.
Small cap companies often pay no dividends and current income is not a factor in
the selection of stocks. The Manager uses a disciplined approach to stock
selection, blending fundamental and quantitative analysis.
RISKS ASSOCIATED WITH SMALL CAP INVESTMENTS. The Fund will primarily invest in
relatively new or unseasoned companies which are in their early stages of
development, or small cap companies positioned in new and emerging industries
where the opportunity for rapid growth is expected to be above average.
Securities of smaller or unseasoned companies present greater risks than
securities of larger, more established companies. The companies may have
relatively small revenues, limited product lines, and may have a small share of
the market for their products or services. Small cap companies may lack depth of
management, they may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms, or they may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small cap companies may suffer significant losses as
well as realize substantial growth, and investments in such companies tend to be
more volatile and are therefore speculative. Besides exhibiting greater
volatility, small cap company stocks may, to a degree, fluctuate independently
of larger company stocks. See "Common Investment Methods and Risks--Small
Capitalization Issuers." THE FUND MAY NOT BE APPROPRIATE FOR SHORT-TERM
INVESTORS, AND AN INVESTMENT IN THE FUND SHOULD NOT BE CONSIDERED A COMPLETE
INVESTMENT PROGRAM.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its total assets in
foreign securities, including those of developing markets and sponsored or
unsponsored Depository Receipts. The Fund will not invest more than 5% of its
assets in developing markets securities. The Fund's investments in foreign
securities involve risks related to currency fluctuations, market volatility,
and economic, social, and political uncertainty that are different from
investing in similar domestic securities. INVESTMENTS IN FOREIGN SECURITIES,
PARTICULARLY IN DEVELOPING MARKETS, INVOLVE SPECIAL AND ADDITIONAL RISKS. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" BELOW AND IN THE SAI.
OTHER INVESTMENTS. Although the Fund's assets will be invested primarily in
equity securities of small cap companies, the Fund may invest up to 35% of its
total assets in other instruments, which may cause its performance to vary from
that of the small capitalization equity markets. The Fund may invest in equity
securities of larger capitalization companies which the Fund's Manager believes
have strong growth potential, or in equity securities of relatively well-known,
larger companies in mature industries which the Manager believes have the
potential for capital appreciation.
The Fund may also invest in debt securities which the Manager believes have the
potential for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income is incidental to the
Fund's objective of capital growth. The Fund may invest in debt securities rated
B or above by Moody's or S&P, or in unrated securities the Manager has
determined are of comparable quality. As an operating policy, however, the Fund
will not invest more than 5% of its assets in debt obligations (including
convertible debt securities) rated lower than BBB by S&P or Baa by Moody's or,
if unrated, determined by the Manager to be of comparable quality. Lower rated
obligations (commonly referred to as "junk bonds") are considered by the rating
agencies to have increased risks related to the creditworthiness of their
issuers.
The Fund may invest up to 10% of its assets in real estate investment trusts
("REITs"), which are described in "Real Estate Fund", above, including small
capitalization REITs.
OTHER INVESTMENT POLICIES. The Fund may write covered put and call options on
securities or financial indices. The Fund may purchase put and call options on
securities or financial indices, provided that premiums on open option positions
may not exceed 5% of the Fund's total assets. The Fund may purchase and sell
futures contracts or related options with respect to securities, indices and
currencies, provided that the sum of deposits and premiums paid on such
contracts may not exceed 5% of the Fund's total assets at current values. Under
the policies discussed in "Common Investment Methods and Risks," "Highlighted
Risk Considerations," and in the SAI, the Fund may also invest in restricted or
illiquid securities, lend portfolio securities, borrow money, enter into
repurchase or reverse repurchase agreements, and engage in other activities
specifically identified for this Fund.
TEMPLETON DEVELOPING MARKETS EQUITY FUND
The investment objective of the Templeton Developing Markets Equity Fund is
long-term capital appreciation.
The Fund seeks to achieve this objective by investing primarily in equity
securities of issuers in countries having developing markets as defined under
"Highlighted Risk Considerations-Foreign Transactions." It is currently expected
that under normal conditions at least 65% of the Fund's total assets will be
invested in such securities. The Fund will at all times, except during defensive
periods, maintain investments in at least three countries having developing
markets. Investments in foreign developing markets involve heightened risks
related to the small size and lesser liquidity of these markets that are in
addition to the special risks associated with foreign investing, including
currency fluctuations, market volatility, and economic, social, and political
uncertainty. From time to time, the Fund may hold significant cash positions
until suitable investment opportunities are available, consistent with its
policy on temporary investments. AN INVESTMENT IN THE FUND MAY BE CONSIDERED
SPECULATIVE. INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL AND HEIGHTENED
RISKS INVOLVED IN INVESTING IN FOREIGN DEVELOPING MARKETS SECURITIES. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
INVESTMENTS IN DEVELOPING MARKETS. "Developing market equity securities" for
purposes of the Fund means any of the following: (i) equity securities of
companies the principal securities trading market for which is a developing
market country, (ii) equity securities, traded in any market, of companies that
derive 50% or more of their total revenue from either goods or services produced
in such developing market countries or sales made in such developing market
countries, or (iii) equity securities of companies organized under the laws of,
and with a principal office in, a developing market country. "Equity securities"
refers to common stock, preferred stock, warrants or rights to subscribe to or
purchase such securities and sponsored or unsponsored Depository Receipts such
as American Depository Receipts, European Depository Receipts, and Global
Depository Receipts. Depository Receipts may not necessarily be denominated in
the same currency as the underlying securities into which they may be converted
and they involve the risks of other investments in foreign securities, as
discussed in "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
The Fund seeks to benefit from economic and other developments in developing
markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having developing markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly the emerging market countries which may be in the
process of developing more market-oriented economies, may experience relatively
high rates of economic growth. Other countries, although having relatively
mature developing markets, may also be in a position to benefit from local or
international developments encouraging greater market orientation and
diminishing governmental intervention in economic affairs.
Other Investments. For capital appreciation, the Fund may invest up to 35% of
its total assets in fixed-income debt obligations (defined as bonds, notes,
debentures, commercial paper, certificates of deposit, time deposits and
bankers' acceptances) which are rated at least C by Moody's or S&P or unrated
debt obligations deemed to be of comparable quality by the Manager. These debt
obligations entail increased risks related to the creditworthiness of their
issuers. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS." As
a current policy established by the Board, however, the Fund will not invest
more than 5% of its total assets in debt obligations rated BBB or lower by S&P
or Baa or lower by Moody's (the lowest category of "investment grade" rating).
The Board may consider an increase in the above percentages if economic
conditions change such that a higher level of investment in high risk, lower
quality debt obligations would be consistent with the interests of the Fund and
its shareholders. Certain debt obligations can provide the potential for capital
appreciation based on various factors such as changes in interest rates,
economic and market conditions, improvement in an issuer's ability to repay
principal and pay interest, and ratings upgrades. Additionally, convertible
bonds offer the potential for capital appreciation through the conversion
feature, which enables the holder of the bond to benefit from increases in the
market price of the securities into which they are convertible.
Defaulted Debt Obligations. As a fundamental policy the Fund may invest up to
10% of its assets in defaulted debt obligations which may be considered
speculative.
Currency Techniques. The Fund may, but with respect to equity securities does
not currently intend, to employ certain active currency hedging techniques. Such
techniques may include investments in foreign currency futures contracts,
forward foreign currency exchange contracts ("forward contracts"), and options
on foreign currencies, all of which involve specialized risks. Further, the Fund
will not enter into forward contracts if, as a result, the Fund will have more
than 20% of its total assets committed to the consummation of such contracts.
See "Highlighted Risk Considerations, Foreign Securities."
Other Investment Policies. The Fund may invest up to 10% of its total assets in
securities of closed end investment companies to facilitate foreign investment.
Under the policies discussed in "Highlighted Risk Considerations", "Common
Investment Methods and Risks," and the SAI, the Fund may also loan its portfolio
securities, engage in repurchase transactions, borrow money for investment
purposes, and for hedging purposes only, enter into transactions in options on
securities and securities indices and futures contracts and related options, and
engage in other activities specifically identified for this Fund. The Fund may
not commit more than 5% of its total assets to initial margin deposits on
futures contracts and related options, and the value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of the Fund. Presently, some of the above
strategies cannot be used to a significant extent by the Fund in the markets in
which the Fund will principally invest.
TEMPLETON GLOBAL GROWTH FUND
The Templeton Global Growth Fund's investment objective is long-term capital
growth; any income realized will be incidental.
PRINCIPAL PORTFOLIO INVESTMENTS. The Fund seeks to achieve its objective through
a flexible policy of investing in stocks and debt obligations of companies and
governments of any nation. The Fund has the right to purchase securities in any
foreign country, developed or underdeveloped. Although the Fund generally
invests in common stock, it may also invest in preferred stocks and certain debt
obligations, rated or unrated, such as convertible bonds and bonds selling at a
discount. The Fund may, from time to time, hold significant cash positions until
suitable investment opportunities are available, consistent with its policy on
temporary investments.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING
IN FOREIGN SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING
MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENTS. For capital appreciation, the Fund may invest in debt
obligations (defined as bonds, notes, debentures, commercial paper, certificates
of deposit, time deposits and bankers' acceptances) which are rated at least C
by Moody's or S&P or unrated debt obligations deemed to be of comparable quality
by the Manager. These debt obligations entail predominantly speculative risks.
SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS" AND
"APPENDIX."
As a policy established by the Board, however, the Fund will not invest more
than 5% of its total assets in debt obligations rated BBB or lower by S&P or Baa
or lower by Moody's. The Board may consider a change if economic conditions
change such that a higher level of investment in high risk, lower quality debt
obligations would be consistent with the objective of the Fund.
These debt obligations can provide the potential for capital appreciation based
on various factors such as changes in interest rates, economic and market
conditions, improvement in an issuer's ability to repay principal and pay
interest, and ratings upgrades. Additionally, convertible bonds offer the
potential for capital appreciation through the conversion feature, which enables
the holder of the bond to benefit from increases in the market price of the
securities into which they are convertible.
DEFAULTED DEBT OBLIGATIONS. As a fundamental policy, the Fund may invest up to
10% of its assets in defaulted debt obligations which may be considered
speculative.
CURRENCY TECHNIQUES. The Fund may, but with respect to equity securities does
not currently intend, to employ certain active currency hedging techniques. Such
techniques may include investments in foreign currency futures contracts,
forward foreign currency exchange contracts ("forward contracts"), and options
on foreign currencies, all of which involve specialized risks. See "HIGHLIGHTED
RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENT POLICIES. The Fund may also purchase and sell stock index
futures contracts up to an aggregate amount not exceeding 20% of its total
assets and may not at any time commit more than 5% of its total assets to
initial margin deposits on futures contracts. In addition, in order to increase
its return or to hedge all or a portion of its portfolio investments, the Fund
may purchase and sell put and call options on securities indices. These
specialized investment techniques involve additional risks as described in
"Common Investment Methods and Risks" and the SAI.
The Fund may invest no more than 5% of its total assets in securities issued by
any one company or government, exclusive of U.S. Government Securities. The Fund
may not invest more than 5% of its assets in warrants (exclusive of warrants
acquired in units or attached to securities) nor more than 10% of its assets in
securities with a limited trading market, i.e., "illiquid securities." Under the
policies discussed in "Common Investment Methods and Risks," "Highlighted Risk
Considerations," and in the SAI, the Fund may also enter into repurchase
agreements, lend its portfolio securities, and engage in other activities
specifically identified for this Fund.
TEMPLETON INTERNATIONAL EQUITY FUND
The investment objective of the Templeton International Equity Fund is to seek
long-term growth of capital.
PRINCIPAL PORTFOLIO INVESTMENTS. Under normal conditions, the Fund will invest
at least 65% of its total assets in an internationally diversified portfolio of
equity securities consisting of common and preferred stock, securities (bonds or
preferred stock) convertible into common stock, warrants and securities
representing underlying international securities such as ADRs and EDRs ("Equity
Securities"). Such Equity Securities purchased by the Fund will trade on markets
in countries other than the U.S. and which are issued by companies (i) domiciled
in countries other than the U.S., or (ii) that derive at least 50% of either
their revenues or pre-tax income from activities outside of the U.S. Thus, it is
possible, although not anticipated, that up to 35% of the Fund's assets could be
invested in U.S. companies.
In selecting portfolio securities, the Fund attempts to take advantage of the
difference between economic trends and the anticipated performance of securities
and securities markets in various countries. The Fund may, from time to time,
hold significant cash positions until suitable investment opportunities are
available, consistent with its policy on temporary investments. The Fund's
investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING
IN FOREIGN SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING
MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENTS. Up to 35% of the Fund's total assets may be invested in debt
obligations of which up to 5% may be debt obligations rated Ba or lower by
Moody's or BB or lower by S&P or that are not rated but determined by the
Manager to be of comparable quality. These debt obligations entail predominantly
speculative risks. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT
OBLIGATIONS" AND "APPENDIX." The balance may be invested in debt obligations
rated Baa or better by Moody's, or BBB or better by S&P or that are not rated
but determined by the Manager to be of comparable quality.
The Fund may seek capital appreciation by investing in such debt obligations
which would occur through changes in relative foreign currency exchange rates,
changes in relative interest rates or improvement in the creditworthiness of an
issuer. These debt obligations may consist of U.S. and foreign government
securities and corporate debt obligations, including Yankee bonds, Eurobonds,
and Depository Receipts. See "Common Investment Methods and Risks."
COUNTRIES OF PRINCIPAL INVESTMENT. Normally, the Fund will invest at least 65%
of its total assets in securities traded in at least three foreign countries,
including the countries listed below. The Fund may invest in securities of
issuers in, but not limited to, the following countries: Argentina, Australia,
Austria, Belgium, Bermuda, Brazil, Canada, Chile, Colombia, Denmark, Finland,
France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Israel, Italy,
Japan, Korea, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand,
Norway, Philippines, Portugal, Singapore, Spain, Sri Lanka, Sweden, Switzerland,
Taiwan, Thailand, Turkey, the United Kingdom, and Uruguay.
OTHER INVESTMENT POLICIES. While the Fund reserves the right to invest up to 10%
of its net assets in illiquid securities, it is the current policy of the Fund
to limit any such investments to 5% of the Fund's net assets. The Fund may
invest up to 10% of its net assets in warrants, including such warrants that are
not listed on an exchange. Under the policies discussed in "Common Investment
Methods and Risks," "Highlighted Risk Considerations," and in the SAI, the Fund
may also write covered call and put purchase options on securities, buy puts and
write calls in "forward conversion" transactions, engage in "spread" and
"straddle" transactions, purchase and write call and put options on stock
indices, enter into contracts for the purchase or sale for future delivery of
U.S. Treasury or foreign securities or futures contracts based upon financial
indices, purchase and sell interest rate futures contracts and related options,
purchase and sell stock index futures contracts and related options, lend its
portfolio securities, engage in repurchase agreements, and engage in other
activities specifically identified for this Fund.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
The investment objective of the Templeton International Smaller Companies Fund
is to seek long-term capital appreciation. The Fund seeks to achieve this
objective by investing primarily in equity securities of smaller companies
outside the U.S., including developing market countries.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund expects to
invest at least 65% of its portfolio in equity securities of companies of any
foreign nation (including developing market nations) whose market
capitalizations do not exceed $1 billion at the time of purchase, generally
considered "small cap companies." The Manager believes that international small
cap companies may provide attractive investment opportunities, because these
securities make up most of the world's equity securities and because they are
frequently overlooked by investors or undervalued in relation to their perceived
earning power. In addition, such securities may provide investors with the
opportunity to increase the diversification of their overall investment
portfolios, because these securities' market performance may differ from that of
U.S. small cap stocks and from large-cap stocks of any nation. Equity securities
of small cap companies may include common stock, preferred stock, warrants for
the purchase of common stock, and convertible securities. See "Common Investment
Methods and Risks, Convertible Securities."
Risk Factors. Securities of smaller companies, particularly if they are
unseasoned, present greater risks than securities of larger, more established
companies. The companies may have relatively small revenues, limited product
lines, and a small share of the market for their products or services. Small cap
companies may lack depth of management, they may be unable to internally
generate funds necessary for growth or potential development or to generate such
funds through external financing on favorable terms, or they may be developing
or marketing new products or services for which markets are not yet established
and may never become established. Due to these and other factors, small cap
companies may suffer significant losses as well as realize substantial growth,
and investments in such companies tend to be more volatile and are therefore
speculative. Besides exhibiting greater volatility, small cap company stocks may
fluctuate independently of larger company stocks. As an operating policy, the
Fund will not invest more than 5% of its assets in securities of companies with
less than three years of continuous operation. See "Common Investment Methods
and Risks." THE FUND MAY NOT BE APPROPRIATE FOR SHORT-TERM INVESTORS, AND AN
INVESTMENT IN THE FUND SHOULD NOT BE CONSIDERED A COMPLETE INVESTMENT PROGRAM.
The Fund's investments in foreign securities, especially those in developing
markets, involve risks related to currency fluctuations, market volatility, and
economic, social, and political uncertainty that are different from investing in
similar obligations of domestic entities. INVESTORS SHOULD CONSIDER CAREFULLY
THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT
ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. SEE "Highlighted Risk
Considerations, Foreign Securities."
Other Investments. The Fund may invest up to 35% of its total assets in: equity
securities of larger capitalization issuers outside the U.S.; equity securities
of larger or smaller capitalization issuers within the U.S., although such
investments are not currently expected to exceed 5% of total assets; or debt
obligations issued by companies or governments in any nation which are rated at
least C by Moody's or S&P or unrated debt obligations deemed to be of comparable
quality by the Manager. These debt obligations entail increased risks related to
the creditworthiness of their issuers. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
LOWER RATED DEBT OBLIGATIONS." These investments may cause the Fund's
performance to vary from those of international smaller capitalization equity
markets.
As a current policy, however, the Fund will not invest more than 5% of its total
assets in debt obligations rated lower than BBB by S&P or Baa by Moody's, which
entail increased risks related to the creditworthiness of their issuers.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest up to 10% of its assets in
defaulted debt obligations, which may be considered speculative.
Currency Techniques. The Fund may, but with respect to equity securities does
not currently intend, to employ certain active currency management techniques.
Such techniques may include investments in foreign currency futures contracts,
forward foreign currency exchange contracts ("forward contracts"), and options
on foreign currencies, all of which involve specialized risks. Further, the Fund
will not enter into forward contracts if, as a result, the Fund would have more
that 20% of its total assets committed to the consummation of such contracts.
See "Highlighted Risk Considerations, Foreign Transactions" and the SAI.
Other Investment Policies. The Fund may invest no more than 5% of its total
assets in securities issued by any one company or government, exclusive of U.S.
Government Securities. The Fund may not invest more than 5% of its assets in
warrants (exclusive of warrants acquired in units or attached to securities) nor
more than 15% of its assets in illiquid investments. See the SAI
"Non-Fundamental Investment Restrictions." For hedging purposes only, the Fund
may enter into: transactions in options on securities, securities indices, and
foreign currencies; forward foreign currency contracts; futures contracts and
related options, and other activities specifically identified for this Fund. The
Fund may not commit more than 5% of its total assets to initial margin deposits
on futures contracts and related options, and the value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of the Fund. See "Common Investment Methods and
Risks, Options and Futures Contracts." Under the policies discussed in "Common
Investment Methods and Risks," "Highlighted Risk Considerations," and in the
SAI, the Fund may also enter into repurchase agreements, lend its portfolio
securities, and engage in other activities specifically identified for this
Fund.
TEMPLETON PACIFIC GROWTH FUND
The Templeton Pacific Growth Fund seeks to provide long-term growth of capital.
Under normal conditions, the Fund will invest at least 65% of its total assets
in Equity Securities as defined in the International Equity Fund discussion
above which trade on markets in the Pacific Rim, including developing markets
and which are (i) issued by companies domiciled in the Pacific Rim or (ii)
issued by companies that derive at least 50% of either their revenues or pre-tax
income from activities in the Pacific Rim. For purposes of the Fund's 65%
investment policy, the countries in the Pacific Rim are Australia, Hong Kong,
Indonesia, Japan, Korea, Malaysia, New Zealand, Singapore and Thailand.
Normally, the Fund will invest at least 65% of its total assets in securities
traded in at least three foreign countries, including the countries listed
herein. The Fund may, from time to time, hold significant cash positions until
suitable investment opportunities are available, consistent with its policy on
temporary investments.
The correlation among the Singapore, Malaysia, Thailand, and Hong Kong markets
is very high. Because these markets comprise such a substantial portion of the
Fund's portfolio, the Fund has less geographical diversification than a
broad-based international fund and thus its volatility is higher. INVESTORS
SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN
SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. AN
INVESTMENT IN THE FUND MAY BE CONSIDERED SPECULATIVE. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS."
Other Investments. The Fund may invest up to 35% of its assets in the securities
of issuers domiciled outside of the Pacific Rim. The investments may consist of,
for example (i) securities of issuers in countries that are not located in the
Pacific Rim but are linked by tradition, economic markets, cultural similarities
or geography to the countries in the Pacific Rim; and (ii) securities of issuers
located elsewhere in the world which have operations in the Pacific Rim or which
stand to benefit from political and economic events in the Pacific Rim. For
example, the Fund may invest in a company outside of the Pacific Rim when the
Managers believe at the time of investment that the value of the company's
securities may be enhanced by conditions or developments in the Pacific Rim even
though the company's production facilities are located outside of the Pacific
Rim.
Up to 35% of the Fund's total assets may be invested in investment grade debt
obligations rated Baa or better by Moody's, or BBB or better by S&P or, if
unrated, determined by the Manager to be of comparable quality.
The Fund may seek capital appreciation by investing in such debt obligations
which would occur through changes in relative foreign currency exchange rates,
changes in relative interest rates or improvement in the creditworthiness of an
issuer. These debt obligations may consist of U.S. and foreign government
securities and corporate debt obligations, including Yankee bonds, Eurobonds,
and Depository Receipts. The issuers of such debt obligations may or may not be
domiciled in the Pacific Rim. See "Common Investment Methods and Risks."
OTHER INVESTMENT POLICIES. While the Fund reserves the right to invest up to 10%
of its net assets in illiquid securities, it is the current policy of the Fund
to limit any such investments to 5% of the Fund's net assets. The Fund may
invest up to 10% of its net assets in warrants, including such warrants that are
not listed on an exchange. Under the policies discussed in "Common Investment
Methods and Risks," "Highlighted Risk Considerations," and in the SAI, the Fund
may also write covered call and put purchase options on securities, buy puts and
write calls in "forward conversion" transactions, engage in "spread" and
"straddle" transactions, purchase and write call and put options on stock
indices, enter into contracts for the purchase or sale for future delivery of
U.S. Treasury or foreign securities or futures contracts based upon financial
indices, purchase and sell interest rate futures contracts and related options,
purchase and sell stock index futures contracts and related options, lend its
portfolio securities, engage in repurchase agreements, and engage in other
activities specifically identified for this Fund.
HIGHLIGHTED RISK CONSIDERATIONS
FOREIGN TRANSACTIONS
Investments in the securities of companies organized outside the U.S. or of
companies whose securities are principally traded outside the U.S. ("foreign
issuers") or investments in securities denominated or quoted in foreign currency
("non-dollar securities") may offer potential benefits not available from
investments solely in securities of domestic issuers or dollar denominated
securities. Such benefits may include the opportunity to invest in foreign
issuers that appear, in the opinion of the Managers, to offer better opportunity
for long-term capital appreciation or current earnings than investments in
domestic issuers, the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the U.S. and the opportunity
to reduce fluctuations in portfolio value by taking advantage of foreign
securities markets that do not necessarily move in a manner parallel to U.S.
markets.
GENERAL CONSIDERATIONS. Investing in non-dollar securities or in the securities
of foreign issuers involves significant risks that are not typically associated
with investing in U.S. dollar denominated securities or in securities of
domestic issuers. These risks, which may involve possible losses, include
political, social or economic instability in the country of the issuer, the
difficulty of predicting international trade patterns, the possibility of the
imposition of exchange controls, expropriation, limits on removal of currency or
other assets, foreign investment controls on daily stock market movements,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes of governmental administrations or of economic or
monetary policies, in the U.S. or abroad, or changed circumstances in dealings
between nations or currency convertibility or exchange rates could result in
investment losses for a Fund. In addition, there may be less publicly available
information about a foreign company than about a U.S. domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to U.S. domestic
companies. Further, the Fund may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. The Fund may also
encounter difficulties or be unable to vote proxies, exercise shareholder
rights, pursue legal remedies and obtain judgments in foreign courts. There is
generally less government supervision and regulation of business and industry
practices, securities exchanges, brokers and listed companies abroad than in the
U.S. This is especially true in developing markets. There is an increased risk,
therefore, of uninsured loss due to lost, stolen, or counterfeit stock
certificates. Confiscatory taxation or diplomatic developments could also affect
investment in those countries. Many debt obligations of foreign issuers, and
especially developing markets issuers, are not rated by U.S. rating agencies and
their selection depends on the Manager's internal analysis.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and types of foreign
investments. Investments may be in securities of foreign issuers located in both
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
corporate obligations or U.S. Government Securities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. Under certain market conditions, these
investments may be less liquid than U.S. Corporate Obligations and are certainly
less liquid than U.S. Government Securities. Finally, in the event of a default
of any such foreign debt obligations, it may be more difficult for a Fund to
obtain or to enforce a judgment against the issuers of such securities.
Securities which are acquired by a Fund outside the U.S. and which are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered to be an illiquid asset so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
While the Funds which may acquire foreign securities intend to acquire
securities of foreign issuers only where there are public trading markets for
such securities (with the exception of the illiquid securities which may be
purchased consistent with a Fund's investment objectives and policies), such
investments, nevertheless, may tend to reduce the liquidity of the Funds'
investment securities due to internal problems in such foreign countries or to
deteriorating relations between the U.S. and such countries.
Transaction costs on foreign securities exchanges may be higher than in the
U.S., and foreign securities settlements may, in some instances, be subject to
delays and related administrative uncertainties. The operating expense ratio of
a Fund with a significant non-U.S. portfolio can be expected to be higher than
those of Funds investing exclusively in domestic securities because of its
additional expenses, such as custodial costs, valuation costs and communication
costs, although they are expected to be similar to expenses of other investment
companies investing in a mix of U.S. securities and securities of one or more
foreign countries.
Brokerage commissions, custodial services, and other costs relating to
investment in developing markets are generally higher than in the U.S. Such
markets have different clearance and settlement procedures and in certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. The inability of a Fund to make intended security purchases due to
settlement problems could cause a Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
INVESTMENTS IN DEVELOPING MARKETS. These countries are located in the
Asia-Pacific region, Eastern Europe, Central and South America and Africa.
Countries considered to have developing markets are all countries that are
generally considered to be developing or emerging countries by the International
Bank for Reconstruction and Development (more commonly referred to as the World
Bank) and the International Finance Corporation, as well as countries that are
classified by the United Nations or otherwise regarded by their authorities as
developing. Currently, the countries not included in this category are
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland,
the United Kingdom and the U.S.
The Funds investing in developing markets seek to benefit from economic and
other developments in developing markets. Such investments reflect the Managers'
belief that investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain countries having developing markets. This trend may
be facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly the emerging market countries which may be in the
process of developing more market-oriented economies, may experience relatively
high rates of economic growth. Other countries, although having relatively
mature developing markets, may also be in a position to benefit from local or
international developments encouraging greater market orientation and
diminishing governmental intervention in economic affairs.
Investments in developing or emerging markets are subject to all of the risks of
foreign investing generally but have additional and heightened risks related to
the small size and lesser liquidity of these markets, making investments in such
markets particularly volatile. While short-term volatility can be disconcerting,
investors should understand that declines of as much as 40% to 50% are not
unusual in emerging markets. For investors comfortable with this level of risk,
developing markets can offer the potential for high return. For example, the
Hong Kong market has increased nine-fold, or 900%, in the last 14 years but has
suffered eight declines of 20% or more during that time, including two declines
of 40% or more.
Among the special risks associated with investment in developing or emerging
markets are political or economic uncertainty. Political and economic structures
in many of these countries may be undergoing significant evolution and rapid
development, and such countries may lack the social, political and economic
stability characteristic of more developed countries. Certain of these countries
may have in the past failed to recognize private property rights and have at
times nationalized or expropriated the assets of private companies. As a result,
the risks of foreign investment generally, including the risks of
nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the values of the
Fund's investments in those countries and the availability to a Fund of
additional investments in those countries.
The small size and inexperience of the securities markets in certain of these
countries and the limited volume of trading in securities in those countries may
also make the Fund's investments in such countries less illiquid and more
volatile than investments in Japan or most Western European countries, and these
Funds may be required to establish special custody or other arrangements before
making certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers. The laws of some foreign countries
may limit the ability of these Funds to invest in securities of certain issuers
located in those countries.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations also may be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations. Repatriation of investment income,
capital and proceeds of sales by foreign investors may require governmental
registration and/or approval in some developing countries. The Fund could be
adversely affected by delays in or a refusal to grant any required governmental
registration or approval for such repatriation. Further, the economies of
developing countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been and may continue to be adversely
affected by economic conditions in the countries with which they trade.
CERTAIN RESTRICTIONS. THE ADJUSTABLE FUND, HIGH INCOME FUND, REAL ESTATE FUND,
RISING DIVIDENDS FUND AND ZERO COUPON FUNDS PRESENTLY INTEND TO INVEST NO MORE
THAN 10% OF THEIR NET ASSETS IN FOREIGN SECURITIES NOT PUBLICLY TRADED IN THE
U.S. THE GROWTH AND INCOME FUND PRESENTLY INTENDS TO INVEST NO MORE THAN 5% OF
ITS ASSETS IN FOREIGN SECURITIES.
Some of the countries in which the Funds invest may not permit direct
investment. Investments in such countries may only be permitted through
government approved investment vehicles. Investing through such vehicles may
involve frequent or layered fees or expenses and may, as well, be subject to
limitations under the 1940 Act. Consistent with the 1940 Act and subject to
applicable fundamental investment restrictions, each Fund may invest up to 10%
of its assets in shares of other investment companies and up to 5% of its assets
in any one investment company as long as the investment does not represent more
than 3% of the voting stock of the acquired investment company.
While the Asset Allocation, Developing Markets, Global Growth, Global Income,
International Equity, International Smaller Companies, Precious Metals and
Pacific Funds, to the extent consistent with their investment objectives and
policies, reserve the right to invest more than 25% of their respective assets
in the securities of issuers in one or more foreign countries, they currently
will not do so while one state's foreign diversification requirements would
preclude them from doing so. Investors should consider the greater risk of such
policy versus the safety that comes with an investment that does not involve
potential geographic concentration and should compare these Funds with other
investment vehicles before making an investment decision.
There may be other applicable policies or restrictions on a Fund's investments
in foreign securities. See "Currency Risks and Their Management," "Investment
Objectives and Policies," "Common Investment Methods and Risks" and the SAI.
CURRENCY RISKS AND THEIR MANAGEMENT. The relative performance of foreign
currencies in which securities held by a Fund are denominated is an important
factor in each Fund's overall performance. The Managers intend to manage a
Fund's exposure to various currencies to take advantage of different yield,
risk, and return characteristics that different currencies, currency
denominations, and countries can provide for U.S. investors.
UNLESS OTHERWISE INDICATED IN THE SPECIFIC FUND DESCRIPTION, THE MANAGERS
GENERALLY DO NOT ACTIVELY HEDGE CURRENCY POSITIONS WITH RESPECT TO EQUITY
SECURITIES, BELIEVING THAT THE COSTS OUTWEIGH THE POTENTIAL BENEFITS. THE
MANAGERS MAY, HOWEVER, HEDGE WHERE THEY BELIEVE IT WOULD BE APPROPRIATE. To
hedge exposure to currency fluctuations or to increase income to a Fund, each of
the Funds which may invest in Foreign Securities may, but is not required to,
enter into forward foreign currency exchange contracts, currency futures
contracts, and options on such futures contracts, as well as purchase put or
call options and write covered put and call options on currencies traded in U.S.
or foreign markets. Other currency management strategies allow the Managers to
hedge portfolio securities, to shift investment exposure from one currency to
another, or to attempt to profit from anticipated declines in the value of a
foreign currency relative to the U.S. dollar. Some of these strategies will
require a Fund to set aside liquid assets in a segregated custodial account to
cover its obligations. THERE IS NO ASSURANCE THAT THE MANAGERS' HEDGING
STRATEGIES WILL BE SUCCESSFUL.
If a security is denominated in foreign currency, the value of the security to a
Fund will be affected by changes in currency exchange rates and in exchange
control regulations, and costs will be incurred in connection with conversions
between currencies. A change in the value of any foreign currency against the
U.S. dollar will result in a corresponding change in the U.S. dollar value of a
Fund's securities denominated in that currency. Such changes will also affect a
Fund's income and distributions to shareholders. In addition, although the Fund
will receive income on foreign securities in such currencies, the Fund will be
required to compute and distribute its income in U.S. dollars. Therefore, if the
exchange rate for any such currency declines materially after a Fund's income
has been accrued and translated into U.S. dollars, the Fund could be required to
liquidate portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time a Fund incurs expenses in U.S. dollars
and the time such expenses are paid, the amount of such currency required to be
converted into U.S. dollars in order to pay such expenses in U.S. dollars will
be greater.
A Fund will use forward currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases and sales of
securities denominated in foreign currencies. A forward currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks). A currency futures contract is a
standardized contract for the future delivery of a specified amount of currency
at a future date at a price set at the time of the contract. A Fund may enter
into currency futures contracts traded on regulated commodity exchanges,
including non-U.S. exchanges.
A Fund will normally conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. A Fund will generally not enter into a forward contract with
a term of greater than one year. Some price spread on currency exchange
transactions (to cover service charges) will be incurred when the Fund converts
assets from one currency to another. A Fund may either accept or make delivery
of the currency specified at the maturity of a forward or futures contract or,
prior to maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts and options thereon are effected on the exchange on which the contract
was entered into (or on a linked exchange).
A Fund will not enter into such forward currency exchange contracts or currency
futures contracts or purchase or write such options or maintain a net exposure
to such contracts where the completion of the contracts would obligate the Fund
to deliver an amount of currency other than U.S. dollars in excess of the value
of the Fund's portfolio securities or other assets denominated in that currency
or, in the case of cross-hedging, in a currency closely correlated to that
currency.
A Fund will generally enter into forward contracts only under two circumstances.
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security in relation to another currency by entering into a
forward contract to buy the amount of foreign currency needed to settle the
transaction. Second, when the Managers believe that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, the Fund may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. This second investment practice is
generally referred to as "cross-hedging." Although forward contracts will be
used primarily to protect the Fund from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted.
As in the case of other kinds of options, the writing of an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received, and a Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs.
A liquid secondary market for any futures or options contract may not be
available when a futures or options position is sought to be closed. In
addition, there may be an imperfect correlation between movements in the
securities or foreign currency on which the futures or options contract is based
and movements in the securities or currency in the Fund's portfolio. Successful
use of futures or options contracts is further dependent on the Managers'
ability to correctly predict movements in the securities or foreign currency
markets and no assurance can be given that its judgment will be correct.
Successful use of options on securities or stock indices is subject to similar
risk considerations. In addition, by writing covered call options, the Fund
gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying security above the option exercise price. See
"Common Investment Methods and Risks" for additional information.
INTEREST RATE AND CURRENCY SWAPS. Interest rate swaps involve the exchange by
the Fund with another party of their respective commitments to pay or receive
interest, such as an exchange of fixed rate payments for floating rate payments.
Currency swaps involve the exchange of their respective rights to make or
receive payments in specified currencies. Since interest rate and currency swaps
are individually negotiated, these Funds expect to achieve an acceptable degree
of correlation between their portfolio investments and their interest rate or
currency swap positions.
A Fund will only enter into interest rate swaps on a net basis, which means that
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Interest rate swaps do
not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the Fund's risk of
loss consists of the net amount of interest payments that the Fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations.
The use of interest rate and currency swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the Managers are incorrect
in their forecasts of market values, interest rates and currency exchange rates,
the investment performance of the Fund would be less favorable than it would
have been if this investment technique were not used.
INVESTMENTS IN DEPOSITORY RECEIPTS. Many securities of foreign issuers are
represented by American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs"), and Global Depository Receipts ("GDRs") (collectively
"Depository Receipts"). ADRs evidence ownership of, and represent the right to
receive, securities of foreign issuers deposited in a domestic bank or trust
company or a foreign correspondent bank. EDRs and GDRs are typically issued by
foreign banks or trust companies, although they also may be issued by U.S. banks
or trust companies, and evidence ownership of underlying securities issued by
either a foreign or a United States corporation. Generally, Depository Receipts
in registered form are designed for use in the U.S. securities market and
Depository Receipts in bearer form are designed for use in securities markets
outside the United States.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the United
States on exchanges or over-the-counter. While ADRs do not eliminate all the
risk associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, a Fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there is
a large, liquid market in the United States for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is subject
to the accounting, auditing and financial reporting standards of the domestic
market or exchange on which they are traded, which standards are more uniform
and more exacting than those to which many foreign issuers may be subject. EDRs
and GDRs may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted.
Depository Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depository Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depository Receipts.
Depository Receipts do not eliminate all the risk inherent in investing in the
securities of foreign issuers. To the extent that a Fund acquires Depository
Receipts through banks which do not have a contractual relationship with the
foreign issuer of the security underlying the Depository Receipt to issue and
service such Depository Receipts, there may be an increased possibility that the
Fund would not become aware of and be able to respond to corporate actions such
as stock splits or rights offerings involving the foreign issuer in a timely
manner. For purposes of each Fund's investment policies, a Fund's investments in
Depository Receipts will be deemed to be investments in the underlying
securities.
LOWER RATED DEBT OBLIGATIONS
Debt obligations are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). Lower rated or unrated obligations are more likely to
react to developments affecting market and credit risk than are more highly
rated obligations, which react primarily to movements in the general level of
interest rates. The Managers consider both credit risk and market risk in making
investment decisions as to corporate debt obligations for a Fund.
Debt obligations rated BB or below by S&P or Ba or below by Moody's (or
comparable unrated obligations), commonly called "junk bonds," are considered by
S&P and Moody's, on balance, speculative and payments of principal and interest
thereon may be questionable. They will generally involve more credit risk than
obligations in the higher rating categories. The market value of junk bonds
tends to reflect individual developments affecting the issuer to a greater
extent than the market value of higher rated obligations, which react primarily
to fluctuations in the general level of interest rates. Lower rated obligations
tend to be more sensitive to economic conditions and are considered by the
rating agencies, on balance, to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories. Bonds rated BBB by S&P or Baa by
Moody's ratings which are considered investment grade, also possess some
speculative characteristics. Unrated debt obligations are not necessarily of
lower quality than rated securities, but they may not be attractive to as many
buyers.
Issuers of high yielding, debt obligations are often highly leveraged and may
not have more traditional methods of financing available to them. Therefore, the
risk associated with acquiring such obligations is generally greater than with
higher rated obligations. For example, during an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of high
yielding obligations may experience financial stress. During these periods, such
issuers may not have sufficient cash flow to meet their interest payment
obligations. Specific developments affecting the issuer, such as the inability
to meet projected business forecasts, or the unavailability of additional
financing, may adversely affect the issuer's ability to service its debt
obligations. The risk of loss due to default by the issuer may be significantly
greater for the holders of high yielding obligations because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
High yielding, debt obligations frequently have call or buy-back features which
permit an issuer to call or repurchase the obligations from a Fund. Although
such obligations are typically not callable for a period from three to five
years after their issuance, when calls are exercised by the issuer during
periods of declining interest rates, the Manager may find it necessary to
replace such obligations with lower yielding obligations which could result in
less net investment income to the Fund. The premature disposition of a high
yielding obligation due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may also make it more difficult for a
Fund to manage the timing of its receipt of income, which may have tax
implications. A Fund may be required under the Code and U.S. Treasury
regulations to accrue income for income tax purposes on defaulted obligations
and to distribute such income to the Fund's shareholders even though the Fund is
not currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy any or all of these distribution requirements,
a Fund may be required to dispose of portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as the
sale of Fund shares.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. The market for lower rated, debt obligations generally tends to be
concentrated among a smaller number of dealers than is the case for obligations
which trade in a broader secondary retail market. Generally, purchasers of these
obligations are predominantly dealers and other institutional buyers, rather
than individuals. To the extent the secondary trading market for a particular
high yielding, debt obligation does exist, it is generally not as liquid as the
secondary market for higher rated obligations. Reduced liquidity in the
secondary market may have an adverse impact on market price, a Fund's ability to
dispose of particular issues, when necessary, to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer. Reduced liquidity may also make it more
difficult for the Fund to obtain market quotations based on actual trades for
purposes of valuing the Fund's portfolio. Current values for these high yield
issues are obtained from pricing services and/or a limited number of dealers and
may be based upon factors other than actual sales. See "Additional Information
Regarding Valuation and Redemption of Shares of the Funds," in the SAI.
Some high yielding, debt obligations are sold without registration under the
federal securities laws and therefore carry restrictions on resale. While many
high yielding obligations have been sold with registration rights, covenants,
and penalty provisions for delayed registration, if a Fund is required to sell
such restricted securities before the securities have been registered, it may be
deemed an underwriter of such securities under the Securities Act of 1933, which
entails special responsibilities and liabilities. A Fund may incur special costs
in disposing of such securities; however, the Fund will generally incur no costs
when the issuer is responsible for registering the securities.
Some high yielding debt obligations may involve special risks because they are
new issues. The Funds have no arrangement with the securities underwriters or
any other person concerning the acquisition of such securities, and the Manager
will carefully review the credit and other characteristics pertinent to such new
issues.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy which continued into
1993, depressed the prices for many of these securities. While market prices may
be temporarily depressed due to these factors, the ultimate price of any
security will generally reflect the operating results of the issuer. In
addition, a Fund may incur additional expenses to the extent it is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings. A Fund will rely on the Manager's judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this evaluation,
the Manager will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the ratings service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
DEFAULTED DEBT OBLIGATIONS. Certain Funds, consistent with their investment
objectives and policies, may purchase debt obligations of issuers not currently
paying interest as well as issuers who are in default. In general, a Fund will
purchase a defaulted debt obligation only, if in the opinion of the Manger, the
issuer is expected to resume interest payments or other advantageous
developments appear likely in the near future. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and a Fund
may have unrealized losses on such defaulted obligations which are reflected in
the price of the Fund's shares. In general, debt obligations which default lose
much of their value in the time period prior to the actual default so that the
Fund's net assets are impacted prior to the default. A Fund may retain an issue
which has defaulted because such issue may present an opportunity for subsequent
price recovery.
A Fund may be required under the Internal Revenue Code of 1986, as amended (the
"Code"), to accrue income for tax purposes on defaulted obligations, even though
it is not currently receiving interest or principal payments on such
obligations. This income must be "distributed" to the insurance company
shareholders each year, whether or not such distributions are paid in cash. To
the extent such distributions are paid in cash, a Fund may be required to
dispose of portfolio securities that it otherwise would have continued to hold
or to use cash flows from other sources such as sales of Fund shares.
THE FUNDS' PORTFOLIOS. BECAUSE OF CERTAIN OF THE FUNDS' POLICIES OF INVESTING IN
HIGHER YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN SUCH A FUND IS
ACCOMPANIED BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN A
FUND THAT INVESTS IN HIGHER RATED, LOWER YIELDING DEBT OBLIGATIONS. ACCORDINGLY,
AN INVESTMENT IN ANY SUCH FUND SHOULD BE CAREFULLY EVALUATED FOR ITS
APPROPRIATENESS IN LIGHT OF THE INVESTOR'S OVERALL INVESTMENT NEEDS AND GOALS.
Persons on fixed incomes, such as retired persons, should also consider the
increased risk of loss of principal which is present with an investment in
higher risk obligations.
As of December 31, 1995, with the exception of the High Income Fund, the Income
Securities Fund, and the Global Income Fund which held 91.05%, 34.29%, and
6.88%, respectively, of their net assets in debt obligations rated below
investment grade by one or more rating agencies or determined by the Manager to
be of comparable credit quality, no other Fund held more than 5% of its assets
in such securities. At December 31, 1995, none of the funds held any such
obligations which were in default on their contractual provisions.
Asset Composition Table. A credit rating by a rating agency evaluates only the
safety of principal and interest of debt obligations, and does not consider the
market value risk associated with an investment in such an obligation. The table
below shows the percentage of Funds' assets invested in securities rated in each
of the specific rating categories shown and those that are not rated by the
rating agency but deemed by the Manager to be of comparable credit quality. The
information was prepared based on a 12 month weighted average of the Funds'
portfolio compositions in the fiscal year ended December 31, 1995. The Appendix
to this Prospectus includes a description of each rating category.
INCOME SECURITIES
MOODY'S FUND
------- ----
AAA 7.83%
Aa1 2.02%
Aa2 0.00%
A 0.00%
A2 0.00%
A3 0.00%
Baa1 6.04%
Baa2 0.00%
Baa3 0.00%
Ba1 4.97%
Ba2 0.00%
Ba3 0.00%
B1 23.78%
B2 0.00%
B3 0.00%
Caa* 5.24%
Ca 0.30%
*0.88% of these securities, which are unrated by Moodys, have been included in
the Caa rating category.
HIGH INCOME GLOBAL INCOME FUND
FUND
S&P
AAA 59.68%
AA+ 13.02%
AA 19.85%
A- 0.35% 0.57%
BBB+ 0.40% 0.00%
BBB- 2.99% 0.00%
BB+ 7.50% 0.42%
BB 6.08% 2.53%
BB- 11.76% 3.93%
B+ 17.54% 0.00%
B 26.32% 0.00%
B- 14.54% 0.00%
CCC+ 1.06% 0.00%
CCC 1.31% 0.00%
D 0.15% 0.00%
No Rating 1.79% 0.00%
()% of these securities, which are unrated by S&P, have been included in the
()rating category. (to be supplied by amendment)
It should be noted that the above ratings are not necessarily indicative of
ratings of bonds at the time of purchase.
COMMON INVESTMENT METHODS AND RISKS
Certain types of investments and investment techniques authorized for more than
one fund, as stated in the descriptions of the individual Funds, are described
below and in the SAI in greater detail. ALL POLICIES AND PERCENTAGE LIMITATIONS
ARE CONSIDERED AT THE TIME OF PURCHASE UNLESS OTHERWISE NOTED. Each of the Funds
will not necessarily use the strategies described to the full extent permitted
unless the Managers believe that doing so will help a Fund reach its objectives,
and not all instruments or strategies will be used at all times. See "Table of
Contents" in front for complete listing and page numbers.
BORROWING
As a matter of fundamental policy, all of the Funds except the Asset Allocation,
Developing Markets, International Smaller Companies and Small Cap Funds, may
borrow money up to 5% of the value of their respective total assets and no such
borrowing may be for direct investment in securities. The Funds may also borrow
from banks for temporary or short-term purposes. The Funds currently define
temporary or short-term purposes to include: (i) short-term (i.e., no longer
than five business days) credits for clearance of portfolio transactions; (ii)
borrowing in order to meet redemption requests or to finance failed settlements
of portfolio trades without immediately liquidating portfolio securities or
other assets; and (iii) borrowing in order to fulfill commitments or plans to
purchase additional securities pending the anticipated sale of other portfolio
securities or assets in the near term. As a fundamental policy, the Asset
Allocation, Developing Markets, International Smaller Companies and Small Cap
Funds may borrow up to 33 1/3% of the value of their respective total net assets
from banks to increase their holdings of portfolio securities or for temporary
purposes.
Under the 1940 Act, each Fund is required to maintain continuous asset coverage
of 300% with respect to such borrowings and to sell (within three days)
sufficient portfolio holdings to restore such coverage if it should decline to
less than 300% due to market fluctuations or otherwise, even if such
liquidations of a Fund's holdings may be disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Fund's net asset
value, and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the income received from the securities purchased
with borrowed funds. A Fund will not purchase additional securities while its
borrowings exceed the above percentage of its total assets.
In addition to the above, to the extent a Fund's policy is less restrictive,
those Funds will nevertheless comply with a certain state's staff guidelines
which currently limit a Fund's borrowing to no more than 10% of net asset value
when borrowing for any general purpose and 25% of net asset value when borrowing
as a temporary measure to facilitate redemptions.
CONCENTRATION
The Adjustable Fund, Asset Allocation Fund, Capital Growth Fund, Developing
Markets Fund, Global Growth Fund, Government Fund, Growth and Income Fund, High
Income Fund, Income Securities Fund, Intermediate Bond Fund, International
Equity Fund, International Smaller Companies Fund, Money Fund, Pacific Fund,
Rising Dividends Fund, Small Cap Fund, and Zero Coupon Funds 2000, 2005, 2010
will not invest more than 25% of the value of their respective total assets in
any one particular industry (excluding the U.S. government). The other Funds
will concentrate in a particular industry or U.S. government securities, as
indicated in the separate discussions above for each respective Fund.
CONVERTIBLE SECURITIES
Convertible Securities. With the exception of the Money Fund, Zero Coupon Funds
and Government Fund, all Funds may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Similar to a common
stock, the value of a convertible security tends to increase as the market value
of the underlying stock rises, and it tends to decrease as the market value of
the underlying stock declines. Because its value can be influenced by both
interest rate and market movements, a convertible security is not as sensitive
to interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The convertible debt obligations in which a Fund may invest are subject to the
same rating criteria and investment policies as that Fund's investments in debt
obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. As with common stocks, preferred stocks are subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for each Fund's financial reporting, credit rating,
and investment limitation purposes.
Certain Funds, consistent with their investment policies, may also invest in
enhanced or synthetic convertible securities. A detailed discussion of these
securities appears in the SAI. None of the Funds currently expect to make
significant use of these securities.
DEBT OBLIGATIONS
Debt obligations are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). The Managers consider both credit risk and market risk
in making investment decisions as to corporate debt obligations for a Fund. Debt
obligations in which the Funds may invest will tend to decrease in value when
prevailing interest rates rise and increase in value when prevailing interest
rates fall. Generally, long-term debt obligations are more sensitive to interest
rate fluctuations than short-term obligations. Because a Fund's investments in
debt obligations are interest rate sensitive, a Fund's performance may be
affected by the Managers' ability to anticipate and respond to fluctuations in
market interest rates. Debt obligations include U.S. Government Securities, debt
obligations of states or municipalities or state or municipal government
agencies or instrumentalities or foreign sovereign entities, U.S. or foreign
corporate debt obligations, preferred stock, zero coupon bonds and mortgage- or
asset-backed securities.
CORPORATE DEBT OBLIGATIONS. See "Highlighted Risk Considerations - Lower Rated
Corporate Debt Obligations."
MONEY MARKET INSTRUMENTS. The investments described in the Money Market Fund,
without regard to required ratings, maturity, and other criteria under Rule 2a-7
of the 1940 Act governing money market funds which define them as "Eligible
Securities" for purposes of the Fund, will be referred to generally as "Money
Market Instruments" in this prospectus.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-Backed and Asset-Backed
Securities. Mortgage-backed securities, represent direct or indirect
participation in, mortgage loans secured by real property. Asset-backed
securities represent participation in, or are secured by and payable from,
assets such as motor vehicle installment sale contracts, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such securities are generally issued by trusts and special purpose
corporations. Mortgage-backed and asset-backed securities are often subject to
more rapid repayment than their stated maturity dates would indicate as a result
of the pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying
mortgage-backed and asset-backed securities can be expected to accelerate, and
thus impair a Fund's ability to reinvest the returns of principal at comparable
yields. Accordingly, the market values of such securities will vary with changes
in market interest rates generally and in yield differentials among various
kinds of U.S. Government Securities and other mortgage-backed and asset-backed
securities. Asset-backed securities present certain additional risks that are
not presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. There is the possibility that, in some cases,
recoveries on repossessed collateral may not be available to support payments on
these securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs, considered derivative or
complex securities, are securities collateralized by pools of mortgage loans
created by commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other issuers in the U.S. Timely
payment of interest and principal (but not the market value) of these pools is
supported by various forms of insurance or guarantees issued by U.S. Government
agencies, private issuers, and mortgage poolers; however, the obligation itself
is not guaranteed. If the collateral securing the obligations is insufficient to
make payment on the obligation, a holder could sustain a loss. In addition, the
Fund may buy CMOs without insurance or guarantees if, in the opinion of the
Managers, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt
obligations when interest rates rise, but when interest rates decline, they may
not increase as much as other debt obligations, due to the prepayment feature.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage securities are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which a Fund may invest.
Stripped mortgage securities are purchased and sold by institutional investors,
such as the Funds, through several investment banking firms acting as brokers or
dealers. As these securities were only recently developed, traditional trading
markets have not yet been established for all such securities. Accordingly, some
of these securities may generally be illiquid. The staff of the SEC (the
"Staff") has indicated that only government-issued IO or PO securities which are
backed by fixed-rate mortgages may be deemed to be liquid, if procedures with
respect to determining liquidity are established by a fund's board. The Board of
Trustees may, in the future, adopt procedures which would permit a Fund to
acquire, hold, and treat as liquid government-issued IO and PO securities. At
the present time, however, all such securities will continue to be treated as
illiquid and will, together with any other illiquid investments, not exceed 10%
of a Fund's net assets. Such position may be changed in the future, without
notice to shareholders, in response to the Staff's continued reassessment of
this matter as well as to changing market conditions. Stripped mortgage
securities are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class is extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Fund's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories, AAA or Aaa, by S&P or Moody's, respectively.
MUNICIPAL SECURITIES. Municipal securities are debt obligations issued by local
and state governments that provide interest income which can be either taxable
or tax exempt. Municipal securities include both municipal bonds (those
securities with maturities of five years or more) and municipal notes (those
with maturities of less than five years). Generally, municipal securities are
used to raise money for various public purposes such as constructing public
facilities and making loans to public institutions. Taxable municipal bonds are
generally issued to provide funding for privately operated facilities. Municipal
notes are issued to meet the short-term funding requirements of local, regional,
and state governments. General obligation municipal securities are secured by
the issuer's pledge of full faith, credit and taxing power. Revenue or special
tax bonds are payable from the revenues derived from a particular facility or,
in some cases, from a special excise or other tax, but not from general tax
revenue.
U.S. GOVERNMENT SECURITIES. All of the Funds may purchase U.S. Government
Securities. U.S. Government Securities are marketable fixed, floating and
variable rate securities issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities. Some U.S. Government Securities,
such as U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of more than ten years) which differ only in their interest rates,
maturities and times of issuance are supported by the full faith and credit of
the U.S. Government. Others, such as obligations issued or guaranteed by U.S.
Government agencies, authorities or instrumentalities are supported either by
(a) the full faith and credit of the U.S. Government (such as securities of the
Small Business Administration), (b) the right of the issuer to borrow from the
Treasury (such as securities of the Federal Home Loan Banks), (c) the
discretionary authority of the U.S. Government to purchase the agency's
obligations (such as FNMA securities), or (d) only the credit of the issuer. No
assurance can be given that the U.S. Government will provide financial support
to U.S. Government agencies, authorities or instrumentalities in the future.
U.S. Government Securities may also include zero coupon bonds and Government
National Mortgage Association ("GNMA") mortgage-backed certificates. The yields
provided by GNMAs have historically exceeded the yields on other types of U.S.
Government Securities with comparable maturities. Unpredictable prepayments of
principal, however, can greatly change realized yields. In a period of declining
interest rates, it is more likely that mortgages contained in GMNA pools will be
prepaid thus reducing the effective yield.
Securities guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities are considered to include (i)
securities for which the payment of principal and interest is backed by a
guarantee of, or an irrevocable letter of credit issued by, the U.S. Government,
its agencies, authorities or instrumentalities and (ii) participation in loans
made to foreign governments or their agencies that are so guaranteed. The
secondary market for certain of these participations is limited. Such
participations may therefore be regarded as illiquid.
Each Fund may also invest in separately traded principal and interest components
of securities guaranteed or issued by the U.S. Treasury if such components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program ("STRIPS"). See "Zero Coupon Securities" below.
ZERO COUPON, DEFERRED INTEREST AND PAY-IN-KIND BONDS. Zero coupon bonds are debt
obligations which are issued at a significant discount from face value. The
original discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest accrual
date at a rate of interest reflecting the market rate of the security at the
time of issuance. A zero coupon security pays no interest to its holder during
its life and its value (above its cost to a Fund) consists of the difference
between its face value at maturity and its cost. While zero coupon bonds do not
require the periodic payment of interest, deferred interest bonds generally
provide for a period of delay before the regular payment of interest begins.
Although this period of delay is different for each deferred interest bond, a
typical period is approximately one-third of the bond's term to maturity. Such
investments benefit the issuer by mitigating its initial need for cash to meet
debt obligations service, but some also provide a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such
investments experience greater volatility in market value due to changes in
interest rates than debt obligations which provide for regular payments of
interest. A Fund will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. A Fund will be deemed to receive interest over the life of
such bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received by
the Fund until the cash payment date or until the bonds mature. Accordingly,
during periods when a Fund receives no cash interest payments on its zero coupon
securities or deferred interest or pay-in-kind bonds, it may be required to
dispose of portfolio securities to meet the distribution requirements.
One particular zero coupon security a Fund may purchase is the FICO STRIP, each
of which represents an interest in securities issued by the Financing
Corporation ("FICO"), whose sole purpose is to function as a financing vehicle
for recapitalizing the Federal Savings and Loan Insurance Corporation ("FSLIC").
FICO STRIPS are not backed by the full faith and credit of the U.S. Government
but are generally treated as U.S. Government Agency Securities.
The credit risk factors pertaining to lower rated debt obligations also apply to
lower rated zero coupon, deferred interest and pay-in-kind bonds. Such bonds
carry an additional risk in that, unlike bonds which pay interest throughout the
period to maturity, the Fund will realize no cash until the cash payment date
and, if the issuer defaults, the Fund may obtain no return at all on its
investment.
DERIVATIVES
As described in the individual Fund sections or the SAI, certain of the Funds
may use certain types of instruments, sometimes referred to as "derivatives."
Derivatives are used to help (a) manage risks relating to interest rates,
currency fluctuations and other market factors ("hedging"); (b) increase
liquidity; and/or (c) invest in a particular stock or bond in a more efficient
or less expensive way. Derivatives are broadly defined as financial instruments
whose performance is derived, at least in part, from the performance of an
underlying asset, such as stock prices or indices of securities, interest rates,
currency exchange rates, or commodity prices. Some, all, or the component parts
of, the following instruments might be considered derivatives or complex
securities: adjustable rate mortgage securities; adjustable rate securities;
collateralized mortgage obligations; convertible securities with enhanced yield
features such as PERCS, ACES, DECS, and PEPS; forward contracts; futures
contracts; inverse floaters and super floaters; multiclass pass-throughs,
stripped mortgage securities, and other asset-backed securities; options; real
estate mortgage investment conduits; spreads and straddles; swaps; synthetic
convertible securities; and uncovered mortgage dollar rolls. These instruments
and their risks are discussed in this section, the individual Fund sections,
and/or in the SAI.
DIVERSIFICATION
Each Fund intends to diversify its investments to meet the requirements under
Section 5 of the 1940 Act (except the Global Income Fund), under Section 851 of
the Code relating to regulated investment companies, under Section 817 of the
Code relating to the treatment of variable contracts issued by insurance
companies, and under a certain state's staff guidelines on foreign investments.
As diversified funds under the 1940 Act, each diversified Fund may not, with
respect to 75% of its total assets, purchase the securities of any one issuer
(except U.S. Government Securities) if more than 5% of the value of the Fund's
assets would be invested in such issuer.
In order to comply with the diversification requirements under section 851 of
the Code, each Fund will limit its investments so that, at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of each
Fund's total assets will be invested in the securities of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities of
a single issuer and each Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A Fund's investment in U.S. Government
Securities are not subject to these limitations.
In order to comply with the Code's diversification requirements under Section
817, each Fund will diversify its investments such that (i) no more than 55% of
the Fund's assets is represented by any one investment; (ii) no more than 70% of
the Fund's assets is represented by any two investments; (iii) no more than 80%
of the Fund's assets is represented by any three investments; and (iv) no more
than 90% of the Fund's assets is represented by any four investments. In the
case of Funds investing in obligations of U.S. government agencies or
instrumentalities, each agency or instrumentality is treated as a separate
issuer for purposes of the above rules.
To comply with a certain state's staff guidelines, each Fund which invests in
foreign countries, as a non-fundamental policy, will follow certain
diversification guidelines with respect to the amount of net assets and the
number of foreign countries in which it may invest. Each such Fund will be
invested in a minimum of five different foreign countries if it has 80% or more
of its net assets invested in foreign countries. Each such Fund may, however,
reduce this minimum to four foreign countries if less than 80% of its net assets
are invested in foreign countries. Each Fund may further reduce the minimum to
three foreign countries if less than 60%; to two foreign countries if less than
40%; and to one foreign country if less than 20% of such Fund's net assets are
invested in issuers located in foreign countries.
No Fund will have more than 20% of its net assets invested in issuers located in
any one foreign country except that a Fund may have up to an additional 15% of
its net assets in securities of issuers located in any one of the following
countries: Australia, Canada, France, Japan, the United Kingdom and Germany.
These diversification guidelines do not apply to a Fund's investment in issuers
located in the U.S.
LOAN PARTICIPATIONS
Certain Funds may acquire loan participations in which a Fund will purchase from
a lender a portion of a larger loan which it has made to a borrower. These
instruments are typically interests in floating or variable rate senior loans to
U.S. corporations, partnerships, and other entities. Generally such loan
participations trade at par value, are sold without guarantee or recourse to the
lending institution, and are subject to the credit risks of both the borrower
and the lending institution. They may enable a Fund to acquire an interest in a
loan from a financially strong borrower which it could not do directly. Some
loan participations sell at a discount because of the borrower's credit
problems. To the extent the borrower's credit problems are resolved, the loan
participations may appreciate in value. Such loan participations, however, carry
substantially the same risk as that for defaulted debt obligations and may cause
loss of the entire investment. Most loan participations are illiquid and, as
such, will be included in a fund's percentage limitation for illiquid
securities.
LOANS OF PORTFOLIO SECURITIES
Consistent with procedures approved by the Board of Trustees and subject to
certain conditions, the Funds may lend their portfolio securities to qualified
securities dealers or other institutional investors, provided that such loans do
not exceed 30% of the value of the Fund's total assets at the time of the most
recent loan (one-third of the Fund's assets in the case of the International,
Pacific, Asset Allocation, and Developing Markets Funds), and further provided
that the borrower deposits and maintains, with the Fund's custodian bank 100%
collateral consisting of cash, U.S. Government Securities, or irrevocable
letters of credit. The lending of securities is a common practice in the
securities industry. A Fund may engage in security loan arrangements with the
primary objective of increasing the Fund's income either through investing the
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, a Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
OPTIONS AND FUTURES CONTRACTS
Certain of the Funds may invest in options and futures contracts. The discussion
below and in the SAI is intended to be generic for those funds permitted under
their investment policies to purchase options and futures and any limitations
noted in this section are qualified by the Funds' individual policies as stated
in the descriptions of each of the Funds. UNLESS OTHERWISE NOTED IN A FUND'S
POLICIES, THE VALUE OF THE UNDERLYING SECURITIES ON WHICH OPTIONS MAY BE WRITTEN
AT ANY ONE TIME WILL NOT EXCEED 15% OF THE TOTAL ASSETS OF A FUND. NOR WILL A
FUND PURCHASE PUT OR CALL OPTIONS IF THE AGGREGATE PREMIUMS PAID FOR SUCH
OPTIONS WOULD EXCEED 5% OF ITS TOTAL ASSETS AT THE TIME OF PURCHASE.
UNLESS OTHERWISE NOTED IN A FUND'S POLICIES, NONE OF THE FUNDS INVESTING IN
THESE CONTRACTS WILL PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS ON FUTURES
CONTRACTS IF IMMEDIATELY THEREAFTER THE AGGREGATE AMOUNT OF INITIAL MARGIN
DEPOSITS ON ALL THE FUTURES POSITIONS OF THE FUND AND PREMIUMS PAID ON OPTIONS
ON FUTURES CONTRACTS WOULD EXCEED 5% OF THE MARKET VALUE OF THE TOTAL ASSETS OF
THE RESPECTIVE FUND. See the "Investment Objectives and Policies" of the
specific Fund for a discussion of whether, and to what extent, the Fund may
purchase these investments.
In general, a Fund will use futures and options primarily for hedging purposes,
that is, in an attempt to reduce or control certain types of risks. There is no
guarantee, however, that these transactions will be successful. In addition,
these transactions may expose a Fund to risks related to counterparty
creditworthiness, illiquidity, and increased expenses. A detailed discussion of
these transactions and their risks appears in the SAI. None of the Funds
currently expect to make significant use of these transactions, except to manage
currency risk. See "Highlighted Risk Considerations, Foreign Transactions."
PORTFOLIO TURNOVER
Each Fund may purchase and sell securities without regard to the length of time
the security has been held, and the frequency of Fund transactions (turnover
rate) will vary from year to year, depending on market conditions. Portfolio
turnover could be greater in periods of unusual market movement and volatility.
The Managers will weigh the potential benefits of any short-term trading against
the higher transaction costs associated with a higher turnover rate.
It is anticipated that each Fund's annual turnover rate generally will not
exceed 100% except for the Intermediate Bond Fund which may exceed 100% per
year. Portfolio turnover rates for recent years are shown in the "Financial
Highlights." More information is in the SAI.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
REPURCHASE AGREEMENTS. Each Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at a mutually agreed price and date. The transaction requires the
collateralization of the seller's obligation by U.S. Government Securities held
with the Fund's custodian, with an initial market value, including accrued
interest, equal to at least 102% of the dollar amount invested by the Fund, with
the value of the underlying security marked to market daily to maintain coverage
of at least 100%. A default by the seller might cause the Fund to experience a
loss or delay in the liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in liquidating the
collateral. Each Fund intends to enter into repurchase agreements only with
qualified securities dealers or other institutional investors deemed
creditworthy by the Fund's investment manager. Under the 1940 Act, a repurchase
agreement is deemed to be the loan of money by the Fund to the seller,
collateralized by the underlying security.
REVERSE REPURCHASE AGREEMENTS. A Fund authorized to do so may also enter into
reverse repurchase agreements which are the opposite of repurchase agreements
but involve similar mechanics and risks. The Fund sells securities to a bank or
broker and agrees to repurchase them at a mutually agreed price and date. Cash
or liquid high-grade debt obligations having an initial market value, including
accrued interest, equal to at least 102% of the dollar amount sold by the Fund
are segregated as collateral and marked to market daily to maintain coverage of
at least 100%. A default by the purchaser might cause the Fund to experience a
loss or delay in the liquidation of the collateral and also disposition costs.
Each Fund intends to enter into repurchase agreements only with government
securities dealers recognized by the Federal Reserve Board or with member banks
of the Federal Reserve System.
RESTRICTED AND ILLIQUID SECURITIES
IT IS A FUNDAMENTAL POLICY OF THE FUNDS TO NOT INVEST MORE THAN 10% OF THEIR
RESPECTIVE NET ASSETS IN ILLIQUID INVESTMENTS, except that the International
Smaller Companies Fund may invest up to 15% in such investments. See the SAI,
"Non-Fundamental Investment Restrictions." Illiquid investments includes most
repurchase agreements of more than seven days duration, currency and interest
rate swaps, time deposits with a notice or demand period of more than seven
days, certain over-the-counter option contracts, participation interests in
loans, securities that are not readily marketable and "restricted securities,"
i.e., securities that are not registered or are offered in an exempt non-public
offering under the Securities Act of 1933 ("1933 Act"). Such restriction shall
not apply to restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act or to foreign securities which are
offered or sold outside the United States where the Managers determine, based
upon a continuing review of the trading markets for the specific restricted
security, that such restricted securities are liquid.
The Board of Trustees has adopted guidelines and delegated to the Managers the
daily function of determining and monitoring the liquidity of restricted
securities. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations. To the extent a Fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in a Fund may be increased if qualified institutional buyers become uninterested
in purchasing these securities or the market for these securities contracts.
The purchase price and subsequent valuation of restricted securities normally
reflect a discount from the price at which such securities would trade if they
were not restricted, since the restriction makes them less liquid. The amount of
the discount from the prevailing market prices is expected to vary, depending
upon the type of security, the character of the issuer, the party who will bear
the expenses of registering the restricted securities and prevailing supply and
demand conditions.
"ROLLS"
Funds that may purchase Treasury securities may also enter into "U.S. Treasury
rolls" in which the Fund sells outstanding U.S. Treasury securities and buys
back "when-issued" U.S. Treasury securities of slightly longer maturity for
simultaneous settlement on the settlement date of the when-issued U.S. Treasury
security. During the period prior to settlement date, the Fund continues to earn
interest on the securities it is selling. It does not earn interest on the
securities which it is purchasing until after settlement date. Two potential
advantages of such a strategy are 1) that the Fund can regularly and
incrementally adjust its weighted average maturity (which otherwise would
constantly diminish with the passage of time); and 2) in a normal yield curve
environment (in which shorter maturities yield less than longer maturities), a
gain in yield to maturity can be obtained along with the desired extension. The
Fund could suffer an opportunity loss if the counterparty to the roll failed to
perform its obligations on settlement date, in that market conditions may have
changed adversely. The Fund, however, intends to enter into U.S. Treasury rolls
only with government securities dealers recognized by the Federal Reserve Board
or with member banks of the Federal Reserve System.
Funds that may purchase mortgage-backed securities may enter into mortgage
"dollar rolls" in which the Fund sells mortgage-backed securities for delivery
in the current month and simultaneously contracts to repurchase substantially
similar (name, type, coupon and maturity) securities on a specified future date.
During the roll period, the Fund forgoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated by the difference between
the current sales price and the lower forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar roll
for which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction and is maintained in a segregated account. A Fund will not
enter into any dollar rolls that are not covered rolls.
SMALL CAPITALIZATION ISSUERS
Certain of the Funds may invest in relatively new or unseasoned companies which
are in their early stages of development, or small companies positioned in new
and emerging industries where the opportunity for rapid growth is expected to be
above average. These are typically companies which have a market capitalization
of less than $1 billion. Investing in securities of small companies may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Securities of
unseasoned companies may present greater risks than securities of larger, more
established companies. Small companies may suffer significant losses as well as
realize substantial growth, and investments in such companies tend to be more
volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in price
than the larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. Investors should therefore expect that the value of a Fund's shares
which invests a substantial portion of its net assets in small company stocks
may be more volatile than the shares of a fund that invests solely in larger
capitalization stocks. For more information, refer to the "Small Cap Fund"
description.
STRUCTURED NOTES
A structured note is a derivative instrument which entitles its holder to
receive some portion of the principal or interest payments which would be due on
a traditional debt obligation. A zero coupon bond, which is the right to receive
only the principal portion of a debt security, is a simple form of structured
note. A structured note's performance or value may be linked to a change in
return, interest rate, or value at maturity of the change in an identified or
"linked" equity security, currency, interest rate, index or other financial
indicator ("reference index"). The holder's right to receive principal or
interest payments on a structured note may also vary in timing or amount,
depending upon changes in certain rates of interest or other external events.
Structured notes may be much more volatile than the underlying instruments
themselves, depending on the direction of interest rates, and may present many
of the same risks as investing in futures and options. Certain structured notes
without leverage characteristics may still be considered risky and an investor
could lose an amount equal to the amount invested. As with any debt instruments,
structured notes pose credit risk, i.e., the issuer may be unable to make the
required payments. Finally, some structured notes may be illiquid, because few
investors or dealers trade in such securities or because the notes are complex
and difficult to price. Such potential illiquidity may be especially pronounced
during severe bond market corrections. The Board will monitor the liquidity of
structured notes and notes determined to be illiquid will be subject to a Fund's
percentage limits on illiquid securities. THE TEMPLETON MANAGERS MAY
OCCASIONALLY INVEST UNDER 5% OF THEIR RESPECTIVE FUND'S ASSETS IN STRUCTURED
NOTES THAT ARE LINKED TO A REFERENCE INDEX, ON A NON-LEVERAGED, ONE-TO-ONE
BASIS.
TEMPORARY INVESTMENTS
In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, a Fund may establish a
temporary defensive position by investing in high quality Money Market
Investments. Any decision to withdraw substantially, and, for a sustained period
of time, from a Fund's "defined" market(s) based on its investment objectives
will be reviewed by the Board of Trustees. All Funds, except the Money Fund, may
therefore invest up to 100% of their respective net assets in, for example, U.S.
Government Securities, bank obligations, the highest quality commercial paper,
or in repurchase agreements as described above. Rising Dividends may also invest
in short-term fixed-income securities.
The Asset Allocation, Global Income, Global Growth, International, International
Smaller Companies, Pacific, and Developing Markets Funds may also invest in
non-U.S. currency and short-term instruments denominated in non-U.S. currencies
for temporary defensive purposes. The Developing Markets and International
Smaller Companies Funds may also invest in medium-term (not more than five years
to maturity) obligations issued or guaranteed by the U.S. government or the
governments of foreign countries, their agencies or instrumentalities.
It is not possible to predict with any certainty when or for how long a Fund
will employ defensive strategies.
TRADE CLAIMS
Trade claims are purchased from creditors of companies in financial difficulty
who seek to reduce the number of debt obligations they are owed. Such trade
creditors generally sell their claims in an attempt to improve their balance
sheets and reduce uncertainty regarding payments. For purchasers, trade claims
offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, have the potential for higher
income and capital appreciation should the debt issuer's financial position
improve. Trade claims are generally liquid as there is a secondary market but
the Board of Trustees will monitor their liquidity.
An investment in trade claims is speculative and there can be no guarantee that
the debt issuer will ever be able to satisfy the obligation. Further, trading in
trade claims is not regulated by federal securities laws but primarily by
bankruptcy laws and commercial laws. Because trade claims are unsecured
obligations, holders may have a lower priority than secured or preferred
creditors.
WARRANTS
A warrant is typically a long-term option issued by a corporation which gives
the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
an expiration date.
Stock index warrants entitle the holder to receive, upon exercise, an amount in
cash determined by reference to fluctuations in the level of a specified stock
index. If a Fund does not exercise or dispose of a warrant prior to its
expiration, it will expire worthless.
"WHEN-ISSUED" AND "DELAYED
DELIVERY" TRANSACTIONS
A Fund may purchase debt obligations on a "when-issued" or "delayed delivery"
basis (in the case of GNMA Certificates, a "To-Be-Announced" basis). Such
securities are subject to market fluctuations prior to delivery to the Fund and
generally do not earn interest until their scheduled delivery date. When the
Fund is the buyer in such transactions, it will maintain, in a segregated
account with its custodian, cash or high-grade marketable securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. To the extent the Fund engages in when-issued and delayed delivery
transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with the Fund's investment objectives and policies, and
not for the purpose of investment leverage. Nonetheless, purchases of securities
on such basis may involve more risk than other types of purchases, for example,
counterparty delivery risk. If the seller fails to complete the transaction, the
Fund may miss a price or yield considered advantageous. See the SAI for
additional information.
INVESTMENT RESTRICTIONS
Each Fund is subject to a number of additional investment restrictions, some of
which are fundamental policies and, like the investment objective of each Fund,
may be changed only with the approval of shareholders as required by the 1940
Act. For a list of these additional restrictions and more information concerning
the policies discussed above, please see the SAI.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trust has a Board of Trustees which has the primary responsibility for the
overall management of the Trust and each of the Funds. The Trustees elect the
officers of the Trust who are responsible for administering its day-to-day
operations.
MANAGERS
The Manager for all series of the Trust, except the Asset Allocation, Global
Growth, International Smaller Companies and Developing Markets Funds, is
Franklin Advisers, Inc. ("Advisers"), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777. In addition, Advisers employs Templeton
Investment Counsel, Inc. ("Templeton Florida"), Broward Financial Centre, Suite
2100, Fort Lauderdale, Florida 33394, to act as subadviser to the International
Equity Fund, the Pacific Fund, and the Global Income Fund.
The Manager for the Asset Allocation and Global Growth Funds is Templeton Global
Advisors Limited ("Templeton Nassau") formerly known as Templeton Galbriath &
Hansberger, Ltd., Lyford Cay Nassau, N.P. Bahamas. Templeton Nassau employs
Templeton Florida to act as subadviser to the Asset Allocation Fund.
As of October 1, 1995, Templeton Asset Management Ltd., formerly known as
Templeton Investment Management (Singapore) Pte Ltd., ("Templeton Singapore") 20
Raffles Place, Ocean Towers, Singapore, replaced Templeton Investment Management
(Hong Kong) Limited ("Templeton Hong Kong") as the Manager for Developing
Markets Fund. Templeton Singapore and Templeton Hong Kong are indirect wholly
owned subsidiaries of Franklin Resources, Inc.
The Manager for the International Smaller Companies Fund is Templeton Florida.
Advisers acts as investment manager or administrator to 34 U.S. registered
investment companies (116 separate series) with aggregate assets of over $75
billion. (Advisers, Templeton Nassau, Templeton Singapore, and Templeton Florida
may be referred to as the "Manager" or "Managers" throughout the prospectus and
SAI.) The Managers are direct or indirect wholly owned subsidiaries of Franklin
Resources, Inc., a publicly owned holding company, the principal shareholders of
which are Charles B. Johnson and Rupert H. Johnson, Jr., who own approximately
20% and 16%, respectively, of its outstanding shares. Through its subsidiaries,
Resources manages over $128 billion in assets worldwide for over 3.8 million
mutual fund shareholders, in addition to foundations and endowments, employee
benefit plans, and individuals.
The Managers, subject to the overall policies, control, direction and review of
the Board of Trustees (and to the instructions and supervision of Advisers and
Templeton Nassau in the case of Templeton Florida) are responsible for
recommending and providing advice with respect to each Fund's investments, and
for determining which securities will be purchased, retained or sold as well as
for execution of portfolio transactions.
The Managers, also subject to the overall review of the Board of Trustees, may,
from time to time, use various methods of selecting securities for the Fund's
portfolio, and these methods are changed and improved by the Managers' research
on superior selection methods. The Managers may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of a Fund's portfolio. Securities are selected for a Fund's portfolio
largely on the basis of fundamental company-by-company analysis. Determinations
of eligible securities will be made by the Managers based on publicly available
information and inquiries made to the companies. The Templeton Managers use a
disciplined, long-term approach to value oriented global and international
investing. The Managers and their affiliates have approximately 4,100 employees
in 10 different countries and an extensive global network of investment research
sources.
MANAGEMENT FEES. The management agreements provide for the management of each
Fund's portfolio and, except for the Asset Allocation and the International
Smaller Companies Funds, for certain administrative services and facilities
which are necessary to conduct the Fund's business, for which each Fund is
obligated to pay a management fee. The Capital Growth and Small Cap Funds are
obligated to pay Advisers a monthly fee computed at the annual rate of 0.75% of
average daily net assets up to and including $500 million, plus 0.625% of the
value of average daily net assets up to and including $1 billion, plus 0.50% of
the value of average daily net assets over $1 billion. Under a management
agreement with Templeton Florida, the International Smaller Companies Fund is
obligated to pay the Manager a monthly fee equal to an annual rate of 0.85% of
the value of the Fund's average daily net assets up to and including $200
million, 0.765% of the value of the Fund's average daily net assets over $200
million up to and including $1.3 billion; and 0.68% of the value of the Fund's
average daily net assets over $1.3 billion.
The fees paid by each Fund are on a declining scale thereafter based on such
Fund's assets. Please refer to the SAI for further details.
Any of the Managers may determine in advance to limit the management fees or
assume responsibility for the payment of certain operating expenses with respect
to any Fund in order to reduce total expenses or increase the yield of each such
Fund. Voluntary reductions of fees or assumption of a Fund's operating expenses
by any of the Managers may be terminated by the Managers at any time or when
reaching a certain level of assets.
For the year ended December 31, 1995, Advisers agreed to limit its management
fees for the Zero Coupon Funds - 2000, - 2005, and - 2010 so that aggregate
expenses did not exceed 0.40% of each of the Fund's average monthly net assets,
including management fees of .37%, .37% and .37%, of the respective Funds. Until
at least December 31, 1996, Advisers has agreed to keep the total expenses of
each Zero Coupon Fund to a maximum of 0.40% of each Zero Coupon Fund's average
monthly net assets. With respect to the Money Fund, during 1995, Advisers
limited its management fees such that aggregate expenses, including management
fees of 0.38%, represented 0.40% of the Money Fund's average daily net assets.
There were no reductions of management fees by the Managers for any of the other
Funds. Please refer to "Financial Highlights" for information on the expense
ratios of each Fund.
The Management Fees below represent the fees for each Fund based on a percentage
of that Fund's net assets under management that were paid to the investment
advisers of the Trust for the 1995 fiscal year (with the exception of the Funds
listed above).
Management and Business
Management Fees1
Adjustable Fund .56%
Growth and Income Fund .49%
High Income Fund .53%
Income Securities Fund .47%
Intermediate Bond Fund .58%
Metals Fund .61%
Rising Dividends Fund .75%
Real Estate Fund .56%
Developing Markets Fund 1.25%
Asset Allocation Fund .80%
Global Income Fund .55%
Global Growth Fund .93%
International Equity Fund .83%
Pacific Fund .90%
Government Fund .49%
Utility Fund .47%
1 The Business Management Fee is a direct expense for the Asset Allocation Fund;
the other Funds pay for similar services indirectly through the Management Fee.
In general, the fees which the Funds investing, substantially in global
securities are obligated to pay the Managers are higher than advisory fees paid
by most other U.S. investment companies, primarily because investing in equity
securities of companies outside the U.S., and especially in developing market
countries which are not widely followed by professional analysts, requires the
Managers to invest additional time and incur added expense in developing
specialized resources, including research sources.
OPERATING EXPENSES. Each Fund is responsible for its own operating expenses.
Expenses incurred jointly by more than one Fund will be apportioned on a pro
rata basis. In addition to the Managers' fees, and Business Managers fees in the
case of the Asset Allocation and the International Smaller Companies Funds, the
Funds are responsible for their pro rata portion of the Trust's operating
expenses, including, but not limited to, taxes, if any; custodian, legal and
auditing fees; fees and expenses of trustees who are not members of, affiliated
with or interested persons of the Managers; salaries of any personnel not
affiliated with the Managers; insurance premiums; trade association dues;
expenses of obtaining quotations for calculating the value of the Fund's net
assets; printing and other expenses which are not expressly assumed by the
Managers.
BROKER/DEALER SELECTION. Under each management agreement, the Manager selects
the brokers and dealers through whom transactions in each Fund's investment
securities will be effected. The Managers try to obtain the best execution on
all such transactions. If it is felt that more than one broker is able to
provide the best execution, the Managers will consider the receipt of quotations
and other market services, and of research, statistical and other data in
selecting a broker-dealer to execute a transaction. Sales of the Policies by
broker-dealers or their affiliates may be a factor in considering the placement
of portfolio transactions, provided the Managers are satisfied that the Funds
are receiving the best execution. For further information see "The Funds'
Policies Regarding Brokers Used on Securities Transactions" in the SAI.
SUBADVISORS
Templeton Florida is paid a fee by Advisers with respect to the Global Income,
International and Pacific Funds, and by Templeton Nassau with respect to the
Asset Allocation Fund, based on a percentage of each Fund's average daily net
assets. In all cases, Templeton Florida's fees are not a separate expense of the
respective Funds but are paid by the Managers from the management fees they
receive from their respective management agreements with the Funds. Templeton
Florida will pay all expenses incurred by it in connection with its activities
under the subadvisory agreement with the Managers, other than the cost of
securities purchased for the Funds and brokerage commissions in connection with
such purchases.
BUSINESS MANAGER
Templeton Global Investors, Inc. ("Business Manager"), Broward Financial Centre,
Suite 2100, Fort Lauderdale, Florida 33394, provides certain administrative
facilities and services for certain of the Funds, including payment of salaries
of officers, preparation and maintenance of books and records, preparation of
tax reports, preparation of financial reports, and monitoring compliance with
regulatory requirements. The Business Manager is employed directly by the Asset
Allocation and International Smaller Companies Funds and receives a monthly fee
equivalent on an annual basis to 0.15% of the combined average daily net assets
of the Fund, reduced to 0.135% of such assets in excess of $200 million, to
0.10% of such assets in excess of $700 million, and to 0.075% of such assets in
excess of $1.2 billion. The Business Manager is employed through subcontracts by
the Managers of the Developing Markets, Global Growth, Global Income,
International Equity, and Pacific Growth Funds. These fees are not separate
expenses of these Funds but are paid by their Managers from the management fees
they receive from their management agreements with the Funds.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day-to-day operations of
the funds of the Trust, other than the Money Fund.
ADJUSTABLE U.S. GOVERNMENT FUND
T. Anthony Coffey
Roger Bayston
Jack Lemein
CAPITAL GROWTH FUND
Conrad B. Herrmann
Vivian J. Palmieri
GROWTH AND INCOME FUND
(FORMERLY, "EQUITY GROWTH FUND")
Frank Felicelli
Douglas Barton
Ernst Schleimer
HIGH INCOME FUND
R. Martin Wiskemann
Chris Molumphy
Betsy Hoffman-Schwab
INCOME SECURITIES FUND
Charles B. Johnson
Matt Avery
INVESTMENT GRADE INTERMEDIATE BOND FUND
Philip H. W. Smith
William Lippman
Margaret McGee
PRECIOUS METALS FUND
R. Martin Wiskemann
Suzanne Willoughby Killea
Shan Green
REAL ESTATE SECURITIES FUND
Matt Avery
Tom Branch
RISING DIVIDENDS FUND
William Lippman
Bruce C. Baughman
Margaret McGee
SMALL CAP FUND
Edward B. Jamieson
Nicholas Moore
Michael McCarthy
TEMPLETON DEVELOPING MARKETS EQUITY FUND
J. Mark Mobius, Ph.D.
H. Allan Lam
Tom Wu
TEMPLETON GLOBAL ASSET ALLOCATION FUND
Jeffrey A. Everett
Thomas J. Dickson
Sean Farrington
TEMPLETON GLOBAL GROWTH FUND
Mark G. Holowesko
Jeffrey A. Everett
Sean Farrington
TEMPLETON GLOBAL INCOME SECURITIES FUND
(FORMERLY "GLOBAL INCOME FUND")
Neil S. Devlin
Thomas J. Dickson
Ronald A. Johnson, Ph.D.
TEMPLETON INTERNATIONAL EQUITY FUND
Marc S. Joseph
Mark Beveridge
TEMPELTON INTERNATIONAL SMALLER COMPANIES FUND
Marc Joseph
Marc Beveridge
Gary Clemons
TEMPLETON PACIFIC GROWTH FUND
William T. Howard
Mark Beveridge
Gary Clemons
U.S. GOVERNMENT SECURITIES FUND
Jack Lemein
David Capurro
Roger Bayston
UTILITY EQUITY FUND
Gregory E. Johnson
Sally Edwards-Haff
Ian Link
ZERO COUPON FUNDS
David Capurro
Jack Lemein
Tony Coffey
BIOGRAPHICAL INFORMATION
Matt Avery
Portfolio Manager
Franklin Advisers, Inc.
Mr. Avery holds a Master of Business Administration degree from the University
of California at Los Angeles. He earned his Bachelor of Science degree in
industrial engineering from Stanford University. He has been in the securities
industry since 1982 and with Franklin since 1987. Mr. Avery has managed the
Income Securities Fund and the Real Estate Fund since their inception.
Douglas Barton
Portfolio Manager
Franklin Advisers, Inc.
Mr. Barton is a Chartered Financial Analyst and holds a Master of Business
Administration degree from California State University in Hayward and a Bachelor
of Science degree from California State University in Chico. Mr. Barton joined
Franklin in July 1988 and has managed the Growth and Income Fund since May of
1995.
Bruce C. Baughman
Portfolio Manager
Franklin Advisers, Inc.
Mr. Baughman holds a Master of Science degree in accounting from New York
University. He earned his Bachelor of Arts degree from Stanford University.
Prior to joining Franklin, Mr. Baughman had been in the securities industry for
over ten years and with Franklin since 1988. He has managed the Rising Dividends
Fund since its inception.
Roger Bayston
Portfolio Manager
Franklin Advisers, Inc.
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. Prior to
joining Franklin, Mr. Bayston was an Assistant Treasurer for Bankers Trust
Company. Following completion of the Masters degree program, Mr. Bayston joined
Franklin in 1991. Mr. Bayston has managed the Adjustable Fund since August 1991
and the Government Fund since November 1993.
Mark R. Beveridge
Vice President and
Portfolio Manager
Templeton Investment Counsel Inc.
Mr. Beveridge is a Chartered Financial Analyst and holds a Bachelor of Business
Administration degree in finance from the University of Miami. He joined
Templeton in 1985 and has managed the International and Pacific Growth Funds
since January 1994 and will manage the Templeton International Smaller Companies
Fund from inception.
Tom Branch
Portfolio Manager
Franklin Advisers, Inc.
Mr. Branch received a Bachelor of Science degree in Business Administration with
a concentration in finance from California Polytechnic State University, San
Luis Obispo. Mr. Branch joined Franklin in July of 1993 and has managed the Real
Estate Fund since 1994.
David Capurro
Portfolio Manager
Franklin Advisers, Inc.
Mr. Capurro holds a Master of Business Administration degree in finance from
California State University at Hayward. He earned his Bachelor of Science degree
in business administration at California State University at Hayward. Mr.
Capurro joined Franklin in 1983 and has managed the Government Fund and the Zero
Coupon Funds since inception.
Gary Clemons
Portfolio Manager
Templeton Investment Counsel Inc.
Mr. Clemons holds a Master of Business Administration degree from the University
of Wisconsin at Madison. He earned his Bachelor of Science degree in earth
science from the University of Nevada at Reno. Mr. Clemons was a research
analyst for Structured Asset Management. He joined Templeton in 1990 and has
managed the Pacific Fund since 1994 and will manage the Templeton International
Smaller Companies Fund from inception.
T. Anthony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration from the University of California at Los Angeles. He earned his
Bachelor of Arts degree from Harvard University. Prior to joining Franklin, Mr.
Coffey was an associate with the Analysis Group. He is a member of several
securities industry committees and associations and joined Franklin in 1989. He
has managed the Zero Coupon Funds since August 1989 and the Adjustable Fund
since its inception.
Neil S. Devlin
Executive Vice President and Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Devlin holds a Bachelor of Arts degree in economics and philosophy from
Brandeis University. He is currently a level III CFA candidate. Prior to joining
Templeton in 1987, Mr. Devlin was a portfolio manager and a bond analyst with
Constitutional Capital Management of Boston and a bond trader and research
analyst for the Bank of New England. He has managed the Templeton Global Income
Securities Fund (formerly the "Global Income Fund") since 1994.
Thomas J. Dickson
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Dickson received his Bachelor of Science degree in managerial economics from
the University of California at Davis. Mr. Dickson joined Franklin in 1992 and
moved to Templeton in 1994. He has managed the Templeton Global Income
Securities Fund (formerly the "Global Income Fund") since 1994, and has managed
the Asset Allocation Fund from inception.
Jeffrey A. Everett
Vice President and
Portfolio Manager
Templeton, Galbraith & Hansberger Ltd.
Mr. Everett is a Chartered Financial Analyst and holds a Bachelor of Science
degree in finance from Pennsylvania State University. Prior to joining
Templeton, he was an Investment Officer at First Pennsylvania Corporation and a
research coordinator for Centre Square Investment Group. He joined Templeton in
1990, has managed the Global Growth Fund from inception and has managed the
Asset Allocation Fund from inception.
Sally Edwards-Haff
Portfolio Manager
Franklin Advisers, Inc.
Ms. Edwards-Haff, is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in economics from the University of California at Santa Barbara. Ms.
Edwards-Haff is a member of several securities industry committees and
associations. She joined Franklin in 1986 and has managed the Utility Fund since
October 1990.
Sean Farrington
Portfolio Manager
Templeton, Galbraith & Hansberger Ltd.
Mr. Farrington, a Chartered Financial Analyst, has a Bachelor of Arts in
Economics from Harvard University. He is a member of a securities association.
He joined Templeton in 1991. He has managed the Global Growth Fund since 1995
and has managed the Asset Allocation Fund from inception.
Frank Felicelli
Executive Vice President
Franklin Management, Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Felicelli, a Chartered Financial Analyst, has a Master in Business
Administration from Golden Gate University and a Bachelor of Arts in economics
from the University of Illinois. He is a member of several securities
industry-related committees and associations. Mr. Felicelli has been in the
industry since 1980 and with Franklin since 1986. He has managed the Growth and
Income Fund since May of 1995.
Shan Green
Portfolio Manager
Franklin Advisers, Inc.
Ms. Green holds a Master of Business Administration degree from the University
of California at Berkeley. She earned her Bachelor of Science degree from State
University of New York at Stoney Brook. Ms. Green has managed the Precious Metal
Fund since joining Franklin in 1994.
Conrad B. Herrmann
Portfolio Manager
Franklin Advisers, Inc.
Mr. Herrmann holds a Master of Business Administration degree from Harvard
University and a Bachelor of Arts degree from Brown University. Mr. Herrmann is
a Chartered Financial Analyst has been with Advisers since 1989 and prior
thereto was Vice President and General Manager of Aquila Management. He will
manage the Capital Growth Fund from inception.
Betsy Hoffman-Schwab
Portfolio Manager
Franklin Advisers, Inc.
Ms. Hoffman is a level three Chartered Financial Analyst candidate and holds a
Master of Business Administration degree from the College of Notre Dame in
California. She earned her Bachelor of Science degree in finance at the College
of Notre Dame in California. She is a member of several securities industry
associations. She has been with Franklin since 1981 and has managed the High
Income Fund since its inception.
Mark G. Holowesko
Director of Global Equity Research
Templeton Worldwide, Inc.
and Portfolio Manager
Templeton, Galbraith & Hansberger Ltd.
Mr. Holowesko is a Chartered Financial Analyst and Chartered Investment
Counselor. He holds a Master of Business Administration degree from Babson
College in Worcester, Massachusetts and a Bachelor of Arts degree in economics
from the College of The Holy Cross, also in Worcester, Massachusetts. He is a
member of several securities industry associations. Mr. Holowesko joined
Templeton in 1985 and has managed the Global Growth Fund from inception.
William T. Howard, Jr.
Vice President and
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Howard is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Emory University. He earned his Bachelor of Arts
degree from Rhodes College. Prior to joining Templeton, Mr. Howard was the
international portfolio manager and analyst with the State of Tennessee
Consolidated Retirement System. He has managed the Pacific Fund since joining
Templeton in 1993.
Edward B. Jamieson
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Jamieson holds a Bachelor of Arts degree from Bucknell University and a
Master's degree in accounting and finance from the University of Chicago
Graduate School of Business. He has been with Advisers since 1987. He is a
member of several securities industry-related committees and associations. He
has managed the Small Cap Fund from inception.
Charles B. Johnson
Chairman of the Board, Director
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Johnson holds a Bachelor of Arts degree in economics and political science
from Yale University. He has been with Franklin since 1957. Mr. Johnson is a
member of several securities industry committees and associations. He has
managed the Income Securities Fund and the Utility Fund since their inception.
Gregory E. Johnson
Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Johnson holds a Bachelor of Science degree in accounting and business
administration from Washington and Lee University. He joined Franklin in 1986.
Mr. Johnson is a member of several securities industry committees and
associations. He has managed the Utility Fund since its inception.
Ronald A. Johnson Ph.D.
Vice President and
Emerging Markets Strategist
Templeton Global Bond Managers
Dr. Johnson holds a Ph.D. and MA in economics from Stanford University, an MBA
in finance and a Bachelor of Arts degree in economics from Adelphi University.
Prior to joining Templeton, Dr. Johnson was chief strategist and head of
research for JPBT Advisers, Inc. Dr. Johnson has managed the Templeton Global
Income Securities Fund (formerly the "Global Income Fund") since 1995.
Marc S. Joseph
Vice President and
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Joseph holds a Doctor of Jurisprudence degree from Harvard Law School. He
earned a Master of Business Administration degree from Harvard Business School
and a Bachelor of Science degree in computer science from William and Mary
College. Prior to joining Templeton, Mr. Joseph was a vice president with
Pacific Financial Research and a management consultant at McKinsey Co. He has
managed the International Equity Fund since joining Templeton in 1993 and will
manage the Templeton International Smaller Companies Fund from inception.
Suzanne Willoughby Killea
Portfolio Manager
Franklin Advisers, Inc.
Ms. Killea holds a Master of Business Administration degree from Stanford
University. She earned her Bachelor of Arts degree in architecture from
Princeton University. Prior to joining Franklin, Ms. Killea worked as a summer
intern with Dillon Read & Co., Inc. (1990) and Dodge & Cox (1989), and for five
years as a broker with the Rubicon Group, a commercial real estate services
firm. Ms. Killea joined Franklin in 1991 and has managed the Precious Metals
Fund since 1994.
H. Allan Lam
Vice President
Templeton Asset Management
(Singapore) Pte Ltd.
Mr. Lam holds a Bachelors of Arts degree in accounting from Rutgers University.
He has had extensive auditing experience with Deloitte Touche & Tohmatsu and
KPMG Peat Marwick. He joined Templeton in 1987 and has managed the Developing
Markets Fund from inception.
Jack Lemein
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Lemein holds a bachelor of science degree in finance from the University of
Illinois. Mr. Lemein has been in the securities industry since 1967. He is a
member of several securities industry-related committees and associations. Mr.
Lemein joined Franklin in 1984 and has managed the Government Fund, the Zero
Coupon Funds, and the Adjustable Fund since their inception.
Ian Link
Portfolio Manager
Franklin Advisers, Inc.
Mr. Link is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
economics from the University of California at Davis. He is a member of several
securities industry-related committees and associations. Mr. Link joined
Franklin in 1989, and has managed the Utility Fund since March 1995.
William Lippman
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Lippman holds a Master of Business Administration degree from the Graduate
School of Business Administration of New York University. He earned his Bachelor
of Science degree in business administration from City College New York. Mr.
Lippman has been in the securities industry for over 30 years and with Franklin
since 1988. He has managed the Intermediate Bond Fund and the Rising Dividend
Fund since their inception.
Michael McCarthy
Portfolio Manager
Franklin Advisers, Inc.
Mr. McCarthy holds a Bachelor of Arts degree in history from the University of
California at Los Angeles. He has been with Advisers since 1992. He has managed
the Small Cap Fund from inception.
Margaret McGee
Portfolio Manager
Franklin Advisers, Inc.
Ms. McGee holds a Bachelor of Arts degree from William Paterson College. She has
been in the securities industry since 1985 and with Franklin since 1988. Ms.
McGee is a member of several securities industry-related committees and
associations. She has managed the Rising Dividend Fund and the Intermediate Bond
Fund since their inception.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Asset Management
(Singapore) Pte Ltd.
Mr. Mobius holds a Doctor of Philosophy degree in economics and political
science from the Massachusetts Institute of Technology. He earned his bachelor's
and master's degrees from Boston University. He is a member of several
industry-related associations. Mr. Mobius joined the Templeton organization in
1987 and has managed the Developing Markets Fund from inception.
Chris Molumphy
Portfolio Manager
Franklin Advisers, Inc.
Mr. Molumphy is a Chartered Financial Analyst and holds a Master's of Business
Administration degree in finance from the University of Chicago. He earned his
Bachelor of Arts degree in economics from Stanford University. Mr. Molumphy is a
member of several securities industry associations. He joined Franklin in 1988
and has managed the High Income Fund since its inception.
Nicholas Moore
Portfolio Manager
Franklin Advisers, Inc.
Mr. Moore holds a Bachelor of Science degree in business administration, with a
focus on accounting and finance, from the School of Business, Menlo College,
Menlo Park, California. He has been with Advisers since 1986. He has managed the
Small Cap Fund from inception.
Vivian J. Palmieri
Portfolio Manager
Franklin Advisers, Inc.
Mr. Palmieri holds a Bachelor of Arts degree in economics from Williams College.
He has been with Advisers since 1965. Mr. Palmieri will manage the Capital
Growth Fund from inception.
Ernst Schleimer
Portfolio Manager
Franklin Advisers, Inc.
Mr. Schleimer holds a Master of Business Administration degree from the Stanford
School of Business and a Bachelor of Arts degree from Tufts University. Mr.
Schleimer has been with Advisers or and affiliate since 1994, and prior thereto
worked as a consultant at KPMG Peat Marwick. He has managed the Growth and
Income Fund since 1995.
Philip H. W. Smith
Portfolio Manager
Franklin Advisers, Inc.
Mr. Smith holds a Doctor of Jurisprudence degree from Yale Law School. He earned
his Bachelor of Arts degree from Princeton University. Mr. Smith has been in the
securities industry since 1964. He joined Franklin in 1988 and has managed the
Intermediate Bond Fund since its inception.
R. Martin Wiskemann
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Wiskemann holds a degree in business administration from the Handelsschule
of the State of Zurich, Switzerland. He has been in the securities business for
more than 30 years, managing mutual fund equity and fixed-income portfolios, and
private investment accounts. He is a member of several securities industry
associations. He joined Franklin in 1972 and has managed the High Income Fund
and the Metals Fund since their inception.
Tom Wu
Vice President and
Portfolio Manager
Templeton Asset Management
(Singapore) Pte Ltd.
Mr. Wu holds a Master of Business Administration degree from the University of
Oregon. He earned a Bachelor of Social Science Degree in economics from the
University of Hong Kong. Prior to joining Templeton, he was a stockbroker at
Vickers da Costa Hong Kong Ltd. He joined Templeton in 1987 and has managed the
Developing Markets Fund from inception.
PURCHASE, REDEMPTION,
AND EXCHANGE OF SHARES
PURCHASES OF SHARES
As noted in the Introduction, shares of each Fund are currently sold only to the
Variable Accounts of Allianz Life to fund the benefits under its Policies. The
Trust does not foresee any disadvantage to purchasers of variable life insurance
policies and variable annuity contracts arising out of the fact that the Trust
may be made available to Variable Accounts which are used in connection with
both types of products. Nevertheless, the Trust's Board of Trustees intends to
monitor events in order to identify any material irreconcilable conflicts which
may possibly arise and to determine what action, if any, should be taken in
response thereto. If such a conflict were to occur, one of the Variable Accounts
might withdraw its investment in the Trust. This might force the Trust to sell
portfolio securities at disadvantageous prices.
The applicable Variable Account of Allianz Life purchases shares of each Fund
using premiums allocated to one or more of the Sub-Accounts of each Variable
Account, as selected by the Policyholders. All shares are sold at net asset
value without a sales charge. Shares are purchased at the net asset value of
each respective Fund next determined after Allianz Life receives the premium
payment in good order.
All investments in each Fund are credited to each Sub-Account in the form of
full and fractional shares of the designated Fund (rounded to the nearest 1/1000
of a share). The Funds do not issue share certificates. Initial and subsequent
payments allocated to a specific Fund are subject to the limits applicable in
the Policies issued by Allianz Life.
The investment objectives and policies of most of the Funds are similar to those
of other Franklin Templeton Funds. Following is a list of the Funds and each
such similar fund in the Franklin Templeton Fund:
<TABLE>
<CAPTION>
FRANKLIN VALUEMARK FUNDS FRANKLIN TEMPLETON FUNDS
<S> <C>
FRANKLIN INVESTORS SECURITIES
TRUST:
Adjustable U.S. Government Fund -Adjustable U.S. Government Securities Fund
FRANKLIN CUSTODIAN FUNDS, INC.:
Capital Growth Fund -Growth Series
High Income Fund -AGE High Income Fund, Inc.
FRANKLIN CUSTODIAN FUNDS, INC.:
Income Securities Fund - Income Series
FRANKLIN MANAGED TRUST:
Investment Grade Intermediate - Franklin Investment Grade
Bond Fund Income Fund
Money Market Fund Franklin Money Fund
Precious Metals Fund Franklin Gold Fund
FRANKLIN REAL ESTATE SECURITIES
TRUST:
Real Estate Securities Fund - Franklin Real Estate Securities
Fund
FRANKLIN MANAGED TRUST:
Rising Dividends Fund - Franklin Rising Dividends Fund
FRANKLIN STRATEGIC SERIES:
Small Cap Fund - Franklin Small Cap Growth Fund
Templeton Developing Markets Equity Fund Markets Fund, Inc.
TEMPLETON VARIABLE PRODUCTS
SERIES FUND:
Templeton Global Asset Allocation Fund - Templeton Asset Allocation Fund
Templeton Global Growth Fund Templeton Growth Fund, Inc.
FRANKLIN INVESTORS SECURITIES
TRUST:
Templeton Global Income Securities Fund (formerly - Franklin Global Government
(Global Income Fund") Income Fund
FRANKLIN INTERNATIONAL TRUST:
Templeton International Equity Fund - Franklin International Equity Fund
FRANKLIN INTERNATIONAL TRUST:
Templeton Pacific Growth Fund - Franklin Pacific Growth Fund
FRANKLIN CUSTODIAN FUNDS, INC.:
U.S. Government Securities Fund U.S. Government Securities Series
</TABLE>
BECAUSE OF DIFFERENCES IN PORTFOLIO SIZE, THE INVESTMENTS HELD, THE TIMING OF
PURCHASES OF SIMILAR INVESTMENTS, CASH FLOWS, AND ADDITIONAL ADMINISTRATIVE AND
INSURANCE COSTS ASSOCIATED WITH INSURANCE COMPANY SEPARATE ACCOUNTS, THE
INVESTMENT PERFORMANCE OF THE FRANKLIN VALUEMARK FUNDS WILL DIFFER FROM THE
PERFORMANCE OF THE CORRESPONDING FRANKLIN TEMPLETON FUNDS.
REDEMPTIONS OF SHARES
Allianz Life redeems shares of the applicable Fund to make benefit or surrender
payments under the terms of its Policies. Redemptions are processed on any day
on which the Funds are open for business (each day the New York Stock Exchange
is open) and are effected at the Fund's net asset value next determined after
the insurance company receives the appropriate order from its Policyholder.
Payment for redeemed shares will be made promptly, but in no event later than
seven days after receipt of the redemption order in proper form. However, the
right of redemption may be suspended or the date of payment postponed in
accordance with the rules under the 1940 Act. Redemptions are taxable events,
and the amount received upon redemption of the shares of any of the Funds may be
more or less than the amount paid for the shares, depending upon the
fluctuations in the market value of the assets constituting the portfolios of
that Fund.
EXCHANGES OF SHARES
Shares of any one Fund may be exchanged by Allianz Life for shares of any of the
other Funds in the Trust, all of which are described in this Prospectus.
Exchanges are treated as a redemption of shares of one Fund and a purchase of
shares of one or more of the other Funds and are effected at the respective net
asset value per share of each Fund on the date of the exchange. If a substantial
portion of any Fund's shares should be redeemed within a short period, the Fund
might have to liquidate portfolio securities it might otherwise hold and also
incur the additional costs related to such transactions.
Neither the Trust nor the Variable Accounts are designed for professional market
timing organizations or other entities using programmed and frequent transfers.
The Variable Accounts, in coordination with the Trust, reserve the right to
temporarily or permanently refuse exchange requests if, in the Managers'
judgment, a Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. In particular, a pattern of exchanges that coincide with a "market
timing" strategy may be disruptive to a Fund and therefore may be refused.
Investors should consult the Variable Account prospectus of the specific
insurance product that accompanies this Trust prospectus for information on
other specific limitations on the transfer privilege.
The Trust reserves the right to modify or discontinue its exchange program at
any time upon 60 days' notice to Allianz Life.
INCOME DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS
Each Fund, other than the Money Market Fund, will declare and pay to the
appropriate Sub-Account of the Variable Account once each year following the
close of the calendar year (i) all net investment income (which includes
dividends and interest paid on each Fund's investments less expenses incurred in
the Fund's operations) and (ii) all net realized short-term and long-term
capital gains, if any, earned during the preceding year.
The Money Fund declares a dividend each day the Fund's net asset value is
calculated, equal to all of its daily net income, payable to the appropriate
Sub-Account of the Variable Account as of the close of business the preceding
day. The amount of dividend may fluctuate from day to day and may be omitted on
some days, depending on changes in the factors that comprise the Fund's net
income.
All distributions, whether from net capital gains or net investment income, will
be paid in the form of additional shares of that Fund, acquired at net asset
value. Because the value of each Fund's shares is based directly on the amount
of its net assets, including any undistributed net income, any distribution of
income or capital gains will result in a decrease in the value of that Fund's
shares equal to the amount of the distribution. The price of each Fund's shares
is quoted ex-dividend on the business day following the record date.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund will be determined separately after
the close of trading on the New York Stock Exchange (the "Exchange") (generally
4:00 p.m. Eastern time) on each day that the Exchange is open for trading.
FUNDS - OTHER THAN MONEY FUND
The net asset value per share for all the Funds, except the Money Fund, is
determined in the following manner: the aggregate of all liabilities, including,
without limitation, the current market value of any outstanding options written
by a Fund, if any, accrued expenses and taxes and any necessary reserves, is
deducted from the total gross value of all assets, and the difference is divided
by the number of shares of that Fund outstanding at the time. The assets in each
Fund's portfolio are valued as described in the SAI.
MONEY FUND
The net asset value per share of the Money Fund is calculated by adding the
value of all portfolio holdings and other assets, deducting its liabilities, and
dividing the result by the number of shares outstanding.
The valuation of the Fund's portfolio securities is based upon their amortized
cost value, which does not take into account unrealized capital gain or loss.
This involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
Further information is included under "Additional Information Regarding
Valuation and Redemption of Shares of the Funds" in the SAI.
TAX CONSIDERATIONS
Each Fund of the Trust is treated as a separate entity for federal income tax
purposes. Each Fund intends to qualify or continue to qualify for treatment as a
regulated investment company under Subchapter M of the Code. By distributing all
of its income, and meeting certain other requirements relating to the sources of
its income and diversification of its assets, each fund will not be subject to
federal income taxes.
In order to ensure that individuals holding the Policies whose assets are
invested in a Fund will not be subject to federal income tax on distributions
made by the Fund prior to the receipt of payments under the Policies, each Fund
intends to comply with the additional requirements of Section 817(h) of the Code
relating to diversification of its assets.
The Funds are not subject to any federal excise tax on undistributed income
because their shares are held exclusively by segregated asset accounts of an
insurance company in connection with variable contracts.
Foreign securities that meet the definition in the Code of a Passive Foreign
Investment Company (a "PFIC") may subject a Fund to an income tax and interest
charge with respect to such investments. To the extent possible, the Fund will
avoid such treatment by not investing in PFIC securities or by adopting other
strategies for any PFIC securities it does purchase.
Foreign exchange gains and losses realized by the Funds in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt obligations, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Funds' income or loss from such transactions
and, in turn, its distributions to shareholders.
The Metals Fund's ability to invest in gold bullion will be limited by the
requirements for qualification as a regulated investment company. For example,
no more than 10% of the Fund's annual gross income may be derived from income
from nonqualifying sources, including gain from the disposition of gold bullion
or gold derivative instruments.
Holders of Policies under which assets are invested in the Trust should refer to
the Prospectus for the Policies for information regarding the tax aspects of
ownership of such Policies.
PERFORMANCE INFORMATION
From time to time, the "yield" and "effective yield" of the Money Fund may be
advertised. Both yield figures will be based on historical earnings and are not
intended to indicate future performance. The "yield" of the Money Fund refers to
the income generated by an investment in the Money Fund over a seven-day period
(which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Money
Fund is assumed to be reinvested. The "effective yield" will be slightly higher
than the "yield" because of the compounding effect of this assumed reinvestment.
From time to time, the current yields and total returns of the other Funds may
be published in advertisements and communications to Policyholders. The current
yield for each Fund will be calculated by dividing the annualization of the
income earned by the Fund during a recent 30-day period by the net asset value
per share at the end of such period. Total return information will include the
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from the Fund's inception of operations, based
upon the value of the shares acquired through a hypothetical $1,000 investment
at the beginning of the specified period and the net asset or redemption value
of such shares at the end of the period, assuming reinvestment of all
distributions at net asset value. Aggregate and average total return information
for each Fund over different periods of time may also be advertised.
A distribution rate for each Fund may also be published in Policyholder
communications preceded or accompanied by a copy of the Funds' current
Prospectus. The current distribution rate for a Fund will be calculated by
dividing the annualization of the total distributions made by that Fund during
the most recent preceding fiscal quarter by the net asset value per share at the
end of such period. The current distribution rate may differ from current yield
because the distribution rate will be for a different period of time and may
contain items of capital gain and other items of income, while current yield
reflects only earned income. Uniformly computed yield and total return figures
for each Fund will also be published along with publication of its distribution
rate.
In each case, the yield, distribution rates and total return figures will
reflect all recurring charges against that Fund's income, including mortality
and expense guarantees and other insurance-related administrative charges (which
may be pro-rated as appropriate) for the applicable time period. In addition,
yield or total return performance information computed on a different basis may
be advertised or presented. Investors should note that the investment results of
each Fund will fluctuate over time, and any presentation of a Fund's current
yield, distribution rate or total return for any prior period should not be
considered as a representation of what an investment may earn or what an
investor's yield, distribution rate or total return may be in any future period.
Hypothetical performance information may also be prepared for sales literature
or advertisements. See "Performance Data" in the Allianz Life prospectus and
"Calculation of Performance Data" in the Allianz Life SAI.
GENERAL INFORMATION
CUSTODY OF ASSETS
Under a custody agreement with the Trust, the Bank of New York serves as the
custodian of the Funds' assets. In addition, Chase Manhattan Bank serves as
custodian for the Asset Allocation, Developing Markets, Global Growth, Global
Income, International, International Smaller Companies, and Pacific Funds.
DISTRIBUTION PLANS
Each Fund's management agreement includes a distribution plan (the "Plan")
pursuant to rule 12b-1 under the 1940 Act. However, no payments are to be made
by any Fund as a result of the Plan. The Funds do not make any payments other
than payments for which the Funds are otherwise obligated to make pursuant to
the applicable then effective management agreement or as incurred in the
ordinary course of their business. To the extent any of the foregoing are
nevertheless deemed indirectly to be payments for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of rule 12b-1, such payments shall be deemed to have been made pursuant
to the Plan (sometimes referred to as a "defensive 12b-1 Plan"). In connection
with their approval of the applicable management agreements, the Board of
Trustees, including a majority of the non-interested trustees, determined that,
in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the implementation of
the respective Plans will benefit each Fund and the Policyholders whose premium
payments have indirectly been invested in each Fund. For further details of this
Plan, see the SAI.
REPORTS
The Trust's fiscal year ends December 31. Annual Reports containing audited
financial statements of the Trust and Semi-Annual Reports containing unaudited
financial statements, as well as proxy materials, are sent to Policyholders,
annuitants or beneficiaries, as appropriate. Inquiries may be directed to the
Trust at the telephone number or address set forth on the cover page of this
prospectus.
TRANSFER AGENT
Franklin Templeton Investor Services, Inc., 777 Mariners Island Blvd., P.O. Box
7777, San Mateo, California 94403-7777, also a wholly-owned subsidiary of
Franklin Resources, Inc., maintains shareholder records, processes purchases and
redemptions of each Fund's shares, and serves as each Fund's dividend-paying
agent.
VOTING PRIVILEGES AND OTHER RIGHTS
The Trust was organized as a Massachusetts business trust under an Agreement and
Declaration of Trust which permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest, with a par value of $.01,
which may be issued in any number of series. Shares issued by each Fund will be
fully paid and nonassessable and will have no preemptive, conversion, or sinking
rights.
Shares of each Fund have equal rights as to voting and vote separately (from
other Funds in the Trust) as to issues affecting that Fund, or the Trust, unless
otherwise permitted by the 1940 Act. Voting privileges are not cumulative, so
that the holders of more than 50% of the shares voting in any election of
trustees can, if they choose to do so, elect all of the trustees. The Trust does
not intend to hold annual shareholders' meetings. The Trust may, however, hold a
special shareholders' meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by the trustees, in their discretion, or by
shareholders holding at least ten percent of the outstanding shares of any Fund.
Shareholders will receive assistance in communicating with other shareholders in
connection with the election or removal of trustees, similar to the provisions
contained in Section 16(c) of the 1940 Act. For information regarding voting
privileges of Policyholders, see Allianz Life Prospectus "Voting Rights."
The Board of Trustees may from time to time issue other series, the assets and
liabilities of which will likewise be separate and distinct from any other
series.
APPENDIX
DESCRIPTION OF BOND RATINGS*
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
*RATINGS ARE GENERALLY GIVEN TO SECURITIES AT THE TIME OF ISSUANCE. WHILE THE
RATING AGENCIES MAY FROM TIME TO TIME REVISE SUCH RATINGS, THEY UNDERTAKE NO
OBLIGATION TO DO SO.
FRANKLIN VALUEMARK FUNDS
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1996
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/342-3863
Franklin Valuemark Funds (the "Trust") is an investment company, organized as a
Massachusetts business trust, and consisting of twenty-three separate investment
portfolios or funds (the "Fund" or "Funds") each of which has different fund
investment objectives. Shares of the Funds are sold only to insurance company
separate accounts to fund the benefits of variable life insurance policies or
variable annuity contracts owned by their respective policyholders or
contractholders. Certain Funds may not be available in connection with a
particular policy or contract or in a particular state. Investors should consult
the separate account prospectus for the specific insurance product that
accompanies the Trust prospectus for information on any applicable restrictions
or limitations with respect to a separate account's investments in the Funds.
A Prospectus for the Trust, dated May 1, 1996, as may be amended from time to
time, provides the basic information an investor should know before investing in
any Fund and may be obtained without charge from the Trust at the address listed
above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT CONTAINS
INFORMATION IN ADDITION TO, AND IN MORE DETAIL THAN SET FORTH IN, THE
PROSPECTUS. THIS STATEMENT IS INTENDED TO PROVIDE THE PROSPECTIVE INVESTOR WITH
ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE TRUST AND
THE FUNDS AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
CONTENTS PAGE
Introduction (See also "Introduction" and
"General Information" in the Prospectus)
FUND INVESTMENT OBJECTIVES AND POLICIES
(See also "Fund Investment Objectives
and Policies" in the Prospectus)
HIGHLIGHTED RISK CONSIDERATIONS
(See also "Highlighted Risks
Considerations" in the Prospectus)
Foreign Securities
Currency Management Techniques
Adjustable Fund - Special Considerations
Metals Fund - Special Considerations
Zero Coupon Funds - Special Considerations
COMMON INVESTMENT
METHODS AND RISKS
Convertible Securities
Illiquid Securities
Interest Rate Swaps
Inverse Floaters
Options and Futures
Portfolio Turnover
Real Estate Fund
Repurchase Transactions
When-Issued Securities
FUNDAMENTAL INVESTMENT RESTRICTIONS
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
OFFICERS AND TRUSTEES
INVESTMENT MANAGEMENT
AND OTHER SERVICES (See also
"Management" in the Prospectus)
Business Managers
Transfer Agent
Custodians
Independent Auditors
Research Services
POLICIES REGARDING BROKERS
USED ON SECURITIES TRANSACTIONS
ADDITIONAL INFORMATION REGARDING
VALUATION AND REDEMPTION OF
SHARES OF THE FUNDS (See also
"Purchase, Redemption and Exchange
of Shares" and "Determination of Net
Asset Value" in the Prospectus)
Calculation of Net Asset Value
Funds Other than Money Fund
Money Market Fund
ADDITIONAL INFORMATION
Additional Information Regarding Taxation
Miscellaneous Information
Financial Statements
INTRODUCTION
Franklin Valuemark Funds (the "Trust") is an open-end management investment
company, or mutual fund, organized as a Massachusetts business trust on April
26, 1988 and registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 (the "1940 Act"). Shares of the Trust
are currently sold only to the separate accounts (the "Variable Accounts") of
Allianz Life Insurance Company of North America and its affiliates ("Allianz
Life") to fund the benefits under variable life insurance policies and variable
annuity contracts (collectively the "Policies") issued by Allianz Life. The
Variable Accounts are divided into sub-accounts (the "Sub-Accounts"), each of
which will invest in one of the Funds, as directed within the limitations
described in the appropriate Policies, by the owners of the respective Policies
issued by Allianz Life (collectively the "Policyholders"). The Trust issues a
separate series of shares of beneficial interest for each Fund. Each Fund
maintains a totally separate and distinct investment portfolio. Some of the
current Funds in the Trust may not be available in connection with a particular
Policy or in a particular state. Policyholders should consult the insurance
product prospectus accompanying the Trust prospectus which describes the
specific Policy or Allianz Life for information on available Funds and any
applicable limitations with respect to a separate account's investments in the
Funds.
FUND INVESTMENT OBJECTIVES AND POLICIES
Each Fund has one or more investment objective and related investment policies
and uses various investment techniques to pursue these objectives and policies,
all of which are described more completely in the Trust's Prospectus. There can
be no assurance that any of the Funds will achieve its investment objective or
objectives. Investors should not consider any one Fund alone to be a complete
investment program and should evaluate each Fund in relation to their personal
financial situation, goals, and tolerance for risk. All of the Funds are subject
to the risk of changing economic conditions, as well as the risk related to the
ability of the Managers to make changes in the portfolio composition of the Fund
in anticipation of changes in economic, business, and financial conditions. As
with any security, a risk of loss of all or a portion of the principal amount
invested accompanies an investment in the shares of any of the Funds.
SUMMARY OF FUND OBJECTIVES
FUND SEEKING STABILITY OF PRINCIPAL AND INCOME
MONEY MARKET FUND ("Money Fund")1 seeks high current income, consistent with
capital preservation and liquidity. The Fund will pursue its objective by
investing exclusively in high quality money market instruments. AN INVESTMENT IN
THE MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE,
ALTHOUGH NO ASSURANCES CAN BE GIVEN THAT THE FUND WILL BE ABLE TO DO SO.
FUNDS SEEKING CURRENT INCOME
ADJUSTABLE U.S. GOVERNMENT FUND ("Adjustable Fund") seeks a high level of
current income, consistent with lower volatility of principal, by investing
primarily in adjustable rate securities which are issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
HIGH INCOME FUND2 seeks a high level of current income, with capital
appreciation as a secondary objective, by investing in debt obligations and
dividend-paying common and preferred stocks. Debt obligations include high
yield, high risk, lower rated obligations (commonly referred to as "junk bonds")
which involve increased risks related to the creditworthiness of their issuers.
INVESTMENT GRADE INTERMEDIATE BOND FUND ("Intermediate Bond Fund")1 seeks
current income, consistent with preservation of capital, primarily through
investment in intermediate-term, investment grade corporate obligations and U.S.
government securities. TEMPLETON GLOBAL INCOME SECURITIES FUND (formerly, the
"Global Income Fund" and referred herein as such)1 seeks a high level of current
income, consistent with preservation of capital, with capital appreciation as a
secondary consideration, through investing in foreign and domestic debt
obligations, including up to 25% in high yield, high risk, lower rated debt
obligations (commonly referred to as "junk bonds"), and related currency
transactions. Investing in a non-diversified fund of global securities including
those of developing markets issuers, involves increased susceptibility to the
special risks associated with foreign investing.
THE U.S. GOVERNMENT SECURITIES FUND ("Government Fund") seeks current income and
safety of capital by investing exclusively in obligations issued or guaranteed
by the U.S. government or its agencies or instrumentalities.
ZERO COUPON FUNDS, 2000, 2005, 2010, seek a high investment return consistent
with the preservation of capital, by investing primarily in zero coupon
securities. In response to interest rate changes, these securities may
experience greater fluctuations in market value than interest-paying securities
of similar maturities. The Funds may not be appropriate for short-term investors
or those who intend to withdraw money before the maturity date.
FUNDS SEEKING GROWTH AND INCOME
GROWTH AND INCOME FUND (formerly the Equity Growth Fund) seeks capital
appreciation, with current income return as a secondary objective, by investing
primarily in U.S. common stocks, securities convertible into common stocks,
preferred stocks, and debt securities.
INCOME SECURITIES FUND1,2 seeks to maximize income while maintaining prospects
for capital appreciation by investing in a diversified portfolio of domestic and
foreign, including developing markets, debt obligations and/or equity
securities. Debt obligations include high yield, high risk, lower rated
obligations (commonly referred to as "junk bonds") which involve increased risks
related to the creditworthiness of their issuers.
REAL ESTATE SECURITIES FUND ("Real Estate Fund") seeks capital appreciation,
with current income return as a secondary objective, by concentrating its
investments in publicly traded securities of U.S. companies in the real estate
industry.
RISING DIVIDENDS FUND seeks capital appreciation, primarily through investment
in the equity securities of companies that have paid consistently rising
dividends over the past ten years. Preservation of capital is also an important
consideration. The Fund seeks current income incidental to capital appreciation.
TEMPLETON GLOBAL ASSET ALLOCATION FUND ("Asset Allocation Fund")1 seeks a high
level of total return through a flexible policy of investing in equity
securities, debt obligations, and money market instruments of issuers in any
nation, including developing markets nations. The mix of investments among the
three market segments will be adjusted in an attempt to capitalize on the total
return potential produced by changing economic conditions throughout the world.
Foreign investing involves special risks.
UTILITY EQUITY FUND ("Utility Fund")1 seeks both capital appreciation and
current income by investing in securities of domestic and foreign, including
developing markets, issuers engaged in the public utilities industry.
FUNDS SEEKING CAPITAL GROWTH
CAPITAL GROWTH FUND ("GROWTH FUND") seeks capital appreciation, with current
income as a secondary consideration. The Fund invests primarily in equity
securities, including common stocks and securities convertible into common
stocks.
PRECIOUS METALS FUND ("Metals Fund")1 seeks capital appreciation, with current
income return as a secondary objective, by concentrating its investments in
securities of U.S. and foreign companies, including those in developing markets,
engaged in mining, processing or dealing in gold and other precious metals.
SMALL CAP FUND1 seeks long-term capital growth. The Fund seeks to accomplish its
objective by investing primarily in equity securities of small capitalization
growth companies. The Fund may also invest in foreign securities, including
those of developing markets issuers. Because of the Fund's investments in small
capitalization companies, an investment in the Fund may involve greater risks
and higher volatility and should not be considered a complete investment
program.
TEMPLETON DEVELOPING MARKETS EQUITY FUND ("Developing Markets Fund")1 seeks
long-term capital appreciation. The Fund seeks to achieve this objective by
investing primarily in equities of issuers in countries having developing
markets. The Fund is subject to the heightened foreign securities investment
risks that accompany foreign developing markets and an investment in the Fund
may be considered speculative.
TEMPLETON GLOBAL GROWTH FUND ("Global Growth Fund")1 seeks long-term capital
growth. The Fund hopes to achieve its objective through a flexible policy of
investing in stocks and debt obligations of companies and governments of any
nation, including developing markets. The realization of income, if any, is only
incidental to accomplishment of the Fund's objective of long-term capital
growth. Foreign investing involves special risks.
TEMPLETON INTERNATIONAL EQUITY FUND ("International Equity Fund")1 seeks
long-term growth of capital. Under normal conditions, the International Equity
Fund will invest at least 65% of its total assets in an internationally mixed
portfolio of foreign equity securities which trade on markets in countries other
than the U.S., including developing markets, and are (i) issued by companies
domiciled in countries other than the U.S., or (ii) issued by companies that
derive at least 50% of either their revenues or pre-tax income from activities
outside of the U.S. Foreign investing involves special risks.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND1 ("International Smaller
Companies Fund") seeks long-term capital appreciation. The Fund seeks to achieve
this objective by investing primarily in equity securities of smaller companies
outside the U.S., including developing markets. Foreign investing involves
special risks and Smaller Company investments may involve higher volatility. An
investment in the Fund should not be considered a complete investment program.
TEMPLETON PACIFIC GROWTH FUND ("Pacific Fund")1 seeks long-term growth of
capital, primarily through investing at least 65% of its total assets in equity
securities which trade on markets in the Pacific Rim, including developing
markets, and are (i) issued by companies domiciled in the Pacific Rim or (ii)
issued by companies that derive at least 50% of either their revenues or pre-tax
income from activities in the Pacific Rim. Investing in a portfolio of
geographically concentrated foreign securities, including developing markets,
involves increased susceptibility to the special risks of foreign investing and
an investment in the Fund may be considered speculative.
1THE ASSET ALLOCATION, DEVELOPING MARKETS, GLOBAL GROWTH, GLOBAL INCOME,
INCOME SECURITIES, INTERMEDIATE BOND, INTERNATIONAL EQUITY, INTERNATIONAL
SMALLER COMPANIES, MONEY MARKET, PACIFIC, PRECIOUS METALS, SMALL CAP, AND
UTILITY FUNDS MAY INVEST MORE THAN 10% OF THEIR TOTAL NET ASSETS IN FOREIGN
SECURITIES WHICH ARE SUBJECT TO SPECIAL AND ADDITIONAL RISKS RELATED TO
CURRENCY FLUCTUATIONS, MARKET VOLATILITY, AND ECONOMIC, SOCIAL, AND POLITICAL
UNCERTAINTY; INVESTING IN DEVELOPING MARKETS INVOLVES SIMILAR BUT HEIGHTENED
RISKS RELATED TO THE RELATIVELY SMALL SIZE AND LESSER LIQUIDITY OF THESE
MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
2THE HIGH INCOME AND INCOME SECURITIES FUNDS MAY INVEST UP TO 100% OF THEIR
RESPECTIVE NET ASSETS IN DEBT OBLIGATIONS RATED BELOW INVESTMENT GRADE, COMMONLY
KNOWN AS "JUNK BONDS," OR IN OBLIGATIONS WHICH HAVE NOT BEEN RATED BY ANY RATING
AGENCY. INVESTMENTS RATED BELOW INVESTMENT GRADE INVOLVE GREATER RISKS,
INCLUDING PRICE VOLATILITY AND RISK OF DEFAULT THAN INVESTMENTS IN HIGHER RATED
OBLIGATIONS. INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THESE FUNDS IN LIGHT OF THE SECURITIES IN WHICH THEY INVEST. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS."
HIGHLIGHTED RISK CONSIDERATIONS
As described more fully in the individual Fund sections in the Trust prospectus
and as supplemented below, an investment in certain of the Funds involves
special additional risks as a result of their ability to invest a substantial
portion of their assets in high yield, high risk, lower rated debt obligations,
foreign investments including those of "developing market" issuers located in
emerging nations as defined by the World Bank, specialized industry sectors, or
derivative instruments. THESE AND OTHER TYPES OF INVESTMENTS AND INVESTMENT
TECHNIQUES AUTHORIZED FOR MORE THAN ONE FUND, AS STATED IN THE INDIVIDUAL FUND
DESCRIPTIONS IN THE PROSPECTUS, ARE DESCRIBED IN GREATER DETAIL, INCLUDING THE
RISKS OF EACH AND ANY LIMITATIONS, IN THE TRUST PROSPECTUS, AND IN THE SAI IN
THIS SECTION, AND "COMMON INVESTMENT METHODS AND RISKS."
ALL POLICIES AND PERCENTAGE LIMITATIONS ARE CONSIDERED AT THE TIME OF PURCHASE.
EACH OF THE FUNDS WILL NOT NECESSARILY USE THE STRATEGIES DESCRIBED TO THE FULL
EXTENT PERMITTED UNLESS THE MANAGERS BELIEVE THAT DOING SO WILL HELP A FUND
REACH ITS OBJECTIVES, AND NOT ALL INSTRUMENTS OR STRATEGIES WILL BE USED AT ALL
TIMES.
FOREIGN SECURITIES
Investors should consider carefully the substantial risks involved in securities
of companies and governments of foreign nations, which are in addition to the
usual risks associated with investing in U.S. issuers. There is generally less
government supervision and regulation of securities exchanges, brokers, dealers
and listed companies than in the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
With respect to American Depositary Receipts ("ADRs") a Fund may purchase the
securities of foreign issuers directly in foreign markets if no ADRs are
available or the Managers believe these securities offer better opportunities
than the ADRs, with reasonable liquidity.
Even though the Funds authorized to invest in foreign securities intend to
acquire the securities of foreign issuers generally where there are public
trading markets, investments by a Fund in the securities of foreign issuers may
tend to increase the risks with respect to the liquidity of that Fund's
portfolio and that Fund's ability to meet large redemption requests should there
be economic or political turmoil in a country in which the Fund has a
substantial portion of its assets invested or should relations between the U.S.
and foreign countries deteriorate markedly. Changes of governmental
administrations or of economic or monetary policies, in the U.S. or abroad, or
changed circumstances in dealings between nations could result in investment
losses for a Fund and could affect adversely that Fund's operations. A Fund's
purchase of securities in foreign countries will involve currencies of the U.S.
and of foreign countries; consequently, changes in exchange rates, currency,
convertibility and repatriation may favorably or adversely affect each Fund.
Securities which are acquired by a Fund outside the U.S. and which are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets so long
as the Fund acquires and holds the securities with the intention of reselling
the securities in the foreign trading market, the Fund reasonably believes it
can readily dispose of the securities for cash in the U.S. or foreign market and
current market quotations are readily available. Investments may be in
securities of foreign issuers, whether located in developed or undeveloped
countries.
Investments in foreign securities where delivery takes place outside the U.S.
will have to be made in compliance with any applicable U.S. and foreign currency
restrictions and tax laws (including laws imposing withholding taxes on any
dividend or interest income) and laws limiting the amount and types of foreign
investments. Changes of governmental administrations or of economic or monetary
policies, in the U.S. or abroad, or changed circumstances in dealings between
nations or currency convertibility or exchange rates could result in investment
losses for a Fund. Investments in foreign securities may also subject a Fund to
losses due to nationalization, expropriation, holding and transferring assets
through foreign subcustodians, depositories and broker dealers, or differing
accounting practices and treatment.
Foreign companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to U.S. companies. The Fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value. Moreover, investors should
recognize that foreign securities are often traded with less frequency and
volume and, therefore, may have greater price volatility, than is the case with
many U.S. securities. Notwithstanding the fact that the Funds permitted to
invest in foreign securities generally intend to acquire the securities of
foreign issuers where there are public trading markets, investments by each Fund
in the securities of foreign issuers may tend to increase the risks with respect
to the liquidity of a Fund's portfolio and a Fund's ability to meet a large
number of shareholder redemption requests should there be economic or political
turmoil in a country in which a Fund has a substantial portion of its assets
invested or should relations between the U.S. and foreign countries deteriorate
markedly. Furthermore, the reporting and disclosure requirements applicable to
foreign issuers may differ from those applicable to domestic issuers, and there
may be difficulties in obtaining or enforcing judgments against foreign issuers.
A Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which a Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. dollar.
Any devaluations in the currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund. The Managers endeavor to
avoid unfavorable consequences and to take advantage of favorable developments
in particular nations where from time to time they place a Fund's investments.
The exercise of this policy may include decisions to purchase securities with
substantial risk characteristics and other decisions such as changing the
emphasis on investments from one nation to another and from one type of security
to another. Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed losses.
DEVELOPING MARKETS. Certain Funds may invest in the obligations of governments,
government agencies and corporations of developing countries. As many developing
countries restructure their existing bank debt and economic conditions improve,
these obligations have become available and may offer the Funds the potential
for current U.S. dollar income. Such instruments are not traded on any exchange.
However, the Managers believe there may be a market for such securities either
in multinational companies wishing to purchase such assets at a discount for
further investment or from the issuing governments which may decide to redeem
their obligations at a discount.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which the Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Despite the recent dissolution of the Soviet Union, the Communist Party may
continue to exercise a significant role in certain Eastern European countries.
To the extent of the Communist Party's influence, investments in such countries
will involve risks of nationalization, expropriation and confiscatory taxation.
The communist governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of such expropriation, the Fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no accounting standards exist in Eastern European countries. Finally,
even though certain Eastern European Currencies may be convertible into U.S.
dollars, the conversion rates may be artificial to the actual market values and
may be adverse to Fund investors.
Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals.
Authoritarian governments in certain Eastern European countries may require that
a governmental or quasi-governmental authority act as custodian of the Fund's
assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the Fund's cash and securities, the Fund's
investment in such countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be in-creased in such countries.
The Funds endeavor to buy and sell foreign currencies on as favorable a basis as
practicable. Some price spread on currency exchange (to cover service charges)
may be incurred, particularly when a Fund changes investment from one country to
another or when proceeds of the sale of Shares in U.S. dollars are used for the
purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent a Fund from transferring cash out of the country or
withhold portions of interest and dividends at the source, or impose other taxes
with respect to a Fund's investments in securities of issuers of that country.
Although the Managers place a Fund's investments only in foreign nations which
they consider as having relatively stable and friendly governments, there is the
possibility of cessation of trading on national exchanges, expropriation,
nationalization, confiscatory or other taxation, foreign exchange controls
(which may include suspension of the ability to transfer currency from a given
country), default in foreign government securities, political or social
instability or diplomatic developments which could affect investments in
securities of issuers in those nations.
CURRENCY MANAGEMENT TECHNIQUES
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A forward contract may be for a single price or for a range of
prices. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers or
between broker-dealers and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
Some forward contracts, however, have a cancellation fee which a Fund must pay
upon cancellation if such Fund determines that canceling the contract is more
favorable to the Fund than completing the contract.
To complete or close a forward contract, a Fund may either accept or make
delivery of the currency specified in the contract at maturity, or enter into a
closing purchase transaction on or before the maturity date, which involves the
purchase or sale of an offsetting contract. Closing purchase transactions with
respect to forward contracts are usually effected with the currency trader who
is a party to the original forward contract.
A Fund may enter into forward contracts in several circumstances. For example,
when a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when the Fund anticipates the receipt in a
foreign currency of dividends or interest payments on such a security which it
holds, the Fund may desire to "lock in" the dollar price of the security or the
dollar equivalent of such dividend or interest payment, as the case may be. In
addition, when a Manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter
into a forward contract to sell, for a fixed amount of dollars, the amount of
foreign currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency.
A Fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
For example, an Italian lira-denominated position could be constructed by
purchasing a German mark-denominated debt security and simultaneously entering
into a forward contract to exchange an equal amount of marks for lira at a
future date and at a specified exchange rate. With such a transaction, the Fund
may be able to receive a return that is substantially similar, from a yield and
currency perspective, to a direct investment in lira debt securities (which are
relatively limited in size and number), while also obtaining the benefits of
liquidity available from German mark-denominated debt securities, which
currently have a lower yield. The Fund may experience slightly different results
from its use of such combined investment positions as compared to its purchase
of a debt security denominated in the particular currency subject to the forward
contract. Such difference may be enhanced or offset by premiums which may be
available in connection with the forward contract.
While a Fund may enter into forward contracts to reduce currency exchange rate
risks, changes in currency prices may result in a poorer overall performance for
the Fund than if it had not engaged in any such transaction. Moreover, there may
be an imperfect correlation between the Fund's holding of securities denominated
in a particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may prevent a Fund from achieving the intended hedge or
expose the Fund to the risk of foreign exchange loss.
Certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which a Fund may enter into forward contracts.
Such transactions may also affect the character and timing of income, gain or
loss recognized by the Fund for U.S. federal income tax purposes.
Certain Funds may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency, if the Managers determine that there is a pattern of
correlation between the two currencies. A Fund may also purchase and sell
forward contracts for non-hedging purposes when the Managers anticipate that the
foreign currency will appreciate or depreciate in value, but securities
denominated in that currency do not present attractive investment opportunities
and are not held in the Fund's portfolio.
The Fund's custodian will place cash or liquid high grade debt securities (i.e.,
securities rated in one of the top three ratings categories by Moody's Investors
Service ("Moody's") or Standard & Poor's Corporation ("S&P") or, if unrated,
deemed by the Manager to be of comparable credit quality, into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward contracts requiring the Fund to
purchase foreign currencies. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Fund's commitments with respect to such contracts. The segregated account
will be marked-to-market on a daily basis. Although forward contracts are not
presently regulated by the Commodity Futures Trading Commission (the "CFTC"),
the CFTC may in the future assert authority to regulate these contracts. In such
event, a Fund's ability to utilize forward contracts may be restricted.
A Fund generally will not enter into a forward contract with a term greater than
one year.
Although a Fund may enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while a Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may cause a Fund to sustain losses which will prevent the
Fund from achieving a complete hedge or expose the Fund to risk of foreign
exchange loss. The Funds may, but are not required, to hedge currency risks.
ADJUSTABLE FUND - SPECIAL CONSIDERATIONS
MORTGAGE SECURITIES
A mortgage security is an interest in a pool of mortgage loans. Most mortgage
securities are pass-through securities, which means that they provide investors
with payments consisting of both principal and interest as mortgages in the
underlying mortgage pool are paid off by the borrower. The dominant issuers or
guarantors of mortgage securities today are the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and
the Federal Home Loan Mortgage Corporation ("FHLMC"). GNMA creates mortgage
securities from pools of government-guaranteed or insured (Federal Housing
Authority or Veterans Administration) mortgages originated by mortgage bankers,
commercial banks, and savings and loan associations. FNMA and FHLMC issue
mortgage securities from pools of conventional and federally insured and/or
guaranteed residential mortgages obtained from various entities, including
savings and loan associations, savings banks, commercial banks, credit unions,
and mortgage bankers.
Many of the mortgage securities either issued or guaranteed by GNMA, FHLMC, or
FNMA ("Certificates") are called pass-through Certificates because a pro rata
share of both regular interest and principal payments (less GNMA's, FHLMC's, or
FNMA's fees and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying mortgage pool are passed through monthly to
the holder of the Certificate (i.e., the Adjustable Fund). The principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. FNMA guarantees full and timely payment of
all interest and principal, while FHLMC guarantees timely payment of interest
and ultimate collection of principal. Mortgage securities from FNMA and FHLMC
are not backed by the full faith and credit of the U.S. government; however,
their close relationship with the U.S. government makes them high quality
securities with minimal credit risks. The yields provided by these mortgage
securities have historically exceeded the yields on other types of U.S.
government securities with comparable maturities. Unpredictable prepayments of
principal, however, can greatly change realized yields. In a period of declining
interest rates it is more likely that mortgages contained in GNMA pools will be
prepaid thus reducing the effective yield. (See "Common Investment Methods and
Risks" in the Prospectus.)
The originators of mortgages also may make mortgage loans that carry an
adjustable rate of interest as well as the older, more traditional fixed-rate
loans. These adjustable rate mortgages ("ARMs") have become an increasingly
important form of residential financing. Generally, ARMs are mortgages
originated by thrift institutions that have a specified maturity date and which
amortize principal much in the fashion of a fixed-rate mortgage. As a result, in
periods of declining interest rates there is a reasonable likelihood that ARMs
will behave like fixed-rate mortgages in that current levels of prepayments of
principal on the underlying mortgages could accelerate. However, one difference
between ARMs and fixed-rate mortgages is that, for certain types of ARM
securities, the rate of amortization of principal, as well as interest payments,
can and does change in accordance with movements in a particular, pre-specified,
published interest rate index. The amount of interest due to an ARM security
holder is calculated by adding a specified additional amount, the "margin," to
the index, subject to limitations or "caps" on the maximum and minimum interest
that is charged to the mortgagor during the life of the mortgage or to maximum
and minimum changes to that interest rate during a given period. It is these
special characteristics which are unique to ARMs that the Fund's Manager
believes make them attractive investments in seeking to accomplish the Fund's
objective.
CHARACTERISTICS OF THE MORTGAGE SECURITIES IN WHICH THE ADJUSTABLE FUND
INVESTS
Collateralized Mortgage Obligations ("CMOs"). As stated in the Prospectus,
the Fund may also invest in CMOs. CMOs purchased by the Fund may be:
(1) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;
(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer and the guarantee is collateralized by
U.S. government securities; or
(3) securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government.
The Fund may also purchase mortgage securities issued by persons that are not
excluded from the definition of investment company under Section 3(c)(5)(C) of
the 1940 Act.
RESETS. As stated in the Prospectus, the interest rates paid on the ARMs and
CMOs in which the Fund invests generally are readjusted at intervals of one year
or less to an increment over some predetermined interest rate index. Commonly
utilized indices include the one-year, three-year and five-year constant
maturity Treasury rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the 11th District
Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the
one-month, three-month, six-month or one year London Interbank Offered Rate
("LIBOR"), the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District Home
Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels
and tend to be somewhat less volatile.
METALS FUND - SPECIAL CONSIDERATIONS
CONCENTRATION OF INVESTMENTS. As a fundamental policy, the Metals Fund intends
to concentrate its investments in securities of issuers engaged in mining,
processing or dealing in gold and other precious metals, such as silver,
platinum and palladium. Such investments may include securities of gold mining
finance companies, as well as operating companies with long-life mines,
medium-life mines or short-life mines. Accordingly, the Metals Fund will have at
least 65% of the value of its assets invested in such securities, except for
temporary periods when unusual and adverse economic conditions exist in that
industry, and it may invest up to 100% of the value of its assets in such
securities.
There are risks inherent in this Fund's policies of investing in securities
engaged in mining, processing or dealing in gold and other precious metals and
in gold bullion. In addition to the general considerations described above, such
investments may involve the following special considerations:
1. FLUCTUATIONS IN THE PRICE OF GOLD. The price of gold has been subject to
substantial upward and downward price movements over short periods of time and
may be affected by unpredictable international monetary and political policies,
such as currency devaluations or revaluations, economic conditions within an
individual country, trade imbalances, trade or currency restrictions between
countries and world inflation and interest rates. The price of gold, in turn, is
likely to affect the market prices of securities of companies mining, processing
or dealing in gold and, accordingly, the value of the Fund's investments in such
securities also may be affected.
2. FOREIGN SECURITIES. As a result of the concentration of investments in gold
and precious metal-related issuers, a substantial portion of the Metals Fund's
assets will be in securities issued by companies domiciled and operating outside
the U.S. or in securities issued by foreign governments. Although the Metals
Fund is not obligated to do so, the Fund presently expects that under normal
conditions more than 50% of the value of its assets may be invested in foreign
securities. At any particular time, a substantial portion of the Fund's assets
may be invested in companies domiciled or operating in very few foreign
countries. In the opinion of the Fund's Manager, current regulations do not
limit seriously the Fund's investment activities, if regulations were changed in
the future, however, they might restrict the ability of the Fund to make its
investments or tend to impair the liquidity of the Fund's investments.
3. POTENTIAL EFFECT OF CONCENTRATION OF SOURCE OF SUPPLY AND CONTROL SALES. At
the current time there are only four major sources of supply of primary gold
production, and the market share of each source cannot be readily ascertained.
The two largest national producers of gold bullion and platinum are the Republic
of South Africa and the Commonwealth of Independent States (formerly, the Union
of Soviet Socialist Republics). Changes in political and economic conditions
affecting either country may have a direct impact on that country's sales of
gold. Under South African law, the only authorized sales agent for gold produced
in South Africa is the Reserve Bank of South Africa which, through its retention
policies, controls the time and place of any sale of South African bullion. The
South African Ministry of Mines determines gold mining policy. South Africa
depends predominantly on gold sales for the foreign exchange necessary to
finance its imports, and its sales policy is necessarily subject to national and
international economic and political developments.
4. TAX AND CURRENCY LAWS. Changes in the tax or currency laws of the U.S.,
and of foreign countries, may inhibit the Fund's ability to pursue, or may
increase the cost of pursuing, its investment programs.
5. UNPREDICTABLE MONETARY POLICIES, ECONOMIC AND POLITICAL CONDITIONS. The
Fund's assets might be less liquid or the change in the value of its assets
might be more volatile (and less related to general price movements in the U.S.
markets) than would be the case with investments in the securities of larger
U.S. companies, particularly because the price of gold and other precious metals
may be affected by unpredictable international monetary policies and economic
and political considerations, governmental controls, conditions of scarcity,
surplus or speculation. In addition, the use of gold or Special Drawing Rights
(which are also used by members of the International Monetary Fund for
international settlements) to settle net deficits and surpluses in trade and
capital movements between nations subjects the supply and demand, and therefore
the price, of gold to a variety of economic factors which normally would not
affect other types of commodities.
6. GOLD BULLION. As a means of seeking its principal objective of capital
appreciation and when it is believed to be appropriate as a possible hedge
against inflation, the Metals Fund may invest a portion of its assets in gold
bullion and may hold a portion of its cash in foreign currency in the form of
gold coins. There is, of course, no assurance that such investments will provide
capital appreciation as a hedge against inflation. The Fund's ability to invest
in gold bullion will be limited to a maximum of 10% of its total assets,
although the extent to which the Fund may make such investments may be further
restricted by the requirements which the Fund must meet in order to qualify as a
regulated investment company under the Code, as well as the diversification
requirements of the 1940 Act applicable to investment companies and the
provisions of the Code applicable to variable annuity policies.
The Metals Fund's assets will be invested in gold bullion at such times as the
prospects of such investments are, in the opinion of its Manager, attractive in
relation to other possible investments. The basic trading unit for gold bullion
is a gold bar weighing approximately 400 troy ounces with a purity of at least
995/1000, although gold bullion is also sold in much smaller units. Gold bars
and wafers are usually numbered and bear an indication of purity by the stamp or
assay mark of the refinery or assay office which certifies the bar's purity.
Bars of gold bullion historically have traded primarily in the London and Zurich
gold markets and, in terms of volume, such gold markets have been the major
markets for trading in gold bullion. Prices in the Zurich gold market generally
correspond to the prices in the London gold market. Since the ownership of gold
bullion became legal in the U.S. on December 31, 1974, U.S. markets for trading
gold bullion have developed. It is anticipated that transactions in gold will
generally be made in such U.S. markets, although such transactions may be made
in foreign markets when it is deemed to be in the best interest of the Fund.
Transactions in gold bullion by the Fund are negotiated with principal bullion
dealers unless, in the Manager's opinion, more favorable prices (including the
costs and expenses described below) are otherwise obtainable. Prices at which
gold bullion is purchased or sold include dealer mark-ups or mark-downs,
insurance expenses, assay charges and shipping costs for delivery to our
custodian. Such costs and expenses may be a greater or lesser percentage of the
price from time to time, depending on whether the price of gold bullion
decreases or increases. Since gold bullion does not generate any investment
income, the only source of return to the Metals Fund on such an investment will
be from any gains realized upon its sales, and a negative return will be
realized, of course, to the extent the Fund sells its gold bullion at a loss.
7. NEW AND DEVELOPING MARKETS FOR PRIVATE GOLD OWNERSHIP. Between 1933 and
December 31, 1974, a market did not exist in the U.S. in which gold bullion
could be purchased by individuals for investment purposes. Since it became legal
to invest in gold, markets have developed in the U.S. Any large purchases or
sales of gold bullion could have an effect on the price of gold bullion. From
time to time, several Central Banks have been sellers of gold bullion from their
reserves. Sales by central banks and/or rumors of such sales may have a negative
effect on gold prices.
8. EXPERTISE OF THE MANAGER AND AVAILABLE INFORMATION. The successful management
of the Fund may be more dependent upon the skills and expertise of its Manager
than is the case for most funds because of the need to evaluate the factors
identified above. Moreover, in some countries, disclosures concerning an
issuer's financial condition and results and other matters may be subject to
less stringent regulatory provisions, or may be presented on a less uniform
basis, than is the case for issuers subject to U.S. securities laws. Issuers and
securities exchanges in some countries also may be subject to less stringent
government regulations than is the case for U.S. companies.
ZERO COUPON FUNDS - SPECIAL CONSIDERATIONS
As stated in the Prospectus, each of the Zero Coupon Funds will be primarily
invested in Stripped Government Securities. These include zero coupon securities
issued by the U.S. government and its agencies and instrumentalities, by a
variety of tax-exempt issuers such as state and local governments and their
agencies and instrumentalities and by "mixed-ownership government corporations."
Zero coupon securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from changing
interest rates than debt obligation of comparable maturities which make current
distributions of interest (cash). As a result, the net asset value of shares of
a Fund prior to its Target Date may fluctuate over a greater range than shares
of other mutual funds investing in U.S. Treasury securities making current
distributions of interest and having similar maturities. The current net asset
value of a Fund generally will vary inversely with changes in current interest
rates.
The Zero Coupon Fund's zero coupon securities investments will include: Stripped
Treasury Securities, Stripped Government Securities, Stripped Corporate
Securities and Stripped Eurodollar Obligations, as defined in the Prospectus. A
holder will separate the interest coupons from the underlying principal (the
"corpus") of the security. A number of securities firms and banks have stripped
the interest coupons and resold them in custodial receipt programs with a number
of different names, including, in the case of stripped Treasury securities,
"Treasury Income Growth Receipts"("TIGRS") and Certificate of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof. Counsel to
the underwriters of these certificates or other evidences of ownership of the
U.S. Treasury securities have stated that for federal tax and securities
purposes, in their opinion, purchasers of such certificates, such as the Funds,
most likely will be deemed the beneficial holders of the underlying U.S.
government securities.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program, a
Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities. When U.S. Treasury obligations have been stripped of their
unmatured interest coupons by the holder, the stripped coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. The principal or corpus is sold at a deep discount because
the buyer receives only the right to receive a future fixed payment on the
security and does not receive any rights to periodic interest (cash) payments.
Purchasers of stripped obligations acquire, in effect, discount obligations that
are economically identical to the zero coupon securities that the Treasury sells
itself. Other facilities are available to facilitate the transfer of ownership
of non-Treasury zero coupon securities by accounting separately for the
beneficial ownership of particular interest coupon and corpus payments on such
securities through a book-entry record-keeping system.
Under normal circumstances, each Zero Coupon Fund will invest at least 65% of
its net assets in stripped securities. For short-term or emergency purchases,
the Zero Coupon Funds may purchase interest-paying U.S. government securities
and other money market instruments. The Zero Coupon Funds may enter into
repurchase agreements with respect to securities in which the Zero Coupon Funds
invest. These interest-paying securities produce income which may be an
efficient way to provide for expenses and redemptions to make benefit or
surrender payments, among other things.
MANAGEMENT OF REINVESTMENT RISK AND ANTICIPATED GROWTH - The Zero Coupon Funds
seek to minimize unknown reinvestment risk. Reinvestment risk arises from the
uncertainty as to the total return which will be realized from conventional
interest-paying bonds due to the fact that periodic interest (cash) will be
reinvested in the future at interest rates unknown at the time of the original
purchase. With zero coupon securities, however, there are no cash distributions
to reinvest, so owners thereof bear no unknown reinvestment risk if they hold a
zero coupon security to maturity.
For a person who makes a direct investment in a zero coupon security (rather
than through a fund which invests in such instruments) and holds it to maturity,
the return or yield to maturity is certain regardless of whether interim
reinvestment rates rise or fall. (See table below).
Total Ending Value on a $1,000 Investment
Coupon Initial Yield (Realized Yield) if Reinvestment Rates are:
- ------------------------------------------------------------------------------
Interest Maturity to Maturity 6% 8% 10% 12% 14%
- ------------------------------------------------------------------------------
10% 10 Years 10% $2345 $2490 $2655 $2841 $3052
(8.7%) (9.3%) (10%) (10.7%) (11.5%)
0% 10 Years 10% $2655 $2655 $2655 $2655 $2655
(10%) (10%) (10%) (10%) (10%)
*These results assume semi-annual compounding. For illustration purposes only,
the table above assumes these reinvestment rates would remain constant over the
life of the bond. The actual reinvestment rates and total returns of
coupon-paying bonds will vary with changing market conditions.
Due to the nature of Stripped Government Securities, which may comprise 80% or
more of the investments of each Zero Coupon Fund, the reinvestment risk
accompanying these Funds is expected to be less than would be the case if these
Funds were entirely invested in interest (cash)-paying securities. Furthermore,
the Fund's Manager will attempt to manage reinvestment risk by maintaining each
Fund's average duration within twelve months of a Fund's Target Date.
Duration is a measure of the length of an investment which takes into account,
through present value analysis, the timing and amount of any interest payments
as well as the amount of the principal repayment. Duration is commonly used by
professional Managers to help control reinvestment risk by balancing investments
with slightly longer and shorter maturities than the investment horizon of the
overall portfolio.
The investment return of a Zero Coupon Fund, if the investment is held to
maturity, will consist primarily of the amortization of discount on the
underlying securities owned by such Fund (i.e., the difference between their
purchase price and their maturity value) and will be realized on the specified
Target Date. Changes in the market value of the Fund's securities will affect
investment return should investors redeem prior to maturity, as can the skill of
the Manager in managing the Fund.
LIQUIDATION AND DISTRIBUTION OF ASSETS IN TARGET YEAR - As securities in a Zero
Coupon Fund's portfolio mature or are sold throughout the Target Year, the
proceeds will be invested in Money Market Instruments. By December of that year,
substantially all of the assets of the Fund will consist of such Money Market
Instruments and other then-maturing securities. These instruments will be sold
or allowed to mature, the liabilities of the Fund will be discharged or
provision made therefor, and the net assets will be reinvested at the direction
of Policyholders in one of the other Funds of the Trust or automatically
reinvested as stated in the Prospectus. The estimated expenses of terminating
and liquidating a Fund will be accrued ratably over its Target Year. These
expenses, which are charged to income as are all expenses, are not expected to
exceed significantly the ordinary annual expenses incurred by the Fund and,
therefore, should have no significant additional effect on the maturity value of
the Fund.
COMMON INVESTMENT METHODS AND RISKS
Certain types of investments and investment techniques authorized for more than
one fund, as stated in the descriptions of the individual Funds in the
Prospectus, are described below and in the Prospectus. ALL POLICIES AND
PERCENTAGE LIMITATIONS ARE CONSIDERED AT THE TIME OF PURCHASE UNLESS OTHERWISE
NOTED. Each of the Funds will not necessarily use the strategies described to
the full extent permitted unless the Managers believe that doing so will help a
Fund reach its objectives, and not all instruments or strategies will be used at
all times.
CONVERTIBLE SECURITIES
Enhanced Convertible Securities. Consistent with their respective investment
policies, certain Funds may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stock
("PERCS"), which provide an investor, such as a Fund, with the opportunity to
earn higher dividend income than is available on a company's common stock. A
PERCS is a preferred stock which generally features a mandatory conversion date,
as well as a capital appreciation limit which is usually expressed in terms of a
stated price. Most PERCS expire three years from the date of issue, at which
time they are convertible into common stock of the issuer (PERCS are generally
not convertible into cash at maturity). Under a typical arrangement, if after
three years the issuer's common stock is trading at a price below that set by
the capital appreciation limit, each PERCS would convert to one share of common
stock. If, however, the issuer's common stock is trading at a price above that
set by the capital appreciation limit, the holder of the PERCS would receive
less than one full share of common stock. The amount of that fractional share of
common stock received by the PERCS holder is determined by dividing the price
set by the capital appreciation limit of the PERCS by the market price of the
issuer's common stock. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. However if called early the issuer must
pay a call premium over the market price to the investor. This call premium
declines at a preset rate daily, up to the maturity date of the PERCS.
Certain Funds may also invest in other classes of enhanced convertible
securities. These include but are not limited to ACES (Automatically Convertible
Equity Securities), PEPS (Participating Equity Preferred Stock), PRIDES
(Preferred Redeemable Increased Dividend Equity Securities), SAILS (Stock
Appreciation Income Linked Securities), TECONS (Term Convertible Notes), QICS
(Quarterly Income Cumulative Securities), and DECS (Dividend Enhanced
Convertible Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all
have the following features: they are issued by a company, the common stock of
which will be received in the event the convertible preferred stock is
converted; unlike PERCS, they do not have a capital appreciation limit; they
seek to provide the investor with high current income with some prospect of
future capital appreciation; they are typically issued with three to four-year
maturities; they typically have some built-in call protection for the first two
to three years; investors have the right to convert them into shares of common
stock at a preset conversion ratio or hold them until maturity, and upon
maturity they will automatically convert to either cash or a specified number of
shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by an
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically, they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
identified here which are also similar to those described above in which a Fund
may invest, consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risk to a Fund. A Fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular security
at any given time. Reduced liquidity may have an adverse impact on market price
and a Fund's ability to dispose of particular securities, when necessary, to
meet the Fund's liquidity needs or in response to a specific economic event,
such as the deterioration in the creditworthiness of an issuer. Reduced
liquidity in the secondary market for certain securities may also make it more
difficult for a Fund to obtain market quotations based on actual trades for
purposes of valuing the Fund's portfolio. Each Fund, however, intends to acquire
liquid securities, though there can be no assurances that this will be achieved.
Synthetic Convertibles. Certain Funds may invest a portion of their assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the right
to acquire the underlying equity security. This combination is achieved by
investing in nonconvertible fixed-income securities and in warrants or stock or
stock index call options which grant the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be "Equity Securities"
for purposes of each Fund's investment policy regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although the Managers expect
normally to create synthetic convertibles whose two components represent one
issuer, the character of a synthetic convertible allows a Fund to combine
components representing distinct issuers, or to combine a fixed income security
with a call option on a stock index, when the Managers determine that such a
combination would better promote a Fund's investment objectives. In addition,
the component parts of a synthetic convertible security may be purchased
simultaneously or separately; and the holder of a synthetic convertible faces
the risk that the price of the stock, or the level of the market index
underlying the convertibility component will decline.
ILLIQUID SECURITIES
The Funds reserve the right to invest up to 10% of their net assets in illiquid
securities. It is the current policy of the International Equity Fund and the
Pacific Fund, however (which may be changed without the approval of the Funds'
shareholders), to limit any such investments to 5% of each Fund's net assets.
Generally an "illiquid security" is any security that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which the Fund has valued the instrument. Subject to this limitation, the Board
of Trustees has authorized each Fund to invest in restricted securities where
such investment is consistent with the Fund's investment objective and has
authorized such securities to be considered to be liquid to the extent the
Fund's Manager determines that there is a liquid institutional or other market
for such securities - for example, restricted securities which may be freely
transferred among qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended, and for which a liquid institutional market
has developed. The Board of Trustees will review any determination by the Fund's
advisers to treat a restricted security as liquid on a monthly basis, including
the advisers' assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the Funds' advisers and the Board of
Trustees will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers,
(iii) dealer undertakings to make a market in the security; and (iv) the nature
of the security and the nature of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent a Fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the applicable Fund may be
increased if qualified institutional buyers become uninterested in purchasing
these securities or the market for these securities contracts.
INTEREST RATE SWAPS
Certain of the Funds may also participate in interest rate swaps. An interest
rate swap is the transfer between two counterparties of interest rate
obligations, one of which has an interest rate fixed to maturity while the other
has an interest rate that changes in accordance with changes in a designated
benchmark (e.g., LIBOR, prime, commercial paper, or other benchmarks). The
obligations to make repayment of principal on the underlying securities are not
exchanged. Such transactions generally require the participation of an
intermediary, frequently a bank. The entity holding the fixed-rate obligation
will transfer the obligation to the intermediary, and such entity will then be
obligated to pay to the intermediary a floating rate of interest, generally
including a fractional percentage as a commission for the intermediary. The
intermediary also makes arrangements with a second entity which has a
floating-rate obligation which substantially mirrors the obligation desired by
the first party. In return for assuming a fixed obligation, the second entity
will pay the intermediary all sums that the intermediary pays on behalf of the
first entity, plus an arrangement fee and other agreed upon fees. Interest rate
swaps are generally entered into to permit the party seeking a floating rate
obligation the opportunity to acquire such obligation at a lower rate than is
directly available in the credit market, while permitting the party desiring a
fixed-rate obligation the opportunity to acquire such a fixed-rate obligation,
also frequently at a price lower than is available in the capital markets. The
success of such a transaction depends in large part on the availability of
fixed-rate obligations at a low enough coupon rate to cover the cost involved.
INVERSE FLOATERS
These are instruments with floating or variable interest rates that move in the
opposite direction, usually at an accelerated speed, to short-term interest
rates or interest rate indices. As with other mortgage-backed securities,
interest rate declines may result in accelerated prepayment of mortgages and the
proceeds from such prepayment must be reinvested at lower prevailing interest
rates. During periods of extreme fluctuations in interest rates, the resulting
fluctuation could affect the net asset value of the Fund in proportion to the
Fund's investment in inverse floaters. An accelerated decline in interest rates
creates a higher degree of volatility and risk.
OPTIONS AND FUTURES
OPTIONS. As a means of seeking to increase overall return, certain Funds, as
described in the Trust's Prospectus, may write covered put and call options, as
well as purchase put and call options.
When a Fund writes a call option on one of its portfolio securities and the
underlying securities do not reach a price level which would make the exercise
of the option profitable to the holder of the option, the option will generally
expire without being exercised. However, if the underlying securities rise in
price and the option is exercised, the Fund will not participate in any increase
in the price of the underlying securities beyond the exercise price of the
option.
It will generally be a Fund's policy, in order to avoid the exercise of a call
or put option written by it, to cancel its obligations under the call or put
option by entering into a "closing purchase transaction," if available, unless
it is determined to be in the Fund's interest to deliver the underlying
securities from its portfolio. A closing purchase transaction consists of a Fund
purchasing an option having the same terms as the option written by that Fund
and has the effect of cancelling that Fund's positions as an options writer. An
option position may be closed out only where there exists a secondary market for
an option of the same series. If a secondary market does not exist, it might not
be possible to effect closing sale transactions in particular options held by a
Fund, with the result that the Fund would have to exercise the options in order
to realize any profit. The premium which a Fund will pay in executing a closing
purchase transaction may be higher or lower than the premium it received when
writing the option, depending in large part upon the relative price of the
underlying security at the time of each transaction. If a Fund is unable to
effect a closing purchase transaction with respect to options it has written in
a secondary market, it will not be able to sell the underlying security or other
asset covering the option until the option expires or it delivers the underlying
security or asset upon exercise.
In the event that it is determined that it is in a Fund's interest to sell the
underlying portfolio securities on which it has written a covered call option in
order to minimize a loss in the underlying security, the policies of each Fund
that engages in option writing authorize its Manager to determine, on the basis
of its opinion of market conditions, whether to cancel the obligation on such
option by entering into a closing purchase transaction or to sell such
underlying security and leave the call option uncovered until it is deemed
advisable to repurchase the underlying security to cover the option or until the
option written by the Fund expires.
A Fund may write options in connection with buy-and-write transactions; that is,
such Fund may purchase a security and then write a call option against that
security. The exercise price of the call will depend upon the expected price
movement of the underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money")
the current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call
option, plus the appreciation in the market price of the underlying security up
to the exercise price, will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, a Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price for the security and the exercise price. If the options
are not exercised and the price of the underlying security declines, the amount
of such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, a Fund may elect to close the position or wait for
the option to be exercised and take delivery of the security at the exercise
price. The Fund's return will be the premium received from the put option, minus
the amount by which the market price of the security is below the exercise
price. Out-of-the-money, at-the-money, and in-the-money put options may be used
by such Fund in the same market environments that call options are used in
equivalent buy-and-write transactions.
A Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, such Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option, plus transaction costs.
A Fund may purchase call options to hedge against an increase in the price of
U.S. or foreign government securities that such Fund anticipates purchasing in
the future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise of the option.
Unless the price of the underlying security rises sufficiently, the option may
expire worthless to the Fund.
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. The Fund, when it is the purchaser of an option, is at
risk only to the full extent of the premium it has paid for the option. The
Fund, when it is the writer of an option, is at risk for the difference between
the price at which the option is exercisable and the market price of the
underlying security, minus the amount of the premium received.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As a
result, many of the protections provided to traders on organized exchanges will
be available with respect to such transactions. In particular, all option
positions entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements. Over-the-counter options and the assets used
to cover such options will be considered illiquid securities and will not,
together with any other illiquid securities, exceed 10% of a Fund's net assets.
The risks of transactions in options on foreign exchanges are similar to the
risks of investing in foreign securities. In addition, a foreign exchange may
impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
OPTIONS ON FOREIGN CURRENCIES. A Fund may purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the U.S.
dollar value of foreign portfolio securities and against increases in the U.S.
dollar cost of foreign securities or other assets to be acquired. As in the case
of other kinds of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium received,
and a Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Fund's position, such Fund may forfeit the entire amount of the premium,
plus related transaction costs.
OPTIONS ON SECURITIES. Covered call options in which a Fund may invest are
typically listed for trading on a national securities exchange. All options
written by a Fund will be "covered."
Call options written by a Fund give the holder the right to buy the underlying
securities from the Fund at a stated exercise price. Put options written by a
Fund give the holder the right to sell the underlying security to the Fund at a
stated exercise price. A call option written by a Fund is "covered" if that Fund
owns the underlying security covered by the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or for additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if a Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by a Fund in cash and high grade debt obligations
in a segregated account with its custodian.
A put option written by a Fund is "covered" if the Fund maintains cash and high
grade debt obligations with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same security and in the
same principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written. The
premium paid by the purchaser of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, a Fund may attempt to close the
position or take delivery of the security at the exercise price, and the Fund's
return will be the premium received from the put options minus the amount by
which the market price of the security is below the exercise price.
Call options on securities may be purchased to limit the risk of a substantial
increase in the market price of such security. A Fund may also purchase call
options on securities held in its portfolio and on which it has written a call
option. A call option gives the holder the right to buy the underlying
securities from the option writer at a stated exercise price. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from such a sale will depend on whether the amount received is more or less
than the premium paid for the call option plus the related transaction costs.
PURCHASING PUT OPTIONS. Put options on particular securities may be purchased to
protect against a decline in the market value of the underlying security below
the exercise price less the premium paid for the option. A put option gives the
holder the right to sell the underlying security at the option exercise price at
any time during the option period. The ability to purchase put options will
allow a Fund to protect the unrealized gain in an appreciated security in its
portfolio without actually selling the security. In addition, a Fund will
continue to receive interest or dividend income on the security. A Fund may sell
a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such sales will result in a net gain or loss,
depending on whether the amount received on the sale is more or less than the
premium and other transaction costs paid for the put option that is sold. Such
gain or loss may be wholly or partially offset by a change in the value of the
underlying security which the Fund owns or has the right to acquire.
PUT AND CALL OPTIONS ON THE SAME SECURITIES. A Fund may buy puts and write calls
on the same portfolio security in "forward conversion" transactions. All options
written by a Fund will be covered. In a forward conversion, a Fund will purchase
securities and write call options and purchase put options on such securities.
By purchasing puts, the Fund protects the underlying security from depreciation
in value. By selling or writing calls on the same security, a Fund receives
premiums which may offset part or all of the cost of purchasing the puts while
forgoing the opportunity for appreciation in the value of the underlying
security. A Fund will not exercise a put it has purchased while a call option on
the same security is outstanding. The use of options in connection with forward
conversions is intended to hedge against fluctuations in the market value of the
underlying security. Although it is generally intended in forward conversion
transactions that the exercise price of put and call options would be identical,
situations might occur in which some option positions are acquired with
different exercise prices. Therefore, each Fund's return may depend in part on
movements in the price of the underlying security because of the different
exercise prices of the call and put options. Such price movements may also
affect each Fund's total return if the conversion is terminated prior to the
expiration date of the options. In such event, a Fund's return may be greater or
less than it would otherwise have been if it had hedged the security only by
purchasing put options.
SPREAD AND STRADDLE TRANSACTIONS. In addition to the options strategies
described above, a Fund may engage in "spread" transactions in which a Fund
purchases and writes a put or call option on the same underlying security with
the options having different exercise prices and/or expiration dates. All
options written by a Fund will be covered. A Fund may also engage in so-called
"straddles," in which the Fund may purchase or write combinations of put and
call options on the same security. When a Fund engages in spread and straddle
transactions, it seeks to profit from differentials in the option premiums paid
and received and in the market prices of the related options positions when they
are closed out or sold. Because the purchase of options by a Fund in connection
with these transactions may, under certain circumstances, involve a limited
degree of investment leverage, a Fund will not enter into any spreads or
straddles or otherwise purchase puts or calls if, as a result, more than 5% of
its net assets will be invested at any time in such option transactions. Spread
and straddle transactions require a Fund to purchase and/or write more than one
option simultaneously. Accordingly, a Fund's ability to enter into such
transactions and to liquidate its positions when necessary or deemed advisable
may be more limited than if the Fund was to purchase or sell a single option.
Similarly, costs incurred by a Fund in connection with these transactions will
in many cases be greater than if the Fund was to purchase or sell a single
option. The ability of a Fund to engage in spread or straddle transactions may
be further limited by state securities laws.
OPTIONS ON STOCK INDICES. Call and put options on stock indices may be purchased
and written to hedge against the risk of market or industry-wide stock price
fluctuations or to increase income to the Fund. A Fund may also purchase and
sell options with respect to securities. An option on a security is a contract
that permits the purchaser of the option, in return for the premium paid, the
right to buy a specified security (in the case of a call option) or to sell a
specified security (in the case of a put option) from or to the writer of the
option at a designated price during the term of the option. Call and put options
on stock indices are similar to options on securities except that, rather than
the right to purchase or sell particular securities at a specified price,
options on a stock index give the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the underlying stock index
is greater than (or less than, in the case of puts) the exercise price of the
option. This amount of cash is equal to the difference between the closing price
of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
stock market generally (or in a particular industry or segment of the market)
rather than price movements in individual securities.
When a Fund writes an option on a stock index, it will establish a segregated
account containing cash or high quality fixed-income securities with its
custodian in an amount at least equal to the market value of the option and will
maintain the account while the option is open or will otherwise cover the
transaction. A Fund may write a call or put option to generate income, and will
do so only if the option is "covered." This means that so long as a Fund is
obligated as the writer of a call option, it will own the underlying securities
subject to the call, or hold a call at the same or lower exercise price, for the
same exercise period, and on the same securities as the written call. A put is
covered if the Fund maintains liquid assets with a value at least equal to the
exercise price in a segregated account, or holds a put on the same underlying
securities at an equal or greater exercise price.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. An exchange traded options position may
be closed out only on an options exchange which provides a secondary market for
an option of the same series. Although a Fund will generally purchase or write
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. For some options, no
secondary market on an exchange may exist. In such event, it might not be
possible to effect closing transactions in particular options, with the result
that a Fund would have to exercise its options in order to realize any profit
and would incur transaction costs upon the sale of underlying securities
pursuant to the exercise of put options. If a Fund as a covered call option
writer is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying currency (or security denominated in
that currency) until the option expires or it delivers the underlying currency
upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
A Fund may purchase and write over-the-counter options to the extent consistent
with its limitation on investments in restricted securities, as described in the
Prospectus. Trading in over-the-counter options is subject to the risk that the
other party will be unable or unwilling to close-out options purchased or
written by a Fund.
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
FUTURES CONTRACTS. Certain of the Funds may enter into contracts for the
purchase or sale for future delivery of debt securities or currency ("futures
contracts"), or may purchase and sell financial futures contracts. AS LONG AS
REQUIRED BY REGULATORY AUTHORITIES, A FUND WILL LIMIT ITS USE OF FUTURES
CONTRACTS TO HEDGING TRANSACTIONS IN ORDER TO AVOID BEING A COMMODITY POOL. A
"sale" of a futures contract means the acquisition and assumption of a
contractual right and obligation to deliver the securities or currency called
for by the contract at a specified price on a specified settlement date. A
"purchase" of a futures contract means the acquisition and assumption of a
contractual right and obligation to acquire the securities or currency called
for by the contract at a specified price on a specified date. U.S. futures
contracts have been designed by exchanges which have been designated "contract
markets" by the CFTC and must be executed through a futures commission merchant
or brokerage firm, which is a member of the relevant contract market. Existing
contract markets for futures contracts on debt securities include the Chicago
Board of Trade, the New York Cotton Exchange, the Mid-America Commodity Exchange
(the "MCE"), and International Money Market of the Chicago Mercantile Exchange
(the "IMM"). Existing contract markets for futures contracts on currency include
the MCE, the IMM and the London International Financial Futures Exchange.
Futures contracts trade on these markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange. A fund may enter into futures contracts
which are based on foreign currencies, interest rates, or on debt securities
that are backed by the full faith and credit of the U.S. government, such as
long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage
Association modified pass-through mortgage-backed securities, and three-month
U.S. Treasury bills. A Fund may also enter into futures contracts which are
based on corporate securities and non-U.S. government debt securities, but such
futures contracts are not currently available.
At the time a futures contract is purchased or sold, the Fund must deposit cash
or securities in a segregated account ("initial deposit") with the Fund's
custodian. It is expected that the initial deposit would be approximately 1% to
5% of a contract's face value. Thereafter, the futures contract is valued daily
and the payment of "variation margin" may be required since each day the Fund
would pay or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of currency or securities, in most cases the contractual obligation
is terminated before the settlement date of the contract without having to make
or take delivery of the securities. The termination of a contractual obligation
is accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical offsetting futures contract calling for delivery in the
same month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the underlying
currency or security. Since all transactions in the futures market are made,
offset or fulfilled through a clearing house associated with the exchange on
which the contracts are traded, the Funds will incur brokerage fees when they
purchase or sell futures contracts.
The purpose of the purchase or sale of a futures contract by the Funds is to
attempt to protect the Funds from fluctuations in interest or currency exchange
rates without actually buying or selling long-term, fixed-income securities or
currency. For example, if a Fund owns long-term bonds and interest rates were
expected to increase, such Fund might enter into futures contracts for the sale
of debt securities. Such a sale would have much the same effect as selling an
equivalent value of the long-term bonds owned by a Fund. If interest rates did
increase, the value of the debt securities owned by a Fund would decline, but
the value of the futures contracts to such Fund would increase at approximately
the same rate, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have. A Fund could accomplish similar results by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is often more liquid than the cash (securities) market, the use of futures
contracts as an investment technique allows a Fund to maintain a defensive
position without having to sell its portfolio securities. Similarly, if a Fund
expects that a foreign currency in which its securities are denominated will
decline in value against the U.S. dollar, the Fund may sell futures contracts on
that currency. If the foreign currency does decline in value, the decrease in
value of the security denominated in that currency will be offset by an increase
in the value of the Fund's futures position.
Alternatively, when it is expected that interest rates may decline, futures
contracts may be purchased in an attempt to hedge against the anticipated
purchase of long-term bonds at higher prices. Since the fluctuations in the
value of futures contracts should be similar to that of long-term bonds, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized. At that
time, the futures contracts could be liquidated and such Fund could then buy
long-term bonds on the cash (securities) market. Similarly, if a Fund intends to
acquire a security or other asset denominated in a currency that is expected to
appreciate against the U.S. dollar, the Fund may purchase futures contracts on
that currency. If the value of the foreign currency does appreciate, the
increase in the value of the futures position will offset the increased U.S.
dollar cost of acquiring the asset denominated in that currency. To the extent a
Fund enters into futures contracts for this purpose, the assets in the
segregated asset account maintained to cover the Fund's purchase obligations
with respect to such futures contracts will consist of cash, cash equivalents or
high quality debt securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial and variation margin payments made by the
Fund with respect to such futures contracts.
The ordinary spreads between prices in the cash (securities or foreign currency)
and futures markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures markets are
subject to initial deposit and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash (securities or foreign currency) and futures
markets. Second, the liquidity of the futures market depends on participants
entering into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced, thus causing distortions. Due to the
possibility of such distortion, a correct forecast of general interest rate
trends by the Manager may still not result in a successful hedging transaction.
In addition, futures contracts entail certain risks. Although the Managers
believe that the use of such contracts will benefit a Fund, if the Manager's
investment judgment about the general direction of interest or currency exchange
rates is incorrect, a Fund's overall performance would be poorer than if it had
not entered into any such contract. For example, if the Fund has hedged against
the possibility of an increase in interest rates which would adversely affect
the price of bonds held in its portfolio and interest rates decrease instead,
the Fund will lose part or all of the benefit of the increased value of its
bonds which it has hedged because it will have offsetting losses in its futures
positions. Similarly, if a Fund sells a foreign currency futures contract and
the U.S. dollar value of the currency unexpectedly increases, the Fund will lose
the beneficial effect of such increase on the value of the security denominated
in that currency. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell bonds from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. Such Fund may have to sell
securities at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. Certain of the Funds are permitted to purchase and
write options on futures contracts for hedging purposes only. The purchase of a
call option on a futures contract is similar in some respects to the purchase of
a call option on an individual security or currency. Depending on the pricing of
the option compared to either the price of the futures contract upon which it is
based or the price of the underlying debt securities or currency, it may or may
not be less risky than direct ownership of the futures contract of the
underlying debt securities or currency. As with the purchase of futures
contracts, when the Fund is not fully invested, it may purchase a call option on
a futures contract to hedge against a market advance due to declining interest
rates or appreciation in the value of a foreign currency against the U.S.
dollar.
If a Fund writes a call option on a futures contract and the futures price at
expiration of the option is below the exercise price, the Fund will retain the
full amount of the option premium, which may provide a partial hedge against any
decline that may have occurred in the value of the Fund's portfolio holdings. If
the futures price at expiration of the option is higher than the exercise price,
such Fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities which the Fund
intends to purchase. If a put or call option a Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, a
Fund's losses from existing options on futures may to some extent be reduced or
increased by changes in the value of its portfolio securities.
The amount of risk a Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased. A
Fund will purchase a put option on a futures contract only to hedge the Fund's
portfolio against the risk of rising interest rates or the decline in the value
of securities denominated in a foreign currency.
A Fund's ability to engage in the options and futures strategies described above
will depend on the availability of liquid markets in such instruments. Markets
in options and futures are relatively new and still developing, and it is
impossible to predict the amount of trading interest that may exist in various
types of options or futures. Therefore, no assurance can be given that the Fund
will be able to utilize these instruments effectively for the purposes set forth
above. Furthermore, a Fund's ability to engage in options and futures
transactions may be limited by tax considerations.
The Funds will engage in futures contracts and related options transactions only
for bona fide hedging or other appropriate risk management purposes in
accordance with CFTC regulations, which permit principals of an investment
company registered under the Investment Company Act of 1940 ("1940 Act") to
engage in such transactions without registering as commodity pool operators.
"Appropriate risk management purposes" means activities in addition to bona fide
hedging which the CFTC deems appropriate for operators of entities, including
registered investment companies, that are excluded from the definition of
commodity pool operator. Such a Fund is not permitted to engage in speculative
futures trading. Each Fund will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by a Fund or
which it expects to purchase. Except as stated below, a Fund's futures
transactions will be entered into for traditional hedging purposes, i.e.,
futures contracts will be sold to protect against a decline in the price of
securities (or the currency will be purchased to protect a Fund against an
increase in the price of securities or the currency in which they are
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures (or option) position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets denominated in the related currency) in
the cash market at the time when the futures (or option) position is closed out.
However, in particular cases, when it is economically advantageous for a Fund to
do so, a long futures position may be terminated (or an option may expire)
without the corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging definition, a
CFTC regulation permits each Fund to elect to comply with a different test,
under which (i) each Fund's long futures positions will be used as part of its
portfolio management strategy and will be incidental to its activities in the
underlying cash market and (ii) the underlying commodity value of such positions
will not exceed the sum of (a) cash or cash equivalents segregated for this
purpose, (b) cash proceeds on existing investments due within 30 days, and (c)
accrued profits on such futures or options positions.
A Fund will engage in transactions in future contracts and related options only
to the extent such transactions are consistent with the requirements of the Code
for maintaining its qualification as a regulated investment company for federal
income tax purposes (see "Tax Considerations" in the Prospectus).
A Fund investing in such investments may not purchase or sell futures contracts
or purchase or sell related options, except for closing purchase or sale
transactions, if immediately thereafter the sum of the amount of margin deposits
on a Fund's outstanding futures and related options positions and the amount of
premiums paid for outstanding options on futures would exceed 5% of the market
value of the Fund's total assets. These transactions involve brokerage costs,
require margin deposits and, in the case of contracts and options obligating a
Fund to purchase securities or currencies, require the Fund to segregate assets
to cover such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for the Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio positions
may be difficult to achieve because no futures contracts based on corporate
fixed-income securities are currently available. In addition, it is not possible
to hedge fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
FINANCIAL FUTURES CONTRACTS. A Fund permitted to do so under its investment
policies may, for bona fide hedging purposes or for other appropriate risk
management purposes permitted under regulations promulgated by the Commodity
Futures Trading Commission ("CFTC"), purchase or sell futures contracts on
interest rates, financial indices, currencies and stock indices, and U.S.
government securities, and may purchase and write on a covered basis put and
call options on futures contracts. Investment decisions relating to futures
contracts and options thereon will be based upon, among other considerations,
the composition of a Fund's portfolio and the Managers' expectations concerning
interest rates and the currency and securities markets. In addition, for hedging
purposes or to increase income to a Fund, the Fund may purchase put and call
options and write covered put and call options on securities, currencies and
securities indices traded on U.S. exchanges and, to the extent permitted by law,
foreign exchanges, as well as over-the-counter.
For bona fide hedging purposes or for other appropriate risk management purposes
pursuant to the Commodity Exchange Act, as amended, and the rules promulgated
thereunder by the CFTC, a Fund may enter into contracts for the purchase or sale
for future delivery of U.S. Treasury or foreign securities. Each Fund may
similarly enter into futures contracts based upon financial indices. A Fund may
enter into financial futures contracts, stock index futures contracts, foreign
currency futures contracts and options on any of the foregoing. These futures
contracts are referred to collectively as "financial futures." Financial futures
are commodity contracts that obligate the long or short holder to take or make
delivery of a specified quantity of a financial instrument, such as U.S.
Treasury or other securities or foreign currencies, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of these types of futures contracts means the acquisition of a contractual
obligation to deliver the securities or the cash value of the index called for
by the contract at a specified price on a specified date. A "purchase" of these
types of futures contracts means the acquisition of a contractual obligation to
acquire the securities or the cash value of the index called for by the contract
at a specified price on a specified date.
At the same time a futures contract is purchased or sold, a Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The futures
contract is valued daily thereafter and the payment of some amount of "variation
margin" may be required, reflecting any decline or increase in the contract's
value.
To the extent a Fund enters into contracts for the purchase or sale for future
delivery of financial futures and to the extent required by SEC rules, it will
maintain, with its custodian bank, assets in a segregated account to cover its
obligations with respect to such contracts. These assets will consist of cash,
cash equivalents or high quality debt obligations from the Fund's portfolio, in
an amount equal to the difference between the fluctuating market value of such
futures contracts and the aggregate value of the initial and variation margin
payments made by the Fund with respect to such futures contracts.
INTEREST RATE FUTURES CONTRACTS. Certain Funds may purchase and sell interest
rate futures contracts and options thereon traded on domestic exchanges and, to
the extent such contracts have been approved by the CFTC for sale to customers
in the U.S., on foreign exchanges.
A Fund may enter into interest rate futures contracts in order to protect its
portfolio securities from fluctuations in interest rates without necessarily
buying or selling the underlying fixed-income securities. For example, if a Fund
owns bonds, and interest rates are expected to increase, it might sell futures
contracts on debt obligations having characteristics similar to those held in
the portfolio. Such a sale would have much the same effect as selling an
equivalent value of the bonds owned by the Fund. If interest rates did increase,
the value of the debt obligations in the portfolio would decline, but the value
of the futures contracts to the Funds would increase at approximately the same
rate, thereby keeping the net asset value of the Fund from declining as much as
it otherwise would have. A Fund could accomplish similar results by selling
bonds with longer maturities and investing in bonds with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of futures contracts as a risk
management technique allows a Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, a Fund may
purchase interest rate futures contracts in an attempt to hedge against having
to make future anticipated purchases of bonds at the higher prices expected to
prevail in the future. Since the fluctuations in the value of appropriately
selected futures contracts should be similar to that of the bonds that will be
purchased, the Fund could take advantage of the anticipated rise in the cost of
the bonds without actually buying them until the market had stabilized. At that
time, the Fund could make the intended purchase of the bonds in the cash market
and the futures contracts could be liquidated.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS. A Fund may also purchase call and
put options and write covered call and put options on interest rate futures
contracts traded on domestic exchanges and, to the extent such contracts have
been approved by the CFTC for sale to customers in the U.S., on foreign
exchanges to hedge against risks associated with shifts in interest rates and
may enter into closing transactions with respect to such options.
STOCK INDEX FUTURES CONTRACTS. Certain Funds may purchase and sell stock index
futures contracts and options on stock index futures contracts traded on
domestic exchanges and, to the extent such contracts have been approved by the
CFTC for sale to customers in the U.S., on foreign exchanges. A stock index
futures contract obligates the seller to deliver (and the purchaser to take) an
amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. Open futures contracts
are valued on a daily basis and a Fund may be obligated to provide or receive
cash reflecting any decline or increase in the contract's value. No physical
delivery of the underlying stocks in the index is made in the future.
A Fund may sell stock index futures contracts in anticipation of or during a
market decline in an attempt to offset the decrease in market value of its
securities that might otherwise result. When a Fund is not fully invested in
stocks and anticipates a significant market advance, it may purchase stock index
futures in order to gain rapid market exposure that may offset increases in the
cost of common stocks that it intends to purchase.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS. Call and put options on stock index
futures may be purchased or sold to hedge against risks of market-side price
movements. Such options may be traded on domestic exchanges and, to the extent
such contracts have been approved by the CFTC for sale to customers in the U.S.,
on foreign exchanges. The need to hedge against such risks will depend on the
extent of diversification of a Fund's common stock portfolio and the sensitivity
of such investments to factors influencing the stock market as a whole.
RISKS IN INVESTING IN OPTIONS AND FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of futures contracts and options thereon, as well as the
purchase and writing of options on securities and securities indices and
currencies, involve risks different from those involved with direct investments
in securities. A liquid secondary market for any futures or options contract may
not be available when a futures or options position is sought to be closed and
the inability to close such positions could leave an adverse impact on a Fund's
ability to effectively hedge its securities on foreign currency exposure. In
addition, there may be an imperfect correlation between movements in the
securities or foreign currency on which the futures or options contract is based
and movements in the securities or currency in the Fund's portfolio. Successful
use of futures or options contracts is further dependent on the Managers'
ability to correctly predict movements in the securities or foreign currency
markets and no assurance can be given that its judgment will be correct.
Successful use of options on securities or stock indices is subject to similar
risk considerations. In addition, by writing covered call options, the Fund
gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying security above the option exercise price.
While utilization of options, futures contracts and similar instruments may be
advantageous to the Funds, if the Managers are not successful in employing such
instruments in managing each Fund's investments, each Fund's performance will be
worse than if they did not employ such strategies. In addition, each Fund will
pay commissions and other costs in connection with such investments, which may
increase each Fund's expenses and reduce its return. In writing options on
futures, each Fund's loss is potentially unlimited and may exceed the amount of
the premium received.
The risk of loss in trading foreign futures contracts and foreign options can be
substantial. Investors should be aware of the following: (i) participation in
foreign futures contracts and foreign options transactions involves the
execution and clearing of trades on, or subject to, the rules of a foreign board
of trade; and (ii) applicable foreign law which will vary, depending on where
the foreign futures or options transaction occurs. For these reasons, a Fund
might not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the CFTC's regulations and the rules of the National
Futures Association and any domestic exchange. In addition, the price of any
foreign futures or foreign options contract and, therefore, the potential profit
and loss thereon, may be affected by any variance in the foreign exchange rate
between the time a particular order is placed and the time it is liquidated,
offset or exercised.
In certain cases the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed more effectively and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities. However, there are risks involved in
these transactions as discussed above.
Any Fund's investment in options, futures contracts, forward contracts, options
on futures contracts or stock indices, and foreign currencies and securities may
be limited by the requirements of the Code for qualification as a regulated
investment company. These securities require the application of complex and
special rules and elections, more information about which is included in the
SAI.
PORTFOLIO TURNOVER
Because the investment outlook of the type of securities which each Fund may
purchase may change as a result of unexpected developments in national or
international securities markets, or in economic, monetary or political
relationships, a Fund's Manager will consider the economic effect of portfolio
turnover but generally not treat portfolio turnover as a limiting factor in
making investment decisions. Investment decisions affecting turnover may include
changes in investment strategies or nonfundamental investment policies,
including changes in management personnel, as well as individual portfolio
transactions.
Moreover, turnover may be increased by certain factors wholly outside the
control of the Managers. For example, during periods of rapidly declining
interest rates, such as the U.S. experienced in 1991 through 1993, the rate of
mortgage prepayments may increase rapidly, resulting in the return of principal
to funds which invest in mortgage securities, thus increasing "sales" of
portfolio securities. Similarly, the rate of bond calls by issuers of
fixed-income securities may increase as interest rates decline, thereby forcing
the "sale" of called bonds by funds which invest in fixed-income securities and
subsequent purchase of replacement investments. In other periods, increased
merger and acquisition activity, or increased rates of bankruptcy or default,
may create involuntary transactions for funds which hold affected stocks and
bonds, especially high-yield bonds. Changes in particular portfolio holdings may
be made whenever it is considered that a security is no longer the most
appropriate investment for a Fund, or that another security appears to have a
relatively greater opportunity, and will be made without regard to the length of
time a security has been held.
The portfolio turnover rates for each Fund are disclosed in the prospectus for
the Funds, in the section entitled "Financial Highlights". Portfolio turnover is
a measure of how frequently a fund's portfolio securities are bought and sold.
As required by the SEC, annual portfolio turnover is calculated generally as the
dollar value of the lesser of a fund's purchases or sales of portfolio
securities during a given year, divided by the monthly average value of the
fund's portfolio securities during that year (excluding securities whose
maturity or expiration at the time of acquisition were less than one year). For
example, a fund reporting a 100% portfolio turnover rate would have purchased
and sold securities worth as much as the monthly average value of its portfolio
securities during the year. Except for certain Funds noted in the Prospectus,
the Funds generally do not expect their annual turnover rates to exceed 100%.
Because so many variable factors are beyond the control of the Managers, it is
not possible to estimate future turnover rates with complete accuracy. Higher
portfolio turnover rates generally increase transaction costs, which are fund
expenses, but would not create taxable capital gains for investors because of
the tax-deferred status of variable annuity and life insurance investments.
REAL ESTATE FUND
REAL ESTATE RELATED INVESTMENTS. In addition to the Fund's investments in real
estate securities, as defined in the Trust Prospectus, the Fund may also invest
a portion of its assets in debt obligations or equity securities of issuers
engaged in businesses whose products and services are closely related to the
real estate industry, and publicly traded on an exchange or in the
over-the-counter market, including principal mortgage pools, CMOs, and related
instruments which are publicly traded (including, without limitation, pools
containing GNMA and FNMA mortgages). The Fund will invest no more than 55% of
its assets in either GNMA or FNMA securities and no more than 70% of its assets
in GNMA and FNMA securities, in the aggregate. In addition, the Fund does not
invest in the "residual interests" of real estate mortgage investment conduits
("REMICs");
REPURCHASE TRANSACTIONS
Each Fund may enter into repurchase agreements. A repurchase agreement is an
agreement in which the seller of a security agrees to repurchase the security
sold at a mutually agreed upon time and price. Under the 1940 Act, a repurchase
agreement is deemed to be the loan of money by the Fund to the seller,
collateralized by the underlying security. The resale price is normally in
excess of the purchase price, reflecting an agreed upon interest rate. The
interest rate is effective for the period of time in which the Fund is invested
in the agreement and is not related to the coupon rate on the underlying
security. The period of these repurchase agreements will usually be short, from
overnight to one week, and at no time will a Fund invest in repurchase
agreements for more than one year. However, the securities which are subject to
repurchase agreements may have maturity dates in excess of one year from the
effective date of the repurchase agreements. The transaction requires the
initial collateralization of the seller's obligation by securities with a market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund, with the value marked-to-market daily to maintain 100%
coverage. A default by the seller might cause the Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Funds might also incur disposition costs in liquidating the collateral. The
Funds may not enter into a repurchase agreement with more than seven days
duration if, as a result, the market value of the Funds' net assets, together
with investments in other securities deemed to be not readily marketable, would
be invested in such repurchase agreements in excess of the Funds' policy on
investments in illiquid securities. The Funds intend to enter into repurchase
agreements only with financial institutions such as broker-dealers and banks
which are deemed creditworthy by their respective Managers. The securities held
subject to resale (the collateral) will be held on behalf of a Fund by a
custodian approved by the Board and will be held pursuant to a written
agreement.
WHEN-ISSUED SECURITIES
Securities when originally issued are sometimes offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield terms,
is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase of such securities;
during the period between purchase and settlement, no payment is made by the
purchaser to the issuer and no interest accrues to the purchaser. To the extent
that assets of a Fund are not vested prior to the settlement of a purchase of
securities, the Fund will earn no income; however, it is intended that each Fund
will be fully invested to the extent practicable and subject to the policies
stated above. While when-issued securities may be sold prior to the settlement
date, it is intended that each Fund will purchase such securities with the
purpose of actually acquiring them, unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The market value of
when-issued securities may be more or less than the purchase price. The Trust
does not believe that the net asset value or income of any of the Funds will be
adversely affected by their purchase of securities on a when-issued basis. The
Trust will establish for each Fund a segregated account with its custodian bank
in which it will maintain cash and/or high grade marketable securities equal in
value to commitments for when-issued securities. Such segregated securities will
either mature or, if necessary, be sold on or before the settlement date. There
are no restrictions on the percentage of net assets of any Fund which may be
invested in when-issued securities at any given time.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions as fundamental policies (except
as otherwise indicated), which means that they may not be changed without the
approval of a majority of that Fund's shares. In order to change any of these
restrictions, the lesser of (i) holders of 67% or more of a Fund's voting
securities present at a meeting of shareholders if the holders of more than 50%
of its voting securities are represented at the meeting or (ii) holders of more
than 50% of that Fund's outstanding voting securities must vote to make the
change.
Each of the Funds may not:
1. with respect to 75% of its total assets, except for the Global Income
Securities Fund (formerly the Global Income Fund), purchase the securities of
any one issuer (other than cash, cash items and obligations of the U.S.
government) if immediately thereafter, and as a result of the purchase, the Fund
would (a) have more than 5% of the value of its total assets invested in the
securities of such issuer or (b) hold more than 10% of any or all classes of the
securities of any one issuer;
2. borrow money in an amount in excess of 5% of the value of its total assets,
except from banks for temporary or emergency purposes, and not for direct
investment in securities (excepting the Asset Allocation, Developing Markets,
International Smaller Companies and Small Cap Funds). The Asset Allocation,
Developing Markets, International Smaller Companies and Small Cap Funds may
borrow money from banks in an amount not exceeding 33 1/3% of the value of the
Fund's total assets including the amount borrowed. Each of these Funds may also
pledge, mortgage or hypothecate its assets to secure borrowings to an extent not
greater than 15% of the Fund's total assets. Arrangements with respect to margin
for futures contracts, forward contracts and related options are not deemed to
be a pledge of assets.
3. lend its assets, except through the purchase or acquisition of bonds,
debentures or other debt securities of a type customarily purchased by
institutional investors, or through loans of portfolio securities, or to the
extent the entry into a repurchase agreement may be deemed a loan;
4. underwrite securities of other issuers, except as noted in number 6 below and
except insofar as a Fund may be technically deemed an underwriter under the
federal securities laws in connection with the disposition of portfolio
securities;
5. purchase illiquid securities, including illiquid securities which, at the
time of acquisition, could be disposed of publicly by the Funds only after
registration under the Securities Act of 1933, if as a result more than 10% of
their net assets would be invested in such illiquid securities(not applicable to
the International Smaller Companies Fund);
6. invest in securities for the purpose of exercising management or control
of the issuer;
7. invest more than 25% of its assets (measured at the time of the most recent
investment) in any single industry (not applicable to the Metals Fund, the
Utility Equity Fund, the Real Estate Securities Fund, the Global Income Fund,
the International Equity Fund, the International Smaller Companies Fund, the
Pacific Fund, or the Asset Allocation Fund);
8. invest in companies which have a record of less than three years of
continuous operation, including the operations of any predecessor companies,
except that the Metals Fund, the Real Estate Fund, the Capital Growth Fund, the
Growth and Income Fund, the Global Income Fund, the International Equity Fund,
the Pacific Fund, the Global Growth Fund, and the Developing Markets Fund may
invest up to 5% of their respective assets in such companies and such limitation
shall not apply to the Asset Allocation Fund, International Smaller Companies
Fund or Small Cap Fund;
9. maintain a margin account with a securities dealer or effect short sales
(with the exceptions that (i) the Growth and Income Fund and the Income
Securities Fund may effect short sales if either owns securities equivalent in
kind and amount to those sold and (ii) the Global Income Fund, the Global Growth
Fund, the Developing Markets Fund, the Intermediate Bond Fund, the Asset
Allocation Fund, the International Equity Fund, the International Smaller
Companies Fund, the Pacific Fund and the Small Cap Fund may make initial
deposits and pay variation margin in connection with futures contracts);
10. invest in commodities or commodity pools, except that (i) certain Funds may
purchase and sell Forward Contracts in amounts necessary to effect transactions
in foreign securities, (ii) the Global Income Fund, the International Equity
Fund, the International Smaller Companies Fund, the Pacific Growth Fund, the
Global Growth Fund, the Developing Markets Fund, the Asset Allocation Fund, the
Small Cap Fund and the Intermediate Bond Fund may enter into Futures Contracts
and may invest in foreign currency and (iii) the Metals Fund may invest in gold
bullion and foreign currency in the form of gold coins;
11. invest directly in real estate although certain Funds may invest in real
estate investment trusts or other publicly traded securities engaged in the
real estate industry;
12. invest in the securities of other open-end investment companies (except
that securities of another open-end investment company may be acquired
pursuant to a plan of reorganization, merger, consolidation or acquisition).
This restriction is not applicable to the Capital Growth Fund, International
Equity Fund, the International Smaller Companies Fund, the Pacific Fund, the
Asset Allocation Fund, or the Developing Markets Fund;
13. invest in assessable securities or securities involving unlimited
liability on the part of the Fund;
14. invest an aggregate of more than 10% of its assets in securities with legal
or contractual restrictions on resale, securities which are not readily
marketable (including over-the-counter options and assets used to cover such
options), and repurchase agreements with more than seven days to maturity (this
restriction does not apply to the Asset Allocation Fund);
15. purchase or retain any security if any officer, director or security holder
of the issuer is at the same time an officer, trustee or employee of the Trust
or of the Fund's Manager and such person owns beneficially more than one-half of
1% of the securities and all such persons owning more than one-half of 1% own
more than 5% of the outstanding securities of the issuer; or
16. invest its assets in a manner which does not comply with the investment
diversification requirements of Section 817(h) of the Code.
17. The Adjustable Fund may invest up to 5% of its total assets in securities
that cannot be offered to the public for sale without first being registered
under the Securities Act of 1933 ("restricted securities") or in other
securities which, in the opinion of the Board of Trustees, may be otherwise
illiquid. It is also the policy of the Trust that illiquid securities (including
illiquid equity securities, repurchase agreements of more than seven days
duration, over-the-counter options and the assets used to cover such options,
and other securities which are not readily marketable) may not constitute, at
the time of purchase or at any time, more than 10% of the value of the total net
assets of the Fund in which they are held.
18. The Global Growth and Developing Markets Funds may not invest more than 5%
of their respective assets in warrants, whether or not listed on the New York or
American Exchange, including no more than 2% of their respective total assets
which may be invested in warrants that are not listed on those exchanges.
Warrants acquired by the Fund in units or attached to securities are not
included in this restriction.
19. The Global Growth Fund and Developing Markets Fund will not invest more than
15% of their respective assets in securities of foreign issuers that are not
listed on a recognized U.S. or foreign securities exchange, including no more
than 10% in illiquid investments.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to these fundamental policies, it is the present policy of each Fund
(which may be changed without the approval of a majority of its outstanding
shares) not to pledge, mortgage or hypothecate its assets as security for loans
(except to the extent of allowable temporary loans), nor to engage in joint or
joint and several trading accounts in securities, except that the Funds may
participate with other investment companies in the Franklin Group of Funds(R) in
a joint account to engage in certain large repurchase transactions and may
combine orders to purchase or sell securities with orders from other persons to
obtain lower brokerage commissions. It is not any Fund's policy to invest in
interests (other than publicly traded equity securities) in oil, gas or other
mineral exploration or development programs.
As non-fundamental investment policies, which may be changed by the Board of
Trustees of the Trust without shareholder approval, the Asset Allocation Fund
and the International Smaller Companies Fund will not invest more than 15% of
their total assets in securities of foreign issuers which are not listed on a
recognized United States or foreign securities exchange, or more than 10% of
their total assets in (a) securities with a limited trading market, (b)
securities subject to legal or contractual restrictions as to resale, (c)
repurchase agreements not terminable within seven days, and (d) debt obligations
rated Baa or lower by Moody's Investors Service, Inc. or BBB or lower by
Standard & Poor's Corporation or, if unrated, are of comparable investment
quality as determined by the Managers.
Whenever any investment policy or investment restriction states a maximum
percentage of a Fund's assets which may be invested in any security or other
property, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
property.
OFFICERS AND TRUSTEES
The Trust is managed by a Board of Trustees who have been elected for an
indefinite term. The Board of Trustees is responsible for the overall management
of the Trust and each Fund, including overseeing the investment of each Fund's
assets. The Board elects the officers who are responsible for administering the
day-to-day operations of the Trust and each Fund. Listed below are the trustees
and officers of the Trust and a brief description of the business experience and
affiliations of each during at least the past five years. Trustees who are
"interested persons" of the Trust, as defined in the 1940 Act, are designated by
an asterisk(*).
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
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President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
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*Lowell C. Anderson (58) Trustee
Allianz Life Insurance Company
of North America
1750 Hennepin Avenue South
Minneapolis, MN 55403-2195
Chairman, President and Chief Executive Officer, Allianz Life Insurance
Company of North America (privately owned company formerly North American
Life & Casualty Company); Director, Preferred Life Insurance Company of New
York.
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Harris J. Ashton (63) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the
Franklin Templeton Group of Funds.
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Harmon E. Burns (51) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; officer and/or director, as the
case may be, of other subsidiaries of Franklin Resources, Inc.; and officer
and/or director or trustee of 43 of the investment companies in the Franklin
Templeton Group of Funds.
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S. Joseph Fortunato (63) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General
Host Corporation; director, trustee or managing general partner, as the case
may be, of 58 of the investment companies in the Franklin Templeton Group of
Funds.
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David W. Garbellano (81) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley
Science Corporation (a venture capital company); and director, trustee or
managing general partner, as the case may be, of 30 of the investment companies
in the Franklin Group of Funds.
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*Charles B. Johnson (63) Chairman of the
777 Mariners Island Blvd. Board and Trustee
San Mateo, CA 94404
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general
partner, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
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*Charles E. Johnson (39) President and
777 Mariners Island Blvd. Trustee
San Mateo CA 94404
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case
may be, of 24 of the investment companies in the Franklin Templeton Group of
Funds.
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*Rupert H. Johnson, Jr. (55) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------
Frank W. T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
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Gordon S. Macklin (67) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
- ------------------------------------------------------------------------------
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case
may be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
- ------------------------------------------------------------------------------
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief Financial
San Mateo, CA 94404 Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; officer of most other subsidiaries of Franklin Resources,
Inc.; and officer of 61 of the investment companies in the Franklin Templeton
Group of Funds.
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Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - General Counsel, Franklin Resources, Inc. and
Franklin Templeton Distributors, Inc.; Vice President, Franklin Advisers,
Inc. and officer of 37 of the investment companies in the Franklin Group of
Funds.
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Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
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Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 32 of the investment companies in the
Franklin Group of Funds.
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Trustees not affiliated with the Managers or Allianz ("non affiliated
trustees") are currently paid fees of $550 per month plus $183 per meeting
attended. As indicated above, certain of the trustees and officers hold
positions with other companies in the Franklin Group of Funds(R) and the
Templeton Funds ("Franklin Templeton Funds"). The following table shows the
fees paid, for the fiscal year ended December 31, 1995, by the Trust to its
non affiliated trustees and the total fees paid to such trustees by the Trust
and other Franklin Templeton Funds for which they serve as directors, trustees
or managing general partners.
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Name Aggregate Number of Franklin Total Compensation from
CompensationTempleton Funds Boards Franklin Templeton
From Trust+ on Which Each Serves** Funds, including the
Trust+
Frank H. Abbott.... $8,800 31 $162,420
Harris Ashton...... 8,800 56 327,925
S. Joseph Fortunato. 8,800 58 344,745
David Garbellano.... 8,800 30 146,100
Frank W.T. LaHaye... 8,800 26 143,200
Gordon Macklin...... 8,800 53 321,525
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+Figures rounded to the nearest dollar.
**The number of boards is based on the number of registered investment companies
in the Franklin Templeton Group of Funds and does not include the total number
of series or funds within each investment company for which the trustees are
responsible. The Franklin Templeton Group of Funds currently includes 61
registered investment companies, consisting of more than 162 U.S.
based mutual funds or series.
Nonaffiliated trustees are also reimbursed for expenses incurred in connection
with attending Board meetings, paid pro rata by each Franklin Templeton fund on
whose Board they serve. No officer or trustee received any other compensation
directly from the Trust. Certain officers or directors who are shareholders of
Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries. For
additional information concerning trustee compensation and expenses, please see
the Trust's Annual Report to Shareholders.
As of February 1, 1996, no officer or trustee of the Trust owned of record or
beneficially shares of any Fund of the Trust. Many of the Fund's trustees own
shares in various of the other funds in the Franklin Templeton Funds. Charles
B. Johnson and Rupert H. Johnson, Jr. are brothers and are the father and
uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Manager for all series of the Trust, except the Asset Allocation Fund,
Global Growth Fund, International Smaller Companies Fund, and Developing Markets
Fund, is Franklin Advisers, Inc.("Advisers"), 777 Mariners Island Blvd., P.O.
Box 7777, San Mateo, California 94403-7777. In addition, Advisers employs
Templeton Investment Counsel, Inc. ("Templeton Florida"), Broward Financial
Centre, Suite 2100, Fort Lauderdale, Florida 33394, to act as subadviser to the
International Equity Fund, the Pacific Fund, and the Templeton Global Income
Securities Fund (formerly the "Global Income Fund"). The Manager of the
International Smaller Companies Fund is Templeton Florida. The Manager for the
Asset Allocation and Global Growth Funds is Global Advisers Limited, formerly
known as Templeton, Galbraith & Hansberger, Ltd. ("Templeton Nassau"), Lyford
Cay Nassau, N.P. Bahamas. The Manager for Developing Markets Fund is Templeton
Asset Management, formerly known as Templeton Investment Management (Singapore)
Pte Ltd. ("Templeton Singapore") 20 Raffles Place, Ocean Towers, Singapore,
which replaced Templeton Investment Management ("Hong Kong") Limited on October
1, 1995. Templeton Nassau employs Templeton Florida to act as subadviser to the
Asset Allocation Fund. Advisers, Templeton Nassau, Templeton Singapore, and
Templeton Florida, may be referred to as the "Manager" or "Managers" throughout
the SAI and Prospectus.
Each Fund, except the International Equity Fund, the Pacific Fund, the Rising
Dividends Fund, the Small Cap Fund, the International Smaller Companies Fund,
the Capital Growth Fund, the Global Growth Fund, the Developing Markets Fund and
the Asset Allocation Fund is obligated to pay Advisers a fee as compensation for
its services, which is paid monthly and accrues daily based upon each Fund's
average net assets at the annual rate of 0.625% of the value of average daily
net assets up to and including $100 million; 0.50% of the value of average daily
net assets over $100 million up to and including $250 million; 0.45% of the
value of average daily net assets over $250 million up to and including $10
billion; 0.44% of the value of average daily net assets over $10 billion up to
and including $12.5 billion; 0.42% of the value of average daily net assets over
$12.5 billion up to and including $15 billion; and 0.40% of the value of average
daily net assets over $15 billion.
The International Equity Fund and the Pacific Fund are each obligated to pay
Advisers a monthly fee, based upon each Fund's average daily net assets, at the
annual rate of 1% of the value of average daily net assets up to and including
$100 million; 0.90% of the average daily net assets over $100 million up to and
including $250 million; 0.80% of average daily net assets over $250 million up
to and including $500 million and 0.75% of average net assets over $500 million.
Templeton, Florida, as the subadviser for the International Equity Fund and the
Pacific Fund under a contract with Advisers, receives a monthly fee from
Advisers at the annual rate of 0.50% of the value of average daily net assets up
to and including $100 million; 0.40% of the average daily net assets over $100
million up to and including $250 million; 0.30% of average daily net assets over
$250 million up to and including $500 million and 0.25% of average net assets
over $500 million.
The Capital Growth Fund, Rising Dividends Fund and the Small Cap Fund are each
obligated to pay Advisers a monthly fee, based upon each Fund's average daily
net assets, computed at the annual rate of 0.75 of 1% of average daily net
assets on the first $500 million of average daily net assets; 0.625 of 1% on the
next $500 million of average daily net assets; and 0.50 of 1% on average daily
net assets in excess of $1 billion.
Under the management agreement with Templeton Nassau, the Global Growth Fund is
obligated to pay Templeton, Nassau a monthly fee equal to an annual rate of 1.0%
of the value of the Fund's average daily net assets up to and including $100
million; 0.90% of the value of the Fund's average daily net assets over $100
million up to and including $250 million; 0.80% of the value of the Fund's
average daily net assets over $250 million up to and including $500 million; and
0.75% of the value of the Fund's average daily net assets over $500 million.
Under the management agreement with Templeton Singapore, the Developing Markets
Fund is obligated to pay Templeton Hong Kong a monthly fee equal to an annual
rate of 1.25% of the value of the Fund's average daily net assets.
Under the management agreement with Templeton Nassau, the Asset Allocation Fund
is obligated to pay the Manager a monthly fee equal to an annual rate of 0.65%
of the value of the Fund's average daily net assets up to and including $200
million, 0.585% of the value of the Fund's average daily net assets over $200
million up to and including $1.3 billion; and 0.52% of the value of the Fund's
average daily net assets over $1.3 billion.
Under a management agreement with Templeton Florida, the International Smaller
Companies Fund is obligated to pay the Manager a monthly fee equal to an annual
rate of 0.85% of the value of the Fund's average daily net assets up to and
including $200 million, 0.765% of the value of the Fund's average daily net
assets over $200 million up to and including $1.3 billion; and 0.68% of the
value of the Fund's average daily net assets over $1.3 billion.
The Managers may determine in advance to limit the management fees or to assume
responsibility for the payment of certain operating expenses relating to the
operations of any Fund, which may have the effect of decreasing the total
expenses and increasing the yield of such Fund. Any such action is voluntary and
may be terminated by the Managers at any time unless otherwise indicated. For at
least to the end of the fiscal year, December 31, 1996, Advisers has agreed to
limit its management fees and, if necessary, to assume responsibility for
payment of each Zero Coupon Fund operating expenses so that each Fund's total
expenses will not exceed 0.40% of each Fund's average net assets.
Expense reductions have not been necessary based on state requirements.
Except as indicated below, the management agreements with Advisers, Templeton
Florida, Templeton Singapore, and Templeton Nassau and the subadvisory
agreements with Templeton Florida are in effect until April 30, 1996, and may
continue thereafter provided they are approved for periods not to exceed one
year by (i) the Trust's Board of Trustees or the vote of a majority of the
outstanding shares of that Fund, and (ii) a majority of the Trustees who are not
parties to the Agreement or interested persons of any such party (other than as
Trustees). The management agreements for the Small Cap(dated July 19, 1995),
Capital Growth(dated January 18, 1996) and International Smaller Companies
(dated January 18, 1996) Funds are in effect for an initial period of one year
and may continue from year to year thereafter under the same provisions
mentioned above. The management agreement with respect to any Fund may be
terminated without penalty at any time by the Fund or by the Managers on 60
days' written notice and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
Pursuant to the management agreements and subadvisory agreements, the Managers
provide investment research and portfolio management services, including the
selection of securities for each Fund to purchase, hold or sell, and the
selection of brokers through whom each such Fund's portfolio transactions are
executed. The Managers' activities are subject to the review and supervision of
the Board of Trustees, and Templeton Florida as subadviser to certain Funds is
subject to the overview of each Fund's respective Manager, to whom the Managers
render periodic reports of each Fund's investment activities. The Managers, or
in certain cases, the Business Manager, provide each Fund with executive and
administrative personnel, office space and facilities, and pay certain
additional administrative expenses incurred in connection with the operation of
each such Fund. Each such Fund bears all of its expenses not assumed by the
Managers or Business Manager. See the Statement of Operations in the financial
statements at the end of this Statement of Additional Information for additional
details of these expenses. The table below sets forth on a per Fund basis the
management fees that would have been accrued by the Managers and the management
fees actually paid by the Funds for the fiscal years ended December 31, 1995,
1994 and 1993.
MANAGEMENT FEES MANAGEMENT FEES
ACCRUED PAID
BY ADVISERS BY FUND
1995
Money Market Fund $2,295,252 $1,700,943
Adjustable Fund 1,158,160 1,158,160
Templeton Global Income
Securities Fund (formerly the
"Global Income Fund") 1,354,128 1,354,128
High Income Fund 1,700,257 1,700,257
Intermediate Bond Fund 933,279 933,279
Government Fund 3,038,772 3,038,772
Zero Coupon Fund - 2000 721,943 439,204
Zero Coupon Fund - 2005 425,696 249,803
Zero Coupon Fund - 2010 398,959 233,644
Income Securities Fund 5,335,780 5,335,780
Rising Dividends Fund 2,858,740 2,858,740
Utility Equity Fund 6,002,369 6,002,369
Growth and Income Fund 3,283,721 3,283,721
Metals Fund 702,034 702,034
Real Estate Fund 1,110,433 1,110,433
Small Cap Fund 9,054 9,054
International Equity Fund 6,748,353 6,748,353
Pacific Fund 3,148,402 3,148,402
Global Asset Allocation Fund 52,421 52,421
Developing Markets 1,636,864 1,636,864
Global Growth 2,309,970 2,309,970
1994
Money Market Fund $1,970,057 1,652,138
Adjustable Fund 1,522,439 1,522,439
Templeton Global Income
Securities Fund (formerly the
"Global Income Fund") 1,404,652 1,404,652
High Income Fund 1,264,737 1,264,737
Intermediate Bond Fund 845,739 845,739
Government Fund 3,100,250 3,100,250
Zero Coupon Fund - 2000 522,841 301,577
Zero Coupon Fund - 2005 281,657 158,311
Zero Coupon Fund - 2010 198,571 110,499
Income Securities Fund 4,475,467 4,475,467
Rising Dividends Fund 2,262,988 2,262,988
Utility Equity Fund 5,985,899 5,985,899
Equity Fund 2,314,166 2,314,166
Metals Fund 644,295 644,295
Real Estate Fund 932,770 932,770
International Equity Fund 5,356,301 5,356,301
Pacific Fund 3,057,140 3,057,140
Developing Markets 511,882 511,882
Global Growth Fund 578,011 578,011
1993 . MANAGEMENT FEES MANAGEMENT FEES
ACCRUED PAID
BY ADVISERS BY FUND
Money Market Fund $ 638,179 $ 638,179
Adjustable Fund 1,524,197 1,524,197
Templeton Global Income
Securities Fund (formerly the
"Global Income Fund") 703,801 703,801
High Income Fund 752,653 752,653
Intermediate Bond Fund 517,568 517,568
Government Fund 2,635,431 2,635,431
Zero Coupon Fund - 2000 411,580 212,328
Zero Coupon Fund - 2005 200,090 102,160
Zero Coupon Fund - 2010 133,886 42,611
Income Securities Fund 2,119,921 2,119,921
Rising Dividends Fund 1,596,300 1,596,300
Utility Equity Fund 5,487,597 5,487,597
Equity Fund 1,561,955 1,561,955
Metals Fund 227,312 227,312
Real Estate Fund 282,364 282,364
International Equity Fund 897,997 897,997
Pacific Fund 527,003 527,003
Please refer to the "Officers and Trustees" table which indicates officers and
trustees who are affiliated persons of the Trust, the Managers and Allianz Life.
BUSINESS MANAGERS
Templeton Global Investors, Inc. ("Business Manager"), Broward Financial Centre,
Suite 2100, Fort Lauderdale, Florida 33394, provides certain administrative
facilities and services for certain of the Funds as described in the Prospectus.
The Business Manager is employed directly by the Asset Allocation Fund and
International Smaller Companies Fund, and through subcontracts by the Managers
of the Developing Markets, Global Growth, Templeton Global Income Securities
(formerly the "Global Income Fund"), International, and Pacific Funds.
TRANSFER AGENT
Franklin Templeton Investor Services, Inc., a wholly owned subsidiary of
Resources, maintains shareholder's records, processes purchases and redemptions
of each Fund's shares and acts as the Trust's transfer agent and dividend-paying
agent.
CUSTODIANS
The Bank of New York, Mutual Funds Division, 90 Washington Street, New York, New
York 10286, acts as custodian of the securities and other assets of the Trust.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian for cash received in connection with the
purchase of Fund shares. In addition, Chase Manhattan Bank, Chase MetroTech
Center, Brooklyn, New York 11245, also acts as custodian for the Global Growth,
Global Income, Developing Markets, Asset Allocation, International Smaller
Companies, Pacific, and International Equity Funds. The Custodians do not
participate in decisions relating to the purchase and sale of portfolio
securities.
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P, 333 Market Street, San Francisco, California 94105,
serves as the Trust's independent auditors. During the fiscal year ended
December 31, 1995, its auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders and in this Statement of Additional Information.
RESEARCH SERVICES
Research services may be provided to the Managers by various affiliates. Such
services may include information, analytical reports, computer screening
studies, statistical data, and factual resumes pertaining to securities eligible
for purchase by the Funds. Such supplemental research, when utilized, is subject
to analysis by the Managers before being incorporated into the investment
advisory process.
POLICIES REGARDING BROKERS
USED ON SECURITIES TRANSACTIONS
The selection of brokers and dealers to execute transactions is made by the
Managers, in accordance with criteria set forth in the respective management and
subadvisory agreements referenced herein and any directions which the Board of
Trustees may give.
When placing a portfolio transaction, the Managers attempt to obtain the best
execution of the transaction. On portfolio transactions which are done on a
securities exchange, the amount of commission paid by each Fund is negotiated
between the Funds' Managers and the broker executing the transaction, and the
Funds' Managers seek to obtain the lowest commission rate available from brokers
which are believed to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Managers will ordinarily
place orders for the purchase and sale of over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of the Managers, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price. The Funds will seek to
obtain prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Funds' best
interests, the Managers may place portfolio transactions with brokers who
provide the types of services described below, even if it means the Funds will
have to pay a higher commission than would be the case if no weight were given
to the broker's furnishing of these services. However, this will be done only
if, in the opinion of the Managers, the amount of any additional commission is
reasonable in relation to the value of the services. Higher commissions will be
paid only when the brokerage and research services received are bona fide and
produce a direct benefit to the Funds or assist their advisers in carrying out
their responsibilities to the Funds, or when it is otherwise in the best
interest of the Funds to do so, whether or not such data may also be useful to
the Managers in advising other clients.
When it is felt that several brokers are equally able to provide the best net
price and execution, the Managers are directed to execute transactions with: (i)
brokers who provide quotations and other services to the Funds, specifically
including the quotations necessary to determine the value of each Fund's net
assets, in such amount of total brokerage as may reasonably be required in light
of such services and (ii) brokers who supply research, statistical and other
data to the Funds and the Managers which the Managers or affiliates may lawfully
and appropriately use in their investment advisory capacities, in such amount of
total brokerage as may reasonably be required.
It is not possible to place a dollar value on the special executions or on the
research services received by the Managers from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits the Managers to supplement their own
research and analysis activities and to make available the views and information
of individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the Managers and their affiliates may use this
research and data in their investment advisory capacities with other clients.
Provided that the Trust's officers are satisfied that the best execution is
obtained, the sale of Policies may also be considered as a factor in the
selection of broker dealers to execute the Fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. ("Distributors"), an affiliate of
the Managers and principal underwriter for many of the mutual funds in the
Franklin Templeton Group of Funds, is a member of the National Association of
Securities Dealers, it is sometimes entitled to obtain certain fees when a Fund
tenders portfolio securities pursuant to a tender-offer solicitation. As a means
of reducing the expenses of a Fund, any portfolio securities tendered by a Fund
will be tendered through Distributors if it is legally permissible to do so. In
turn, the next management fee payable to the Manager under the applicable
management agreement will be reduced by the amount of any fees received by
Distributors in cash, less certain costs and expenses incurred in connection
therewith.
If purchases or sales of securities of certain of the Funds and other funds or
other investment companies or clients supervised by the Managers or their
affiliates are considered at or about the same time, the trades may be
aggregated for execution and then allocated by the Managers among the several
investment companies and clients in a manner designated to be equitable to each
party, taking into account the respective sizes of the Funds or clients and the
amount of securities to be purchased or sold. It is recognized that it is
possible that in some cases this procedure could have a detrimental effect on
the price or volume of the security, in so far as a particular Fund is
concerned. However, in other cases it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to all the Funds.
The Funds are authorized, to the extent consistent with their respective
investment policies and restrictions and in compliance with applicable rules
under the 1940 Act, to acquire securities of broker/dealers.
Most foreign stock exchange transactions are executed at fixed commission rates.
Fixed commissions on foreign stock exchange transactions are generally higher
than negotiated commissions on U.S. transactions. The Managers will endeavor to
achieve the best net results in effecting portfolio transactions for Funds on
foreign stock exchanges. There is also generally less government supervision and
regulation of foreign stock exchanges and brokers than in the U.S.
ADDITIONAL INFORMATION REGARDING VALUATION AND REDEMPTION OF SHARES OF THE
FUNDS
CALCULATION OF NET ASSET VALUE
As noted in the Prospectus, each Fund will generally calculate its net asset
value only on days when the New York Stock Exchange (the "Exchange") is open for
trading, even though trading in the portfolio securities of a Fund may occur on
other days in other markets or over-the-counter. As of the date of this
Statement of Additional Information, the Funds are informed that the New York
Stock Exchange will be closed in observance of the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas.
FUNDS OTHER THAN MONEY FUND
The net asset value per share of each Fund except the Money Fund is calculated
as follows: the aggregate of all liabilities, including, without limitation, the
current market value of any outstanding options written by a Fund, if any,
accrued expenses and taxes and any necessary reserves, is deducted from the
total gross value of all assets, and the difference is divided by the number of
shares of that Fund outstanding at the time. For the purpose of determining the
aggregate net assets of each Fund (except the Money Fund), cash and receivable
are valued at their realizable amounts, interest is recorded as accrued, and
dividends are recorded on the ex-dividend date.
Portfolio securities listed on a securities exchange or on NASDAQ for which
market quotations are readily available are valued at the last quoted sale price
of the day or, if there is no such reported sale, within the range of the most
recent quoted bid and ask prices. Over-the-counter portfolio securities for
which market quotations are readily available are valued within the range of the
most recent bid and ask prices as obtained from one or more dealers that make
markets in the securities. Portfolio securities which are traded both in the
over-the-counter market and on a securities exchange are valued according to the
broadest and most representative market as determined by the Managers. Portfolio
securities underlying actively traded options are valued at their market price
as determined above. The current market value of any option held by a Fund is
its last sales price on the relevant Exchange prior to the time when assets are
valued. Lacking any sales that day or if the last sale price is outside the bid
and ask prices, the options are valued within the range of the current closing
bid and ask prices if such valuation is believed to fairly reflect the
contract's market value. If a Fund should have an open option position as to a
security, the valuation of the contract will be within the range of the bid and
ask prices.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors, including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board of Trustees.
The value of a foreign security is determined in its national currency as of the
close of trading on the foreign exchange on which it is traded or as of the
scheduled close of trading on the Exchange, if that is earlier, and that value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at noon, Eastern time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the mean between the current
bid and ask price is used. Occasionally, events which affect the values of
foreign securities and foreign exchange rates may occur between the times at
which values and rates are determined and the close of the Exchange and will,
therefore, not be reflected in the computation of a Fund's net asset value. If
events materially affecting the value of these foreign securities occur during
such periods, then these securities will be valued in accordance with procedures
established by the Board of Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
in New York on each day on which the Exchange is open. Trading in European or
Far Eastern securities generally, or in a particular country or countries, may
not take place on every Exchange business day. Furthermore, trading takes place
in various foreign markets on days which are not business days for the Exchange
and on which the Fund's net asset value is not calculated. Each Fund calculates
net asset value per Share, and therefore effects sales and redemptions of its
Shares, as of the close of the Exchange once on each day on which that Exchange
is open. Such calculation does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in such
calculation and if events occur which materially affect the value of these
foreign securities, they will be valued at fair market value as determined by
the Managers and approved in good faith by the Board of Trustees.
All Money Market Instruments owned by Funds other than the Money Market Fund are
valued at current market, as discussed above. With the approval of trustees, a
Fund may utilize a pricing service, bank or broker/dealer to perform any of the
above described functions.
MONEY MARKET FUND
The valuation of the Fund's portfolio securities (including any securities held
in the segregated account maintained for when-issued securities) is based upon
their amortized cost, which does not take into account unrealized capital gains
or losses. This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in calculation, it may
result in periods during which value, as determined by amortized cost, is higher
or lower than the price the Fund would receive if it sold the instrument. During
periods of declining interest rates, the daily yield on shares of the Fund
computed as described above may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by the Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing solely market values, and existing investors in
the Fund would receive less investment income. The converse would apply in a
period of rising interest rates.
The Fund's use of amortized cost which facilitates the maintenance of the Fund's
per share net asset value of $1.00 is permitted by a Rule adopted by the SEC,
pursuant to which the Fund must adhere to certain conditions.
The Fund must maintain a dollar-weighted average portfolio maturity of 90 days
or less, only purchase instruments having remaining maturities of 397 calendar
days or less, and invest only in those U.S. dollar-denominated instruments that
the Board of Trustees determines present minimal credit risks and which are, as
required by the federal securities laws, rated in one of the two highest rating
categories as determined by nationally recognized statistical rating agencies,
instruments deemed comparable in quality to such rated instruments, or
instruments, the issuers of which, with respect to an outstanding issue of
short-term debt that is comparable in priority and protection, have received a
rating within the two highest categories of nationally recognized statistical
rating agencies. Securities subject to floating or variable interest rates with
demand features in compliance with applicable rules of the SEC may have stated
maturities in excess of one year. The trustees have agreed to establish
procedures designed to stabilize, to the extent reasonably possible, the Fund's
price per share as computed for the purpose of sales and redemptions at $1.00.
Such procedures will include review of the Fund's portfolio holdings by the
trustees, at such intervals as they may deem appropriate, to determine whether
the Fund's net asset value calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the trustees. If such deviation exceeds 1/2 of 1%,
the trustees will promptly consider what action, if any, will be initiated. In
the event the trustees determine that a deviation exists which may result in
material dilution or other unfair results to investors or existing shareholders,
they will take such corrective action as they regard as necessary and
appropriate, which may include the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends, redemptions of shares in kind, or establishing
a net asset value per share by using available market quotations.
ADDITIONAL INFORMATION
ADDITIONAL INFORMATION REGARDING TAXATION
As stated in the Prospectus, each Fund intends to be treated as a regulated
investment company under Subchapter M of the Code.
Any Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales or foreign
exchange gains or losses are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indexes, will be subject to
tax under Section 1234 of the Code, generally producing a long-term or
short-term capital gain or loss upon exercise, lapse, or closing out of the
option or sale of the underlying stock or security. By contrast, the Fund
treatment of certain other options, futures and forward contracts entered into
by a Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contacts and certain foreign currency contacts and
options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by a
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year, and all gain or loss
associated with fiscal year transactions and mark-to-market positions at fiscal
year end (except certain foreign currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to-market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains or short-term capital
losses into long-term capital losses within the Fund. The acceleration of income
on Section 1256 positions may require the Fund to accrue taxable income without
the corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, the Fund may be required to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Fund shares. In these ways,
any or all of these rules may affect both the amount, character and timing of
income distributed to shareholders by the Fund.
When a Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles (i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
In order for a Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than 3 months. Foreign exchange gains,
derived by a Fund with respect to the Fund's business investing in stock or
securities, or options or futures with respect to such stock or securities
constitute income for purposes of this 90% limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not
directly related to a Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than 3 months are treated as derived from the
disposition of securities held less than 3 months in determining the Fund's
compliance with the 30% limitation. The Funds will limit their activities
involving foreign exchange gains to the extent necessary to comply with these
requirements.
The federal income tax treatment of interest rate and currency swaps is unclear
in certain respects and may in some circumstances result in the realization of
income not qualifying under the 90% test described above or be deemed to be
derived from the disposition of securities held less than three months in
determining a Fund's compliance with the 30% limitation. The Funds will limit
their interest rate and currency swaps to the extent necessary to comply with
these requirements.
If a Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income on a portion of any "excess distribution" it receives from the PFIC or
any gain it derives from the disposition of such shares, even if such income is
distributed as a taxable dividend by the Fund to its U.S. shareholders. The Fund
may also be subject to additional interest charges in respect of deferred taxes
arising from such distributions or gains. Any federal income tax paid by a Fund
as a result of its ownership on shares of a PFIC will not give rise to a
deduction or credit to the Fund or to any shareholder. A PFIC means any foreign
corporation if, for the taxable year involved, either (i) it derives at least 75
percent of its income from "passive income" (including, but not limited to,
interest, dividends, royalties, rents and annuities), or (ii) on average, at
least 50 percent of the value (or adjusted basis, if elected) of the assets held
by the corporation produce "passive income".
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark to market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by a Fund in
a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has nor received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
MISCELLANEOUS INFORMATION
The organizational expenses of certain series of the Trust are being amortized
on a straight line basis over a period of five years from the commencement of
the offering of any such Fund's shares. Policyholders allocating payments to
shares of a Fund after the effective date of the Trust's Registration Statement
under the Securities Act of 1933 will be bearing such expenses during the
amortization period only as such charges are accrued daily against the
investment income of that Fund.
As of December 31, 1995, Allianz Life Variable Account A, Allianz Life Variable
Account B and Preferred Life Variable Account C owned, (inforamtion to be filied
by amendment) respectively, of the issued and outstanding shares of the Trust.
Policyholders will be informed of each Fund's progress through periodic reports.
Financial statements certified by independent public auditors will be available
at least annually.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of each Fund's assets for any shareholder held personally liable
for obligations of that Fund or the Trust. The Declaration of Trust provides
that the Trust shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of a Fund or the Trust and shall
satisfy any judgment thereon. All such rights are limited to the assets of the
Fund of which a shareholder holds shares. The Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance exists and the Fund itself is unable to meet
its obligations.
The Trust is registered with the SEC as a management investment company. Such
registration does not involve supervision of the management or policies of the
Funds by the SEC. The Prospectus and this Statement of Additional Information
omit certain of the information contained in the Registration Statement filed
with the SEC, copies of which may be obtained from the SEC upon payment of the
prescribed fee.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 40 Act, who are employees of Franklin Resources, Inc. or its
subsidiaries, are permitted to engage in personal securities transactions
subject to the following general restrictions and procedures: (1) The trade must
receive advance clearance from a Compliance Officer and must be completed within
24 hours after this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and within 10 days after the end of each calendar
quarter, a report of all securities transactions must be provided to the
Compliance Officer; (3) In addition to items (1) and (2), access persons
involved in preparing and making investment decisions must file annual reports
of their securities holdings each January and also inform the Compliance Officer
(or other designated personnel) if they own a security that is being considered
for a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
FINANCIAL STATEMENTS
To be supplied.
FRANKLIN VALUEMARK FUNDS
File Nos. 33-23493
811-5583
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements: Current updated Financial Statements to be
provided in a subsequent amendment.
(B) Exhibits:
The following exhibits where applicable, are herewith incorporated by
reference to the filings as noted with the exception of Exhibits 5(xiii);
5(xiv); 5(xv).
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated April 20,
1988
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment to Agreement and Declaration of
Trust dated October 21, 1988
Filing: Post Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(2) copies of the By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Post Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of By-Laws dated May 16, 1995.
Filing: Post Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(3) copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities, and copies of each
security being registered;
Not Applicable
(5) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated January 24, 1989:
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Addendum to Investment Management Agreement dated March 14,
1989
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Management Agreement between Registrant, on behalf of
International Equity Fund and Pacific Growth Fund, and
Franklin Advisers, Inc. dated January 27, 1992
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iv) Subadvisory Agreement dated between Franklin Advisers, Inc.
and Templeton Investment Counsel, Inc. January 1, 1993
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(v) Management Agreement between Registrant on behalf of
Franklin Rising Dividends Fund, and Franklin Advisers, Inc.
dated January 27, 1992
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(vi) Investment Management Agreement between the Trust, on
behalf of the Templeton Global Growth Fund, and Templeton,
Galbraith & Hansberger Ltd. dated March 15, 1994
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(vii) Subadvisory Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, on behalf of Global Income
Fund dated August 1, 1994
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(viii)Investment Management Agreement between Registrant, on
behalf of Templeton Global Asset Allocation Fund, and
Templeton Galbraith & Hansberger, Ltd. dated April 19, 1995
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ix) Subadvisory Agreement between Templeton Galbraith &
Hansberger, Ltd. and Templeton Investment Counsel, Inc., on
behalf of Templeton Global Asset Allocation Fund dated
April 19, 1995
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(x) Business Management Agreement between Registrant,
on behalf of Templeton Global Asset Allocation Fund, and
Templeton Global Investors, Inc. April 19, 1995
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(xi) Management Agreement between Registrant, on behalf of
Small Cap Fund dated July 19, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: October 27, 1995
(xii) Investment Management Agreement between Registrant, on
behalf of Development Markets Fund dated October 1, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: October 27, 1995
(xiii)Form of Business Management Agreement between Registrant,
on behalf of International Smaller Companies Fund and
Templeton Global Investors, Inc. dated January 18, 1996
(xiv) Investment Management Agreement between Registrant, on
behalf of International Smaller Companies Fund and
Templeton Investment Counsel, Inc. dated January 18, 1996
(xv) Management Agreement between Registrant, on behalf of
Capital Growth Fund and Franklin Advisers dated January
18, 1996.
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
Not Applicable
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
Trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish
a reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the Investment Company Act of 1940 (the "1940
Act"), with respect to securities and similar investments of the
Registrant, including the schedule of renumeration;
(i) Custodian Agreement between Registrant and Bank of America
NT & SA dated September 17, 1991
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the International Equity
Fund, and Morgan Guaranty Trust Company of New York, dated
March 19, 1992
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the Pacific Growth Fund,
and Morgan Guaranty Trust Company of New York, dated March
19, 1992
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iv) Custody Agreement between the Trust, on behalf of the
Templeton Developing Markets Equity Fund and the
Templeton Global Growth Fund, and The Chase Manhattan Bank,
N.A. dated March 15, 1994
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(v) Amendment to Custodian Agreement between Registrant and
Bank of America NT & SA, dated April 12, 1995
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(vi) Amendment to Global Custody Agreement dated July 1, 1995
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A File No. 33-23493
Filing Date: August 19, 1995
(vii) Form of Amendment to Custodian Agreement between
Registrant and Bank of America, NT & SA
Filing: Post-Effective Amendment No. 17 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: October 27, 1995
(9) Copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when
sold be legally issued, fully paid and nonassessable;
(i) Opinion of Counsel dated September 16, 1987
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(11) Copies of any other rulings and consents to the use thereof
relied on in the preparation of this registration statement and
required by Section 7 of the 1933 Act;
Not Applicable
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration
for providing the initial capital between or among the
Registrant, the underwriter, adviser, promoter or initial
stockholders and written assurances from promoters or initial
stockholders that their purchases were made for investment
purposes without any present intention of redeeming or reselling;
(i) Letter of Understanding dated April 11, 1995
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Letter of Understanding dated September 12, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: October 27, 1996
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant offers its
securities, any instructions thereto and any other documents
making up the model plan. Such form(s) should disclose the costs
and fees charged in connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan.
Registrant hereby incorporates by reference the Plans of Distribution
included in the management agreements which are exhibits 5(i); 5(iii);
5(v); 5(vi); 5(viii); 5(xi); 5(xii); 5(xiv); and 5(xv).
(16) Schedule for computation of each performance quotation provided
in the registration statement in response to Item 22 (which need
not be audited).
Not Applicable
(17) Power of Attorney
(i) Power of Attorney dated July 18, 1995
(ii) Certificate of Secretary dated July 18, 1995
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of January 31, 1996, there are three shareholders of record of Registrant's
shares.
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) The officers and directors of the Registrant's investment adviser also
serve as officers and/or directors or trustees for (1) the corporate parent of
Franklin Advisers, Inc., ("Advisers") the investment manager of 19 of
Registrant's Funds, Franklin Resources, Inc. ("Resources"), and/or (2) other
investment companies in the Franklin Group of Funds. For additional information,
please see Part B and Schedules A and D of Form ADV of Advisers (SEC File
801-26292), incorporated herein by reference, which sets forth the officers and
directors of Advisers and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and directors
during the past two years.
(b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Resources, serves as adviser to the International Smaller
Companies Fund and as sub-adviser to certain of the Funds, furnishing to
Advisers and to Templeton Global Advisers, Limited in that capacity portfolio
management services and investment research. For additional information please
see Part B and Schedules A and D of Form ADV of TICI (SEC File 801-15125),
incorporated herein by reference, which set forth the officers and directors of
TICI and information as to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during the past
two years.
(c) Templeton Global Advisers Limited, formerly known as Templeton
Galbraith and Hansberger Ltd.
Templeton Global Advisers Limited ("Templeton Nassau"), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to Templeton Global
Growth Fund and Templeton Global Asset Allocation Fund. For additional
information please see Part B and Schedules A and D of Form ADV of Templeton
Nassau (SEC File 801-42343), incorporated herein by reference, which set forth
the officers and directors of Templeton Nassau and information as to any
business, profession, vocation of employment of a substantial nature engages in
by those officers and directors during the past two years.
(d) Templeton Asset Management Ltd., formerly known Templeton Investment
Management (Singapore) Pte Ltd.
Templeton Asset Management ("Templeton Singapore"), an indirect, wholly owned
subsidiary of Resources, serves as investment manager to Templeton Developing
Markets Equity Fund. For information please see Part B and Schedules A and D of
Form ADV of Templeton Singapore (SEC File 801-46997), incorporated herein by
reference, which set forth the officers and directors of Templeton Singapore and
information as to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during the past
two years.
ITEM 29 PRINCIPAL UNDERWRITERS
Not applicable.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the 1940 Act are kept by the Registrant or its shareholder services
agent, Franklin/Templeton Investors Services, Inc., both of whose address is 777
Mariners Island Blvd., San Mateo, CA 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
(a) The Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any trustee or
trustees when requested in writing to do so by the record holders of not
less than 10 per cent of the Registrant's outstanding shares to assist its
shareholders in the communicating with other shareholders in accordance
with the requirements of Section 16(c) of the Investment Company Act of
1940.
(b) The Registrant hereby undertakes to file a post-effective amendment using
financial statements which need not be certified, within four to six months
from the effective date of Registrant's Registration Statement for its new
series, Small Cap Fund (effective November 1, 1995), Templeton
International Smaller Companies Fund (proposed effective date May 1, 1996),
and Capital Growth Fund (proposed effective date May 1, 1996) under the
Securities Act of 1933.
(c) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the
Fund's annual report and to furnish each person to whom a prospectus is
delivered a copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this
post-effective amendment to the Registrant's Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Mateo and the State of California, on the 14th day of
February, 1996.
FRANKLIN VALUEMARK FUNDS
(Registrant)
By: CHARLES E. JOHNSON*
Charles E. Johnson, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
CHARLES E. JOHNSON* Principal Executive Officer and
Charles E. Johnson Trustee
Dated: February 14, 1996
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: February 14, 1996
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: February 14, 1996
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: February 14, 1996
LOWELL C. ANDERSON Trustee
Lowell C. Anderson Dated: February 14, 1996
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: February 14, 1996
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 14, 1996
DAVID W. GARBELLANO Trustee
David W. Garbellano Dated: February 14, 1996
CHARLES B. JOHNSON Trustee
Charles B. Johnson Dated: February 14, 1996
RUPERT H. JOHNSON, JR. Trustee
Rupert H. Johnson, Jr. Dated: February 14, 1996
*By /S/ KAREN L. SKIDMORE
Karen L. Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN VALUEMARK FUNDS
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. IN
SEQUENTIAL
NUMBERING
SYSTEM
EX-99.B1(i) Agreement and Declaration of Trust dated *
April 20, 1988
EX-99.B1(ii) Certificate of Amendment to Agreement and *
Declaration of Trust dated October 21, 1988
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Certificate of Amendment of By-Laws dated May *
16, 1995
EX-99.B5(i) Management Agreement between Registrant and *
Franklin Advisers, Inc. dated January 24, 1989
EX-99.B5(ii) Addendum to Investment Management Agreement *
dated March 14, 1989
EX-99.B5(iii) Management Agreement between Registrant on *
behalf of International Equity Fund and
Pacific Growth Fund and Franklin Advisers,
Inc. dated January 27, 1992
EX-99.B5(iv) Subadvisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment
Counsel, Inc. dated January 1, 1993
EX-99.B5(v) Management Agreement between Registrant on *
behalf of Franklin Rising Dividends Fund and
Franklin Advisers, Inc. dated January 27, 1992
EX-99.B5(vi) Investment Management Agreement between the *
Trust on behalf of the Templeton Developing
Markets Equity Fund and Templeton Investment
Management (Hong Kong) Limited dated March
15, 1994
EX-99.B5(vii) Investment Management Agreement between the *
Trust on behalf of the Templeton Global
Growth Fund and Templeton, Galbraith &
Hansberger Ltd. dated March 15, 1994
EX-99.B5(viii) Subadvisory Agreement between Franklin *
Advisers, Inc. and Templeton Quantitative
Advisers, Inc., on behalf of Equity Growth
Fund dated August 1, 1994
EX-99.B5(ix) Subadvisory Agreement between Franklin *
Advisers, Inc. and Templeton Quantitative
Advisers, Inc. on behalf of Global Income
Fund dated August 1, 1994
EX-99.B5(x) Investment Management Agreement between *
Registrant, on behalf of Templeton Global
Asset Allocation Fund, and Templeton
Galbraith & Hansberger, Ltd. dated April 19,
1995.
EX-99.B5(xi) Business Management Agreement between *
Registrant, on behalf of Small Cap Fund dated
July 19, 1995
EX-99.B5(xii) Business Management Agreement between *
Registrant, on behalf of Development Markets
Fund
EX-99.B5(xiii) Form of Business Management Agreement between Attached
Registrant, on behalf of International
Smaller Companies Fund dated January 18, 1996
EX-99B5(xiv) Investment Management Agreement between Attached
Registrant, on behalf of International
Smaller Companies Fund dated January 18, 1996
EX-99B5(xv) Management Agreement between Registrant, on Attached
behalf of Capital Growth Fund dated January
18, 1996
EX-99.B8(i) Custodian Agreement between Registrant and *
Bank of America NT & SA dated September 17,
1991
EX-99.B8(ii) Foreign Exchange Netting Agreement between *
Franklin Valuemark Funds, on behalf of the
International Equity Fund and Morgan
Guaranty Trust Company of New York dated
March 19, 1992
EX-99.B8(iii) Foreign Exchange Netting Agreement between *
Franklin Valuemark Funds, on behalf of the
Pacific Growth Fund and Morgan Guaranty
Trust Company of New York dated March 19,
1992
EX-99.B8(iv) Custody Agreement between the Trust on *
behalf of the Templeton Developing Markets
Equity Fund and the Templeton Global Growth
Fund and The Chase Manhattan Bank, N.A.
dated March 15, 1994
EX-99.B8(v) Amendment to Custodian Agreement between *
Registrant and Bank of America NT & SA dated
April 12, 1995
EX-99.B8(vi) Amendment to Global Custody Agreement dated *
July 1, 1995
EX-99.B8(vii) Form of Amendment to Custodian Agreement *
between Registrant and Bank of America NT &
SA
EX-99.B10(i) Opinion and consent of counsel dated *
September 16, 1987
EX-99.B11(i) Consent of Independent Auditors for the *
Registrant dated October 18, 1995
EX-99.B11(ii) Consent of Independent Auditors for the *
Small Cap Fund dated October 18, 1995
EX-99.B13(i) Letter of Understanding dated April 11, 1995. *
EX-99.B13(ii) Letter of Understanding dated September 12, *
1995
EX-99.B17(i) Power of Attorney dated July 18, 1995 *
EX-99.B17(ii) Certificate of Secretary dated July 18, 1995 *
*Incorporated by Reference
BUSINESS MANAGEMENT AGREEMENT BETWEEN
FRANKLIN VALUEMARK FUNDS
(TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND)
AND
TEMPLETON GLOBAL INVESTORS, INC.
AGREEMENT dated as of _______________, 1996, between Franklin
Valuemark Funds, a Massachusetts business trust (the "Trust"), on behalf of
the Templeton International Smaller Companies Fund (the "Fund"), a separate
series of the Trust, and Templeton Global Investors, Inc. ("TGI").
In consideration of the mutual promises herein made, the parties
hereby agree as follows:
(1) TGI agrees, during the life of this Agreement, to be
responsible for:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) paying compensation of the Fund's officers for services
rendered as such;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of annual and semiannual reports to
Shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to routine
correspondence and other communications with individual
Shareholders;
(e) daily pricing of the Fund's investment portfolio and
preparing and supervising publication of daily quotations
of the bid and asked prices of the Fund's Shares, earnings
reports and other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents and printers;
(g) providing trading desk facilities for the Fund;
(h) supervising compliance by the Fund with
recordkeeping requirements under the Investment Company Act
of 1940 (the "1940 Act") and the rules and regulations
thereunder, supervising compliance with recordkeeping
requirements imposed by state laws or regulations, and
maintaining books and records for the Fund (other than
those maintained by the custodian and transfer agent);
(i) preparing and filing of tax reports including
the Fund's income tax returns, and monitoring the Fund's
compliance with subchapter M of the Internal Revenue Code,
provisions of the Code applicable to insurance company
separate accounts, and other applicable tax laws and
regulations;
(j) monitoring the Fund's compliance with: the 1940
Act and rules and regulations thereunder, state laws and
regulations applicable to the operation of investment
companies funding variable insurance products, the Fund's
investment objectives and policies, and Codes of Ethics and
other policies adopted by the Fund's Board of Trustees or
by the Adviser and applicable to the Fund; and
(k) providing executive, clerical and secretarial
personnel needed to carry out the above responsibilities.
(2) The Trust agrees, during the life of this Agreement, to pay
to TGI as compensation for the foregoing a monthly fee equal on an annual
basis to 0.15% of the first $200 million of the average daily net assets of
the Fund during the month preceding each payment, reduced as follows: on
such net assets in excess of $200 million up to $700 million, a monthly fee
equal on an annual basis to 0.135%; on such net assets in excess of $700
million up to $1.2 billion, a monthly fee equal on an annual basis to 0.10%;
and on such net assets in excess of $1.2 billion, a monthly fee equal on an
annual basis to 0.075%.
(3) This Agreement shall remain in full force and effect
through April 30, 1997 and thereafter from year to year to the extent
continuance is approved annually by the Board of Trustees of the Trust.
(4) This Agreement may be terminated by the Trust at any time
on sixty (60) days' written notice without payment of penalty, provided that
such termination by the Trust shall be directed or approved by the vote of a
majority of the Trustees of the Trust in office at the time or by the vote of
a majority of the outstanding voting securities of the Trust (as defined by
the 1940 Act); and shall automatically and immediately terminate in the event
of its assignment (as defined by the 1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of TGI, or of reckless disregard of its duties and
obligations hereunder, TGI shall not be subject to liability for any act or
omission in the course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
FRANKLIN VALUEMARK FUNDS
By:
TEMPLETON GLOBAL INVESTORS, INC.
By:
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of __________, 1996, between Franklin
Valuemark Funds, a Massachusetts business trust (the "Trust"), on behalf of
the Templeton International Smaller Companies Fund (the "Fund"), a separate
series of the Trust, and Templeton Investment Counsel, Inc. ("Investment
Manager").
In consideration of the mutual agreements herein made, the Trust
and the Investment Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Fund's assets consistent with the provisions of the Trust
Instrument of the Trust and the Fund's investment policies adopted and
declared by the Trust's Board of Trustees. In pursuance of the foregoing,
the Investment Manager shall make all determinations with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, and shall take such steps as may be necessary to implement those
determinations. Such determinations and services shall include determining
the manner in which any voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's investment securities shall be
exercised, subject to guidelines adopted by the Board of Trustees.
(2) The Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Fund, including trading desk
facilities or daily pricing of the Fund's portfolio.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the execution of
the Fund's portfolio transactions consistent with the Fund's brokerage
policies and, when applicable, the negotiation of commissions in connection
therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as able to achieve "best
execution" of such orders. "Best execution" shall mean prompt and reliable
execution at the most favorable security price, taking into account the other
provisions hereinafter set forth. The determination of what may constitute
best execution and price in the execution of a securities transaction by a
broker involves a number of considerations, including, without limitation,
the overall direct net economic result to the Fund (involving both 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. Such considerations are
judgmental and are weighed by the Investment Manager in determining the
overall reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past experience as to brokers
qualified to achieve "best execution," including brokers who specialize in
any foreign securities held by the Fund.
C. The Investment Manager is authorized to allocate
brokerage business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the Securities
Exchange Act of 1934 (the "1934 Act"), for the Fund and/or other accounts, if
any, for which the Investment Manager exercises investment discretion (as
defined in Section 3(a)(35) of the 1934 Act) and, as to transactions for
which fixed minimum commission rates are not applicable, to cause the Fund to
pay a commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting that transaction, if
the Investment Manager determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms of either that
particular transaction or the Investment Manager's overall responsibilities
with respect to the Fund and the other accounts, if any, as to which it
exercises investment discretion. In reaching such determination, the
Investment Manager will not be required to place or attempt to place a
specific dollar value on the research or execution services of a broker or on
the portion of any commission reflecting either of said services. In
demonstrating that such determinations were made in good faith, the
Investment Manager shall be prepared to show that all commissions were
allocated and paid for purposes contemplated by the Fund's brokerage policy;
that the research services provide lawful and appropriate assistance to the
Investment Manager in the performance of its investment decision-making
responsibilities; and that the commissions paid were within a reasonable
range. Whether commissions were within a reasonable range shall be based on
any available information as to the level of commission known to be charged
by other brokers on comparable transactions, but there shall be taken into
account the Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is recognized
that usually it is more beneficial to the Fund to obtain a favorable price
than to pay the lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies that are provided for the Investment
Manager are useful to the Investment Manager in performing its advisory
services under this Agreement. Research services provided by brokers to the
Investment Manager are considered to be in addition to, and not in lieu of,
services required to be performed by the Investment Manager under this
Agreement. Research furnished by brokers through which the Fund effects
securities transactions may be used by the Investment Manager for any of its
accounts, and not all research may be used by the Investment Manager for the
Fund. When execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates, account may be
taken of various services provided by the broker.
D. Purchases and sales of portfolio securities within
the United States other than on a securities exchange shall be executed with
primary market makers acting as principal, except where, in the judgment of
the Investment Manager, better prices and execution may be obtained on a
commission basis or from other sources.
E. Sales of Franklin Valuemark contracts, or of shares
of other registered investment companies which have either the same adviser
or an investment adviser affiliated with the Investment Manager, by a broker
are one factor among others to be taken into account in deciding to allocate
portfolio transactions (including agency transactions, principal
transactions, purchases in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker; provided that the broker
shall furnish "best execution," as defined in subparagraph A above, and that
such allocation shall be within the scope of the Fund's policies as stated
above; provided further, that in every allocation made to a broker in which
the broker's sale of Franklin Valuemark contracts or of mutual fund shares is
taken into account, there shall be no increase in the amount of the
commissions or other compensation paid to such broker beyond a reasonable
commission or other compensation determined, as set forth in subparagraph C
above, on the basis of best execution alone or best execution plus research
services, without taking account of or placing any value upon such sale of
Franklin Valuemark contracts or mutual fund shares.
(4) The Trust agrees to pay to the Investment Manager a monthly
fee in dollars based on a percentage of the Fund's average daily net assets,
payable at the end of each calendar month. This fee shall be calculated daily
at the following annual rates:
0.85 % of the value of the Fund's net assets up to and including
$200 million;
0.765 % of the value of the Fund's net assets over $200 million
up to and including $1.3 billion;
0.68 % of the value of the Fund's net assets over $1.3 billion.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used
in this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this
limit, the monthly payment of the Investment Manager's fee will be reduced by
the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below
the limit.
The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price
of its services. The Manager shall be contractually bond hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were full set forth herein.
(5) The provisions set forth in this paragraph 5 (hereinafter
referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under the
Act by the Trust, having been approved by a majority of the Trust's Board of
Trustees, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested Trustees"), cast in person at a
meeting called for the purpose of voting on such Plan. The Board of Trustees
concluded that the rate of compensation to be paid to the Manager by the Fund
was fair and not excessive, but that due solely to the uncertainty that may
exist from time to time with respect to whether payments made by the Fund to
the Manager or to other firms may nevertheless be deemed to constitute
distribution expenses, it was determined that adoption of the Plan would be
prudent and in the best interests of the Fund and its shareholders or
policyholders having an interest in the Fund. The Trustees' approval
included a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders or
policyholders investing in the Fund.
A. No additional payments are to be made by the Fund as
a result of the Plan other than the payments the Fund is otherwise obligated
to make (i) to the Manager pursuant to paragraph 4 of this Agreement, (ii) to
their Transfer and Dividend Paying Agents or Custodian, pursuant to their
respective Agreements as in effect at any time, and (iii) in payment of any
expenses by the Fund in the ordinary course of their respective businesses
that may be deemed primarily intended to result in the sale of shares issued
by such Fund. However, to the extent any of such other payments by the Fund,
to or by the Manager, or to the Fund' Agents, are nevertheless deemed to be
payments for the financing of any activity primarily intended to result in
the sale of shares issued by the Fund within the context of Rule 12b-1 under
the Act, then such payments shall be deemed to have been made pursuant to the
Plan as set forth herein. The costs and activities, the payment of which are
intended to be within the scope of the Plan, shall include, but not
necessarily be limited to, the following:
(a) the costs of the preparation, printing and
mailing of all required reports and notices to shareholders or policyholders
investing in the Fund;
(b) the costs of the preparation, printing and
mailing of all prospectuses and statements of additional information;
(c) the costs of preparation, printing and mailing
of any proxy statements and proxies;
(d) all legal and accounting fees relating to the
preparation of any such reports, prospectuses, proxies and proxy statements;
(e) all fees and expenses relating to the
qualification of the Fund and/or its shares under the securities or "Blue
Sky" laws of any jurisdiction;
(f) all fees under the Securities Act of 1933 and
the Act, including fees in connection with any application for exemption
relating to or directed toward the sale of the Fund's shares;
(g) all fees and assessments of the Investment
Company Institute or any successor organization, irrespective of whether some
of its activities are designed to provide sales assistance;
(h) all costs of the preparation and mailing of
confirmations of shares sold or redeemed, and reports of share balances;
(i) all costs of responding to telephone or mail
inquiries of investors or prospective investors; and
(j) payments to dealers, financial institutions,
advisers, or other firms, any one of whom may receive monies in respect of
the Fund's shares held in accounts for policyholders for whom such firm is
the dealer of record or holder of record, or with whom such firm has a
servicing relationship. Servicing may include, among other things: (i)
answering client inquiries regarding the Fund; (ii) assisting clients in
changing account designations and addresses; (iii) performing sub-accounting;
(iv) establishing and maintaining shareholder or policyholder accounts and.
records; (v) processing purchase and redemption transactions; (vi) providing
periodic statements showing a client's account balance and integrating such
statements with those of other transactions and balances in the client's
other accounts serviced by such firm; (vii) arranging for bank wires; and
(viii) such other services as the Fund may request, to the extent such are
permitted by applicable statute, rule or regulation.
B. The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of
Trustees of the Trust at least quarterly on payments for any of the
activities in subparagraph A of this paragraph 5, and shall furnish the Board
of Trustees of the Trust with such other information as the Board may
reasonably request in connection with such payments in order to enable the
Board to make an informed determination of whether the Plan should be
continued.
(b) The Plan shall continue in effect for a period
of more than one year from the date written below only so long as such
continuance is specifically approved at least annually (from the date below)
by the Trust's Board of Trustees, including the non-interested Trustees, cast
in person at a meeting called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to the
Fund at any time by vote of a majority of non-interested Trustees or by vote
of a majority of the Fund's outstanding voting securities on not more than
sixty (60) days' written notice to any other party to the Plan, and the Plan
shall terminate automatically in the event of any act that constitutes an
assignment of this Management Agreement.
(d) The Plan may not be amended to increase
materially the amount deemed to be spent for distribution without approval by
a majority of the Fund's outstanding shares (as defined by the Act and all
material amendments to the Plan shall be approved by the non-interested
Trustees cast in person at a meeting called for the purpose of voting on such
amendment.
(e) So long as the Plan is in effect, the selection
and nomination of the Trust's non-interested Trustees shall be committed to
the discretion of such non-interested Trustees.
(f) Any termination of the Plan shall not terminate
this Management Agreement or affect the validity of any of the provisions of
this Agreement other than this paragraph 5.
(6) This Agreement shall become effective on April 19, 1995 and
shall continue in effect until April 30, 1996. If not sooner terminated,
this Agreement shall continue in effect for successive periods of 12 months
each thereafter, provided that each such continuance shall be specifically
approved annually by the vote of a majority of the Trust's Board of Trustees
who are not parties to this Agreement or "interested persons" (as defined in
Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in
person at a meeting called for the purpose of voting on such approval and
either the vote of (a) a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of
Trustees as a whole.
(7) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Trust is approved by vote of a majority of the Trust's
Board of Trustees in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act).
(8) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(9) In the event this Agreement is terminated and the
Investment Manager no longer acts as Investment Manager to the Fund, the
Investment Manager reserves the right to withdraw from the Fund the use of
the name "Templeton" or any name misleadingly implying a continuing
relationship between the Fund and the Investment Manager or any of its
affiliates.
(10) Except as may otherwise be provided by the 1940 Act,
neither the Investment Manager nor its officers, directors, employees or
agents shall be subject to any liability for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or omission in
the performance by the Investment Manager of its duties under the Agreement
or for any loss or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of the Fund's
assets, or from acts or omissions of custodians, or securities depositories,
or from any war or political act of any foreign government to which such
assets might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Manager's part or by reason of reckless disregard of the
Investment Manager's duties under this Agreement. It is hereby understood
and acknowledged by the Trust that the value of the investments made for the
Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Trust
that investment decisions made on behalf of the Fund by the Investment
Manager are subject to a variety of factors which may affect the values and
income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct.
(11) It is understood that the services of the Investment
Manager are not deemed to be exclusive, and nothing in this Agreement shall
prevent the Investment Manager, or any affiliate thereof, from providing
similar services to other investment companies and other clients, including
clients which may invest in the same types of securities as the Fund, or, in
providing such services, from using information furnished by others. When
the Investment Manager determines to buy or sell the same security for the
Fund that the Investment Manager or one or more of its affiliates has
selected for clients of the Investment Manager or its affiliates, the orders
for all such security transactions shall be placed for execution by methods
determined by the Investment Manager, with approval by the Trust's Board of
Trustees, to be impartial and fair.
(12) This Agreement shall be construed in accordance with the
laws of the State of California of the United States of America, provided
that nothing herein shall be construed as being inconsistent with applicable
Federal and state securities laws and any rules, regulations and orders
thereunder.
(13) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the
Investment Manager an agent of the Trust or of the Fund.
(15) It is understood and expressly stipulated that neither the
holders of shares of the Fund nor any Trustee, officer, agent or employee of
the Trust shall be personally liable hereunder, nor shall any resort be had
to other private property for the satisfaction of any claim or obligation
hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
FRANKLIN VALUEMARK FUNDS
By:_______________________________
TEMPLETON INVESTMENT COUNSEL, INC.
By:_______________________________
FRANKLIN VALUEMARK FUNDS
on behalf of
CAPITAL GROWTH FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN VALUEMARK FUND, a
Massachusetts business trust (the "Trust"), on behalf of CAPITAL GROWTH FUND
(the "Fund"), a series of the Trust, and FRANKLIN ADVISERS, INC., a
California corporation, (the "Manager").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust desires to avail itself of the services, information, advice,
assistance and facilities of an investment manager and to have an investment
manager perform various management, statistical, research, investment
advisory and other services for the Fund; and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. Employment of the Manager. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the
officers of the Trust, for the period and on the terms hereinafter set
forth. The Manager hereby accepts such employment and agrees during such
period to render the services and to assume the obligations herein set forth
for the compensation herein provided. The Manager shall for all purposes
herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Fund or the Trust in any way or
otherwise be deemed an agent of the Fund or the Trust.
2. Obligations of and Services to be Provided by the Manager. The
Manager undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. Administrative Services. The Manager shall furnish to the
Fund adequate (i) office space, which may be space within the offices of the
Manager or in such other place as may be agreed upon from time to time, (ii)
office furnishings, facilities and equipment as may be reasonably required
for managing the affairs and conducting the business of the Fund, including
conducting correspondence and other communications with the shareholders of
the Fund, maintaining all internal bookkeeping, accounting and auditing
services and records in connection with the Fund's investment and business
activities. The Manager shall employ or provide and compensate the
executive, secretarial and clerical personnel necessary to provide such
services. The Manager shall also compensate all officers and employees of
the Trust who are officers or employees of the Manager or its affiliates.
B. Investment Management Services.
(a) The Manager shall manage the Fund's assets subject
to and in accordance with the investment objectives and policies of the Fund
and any directions which the Trust's Board of Trustees may issue from time to
time. In pursuance of the foregoing, the Manager shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services
shall include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised. The Manager shall render or cause
to be rendered regular reports to the Trust, at regular meetings of its Board
of Trustees and at such other times as may be reasonably requested by the
Trust's Board of Trustees, of (i) the decisions made with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, (ii) the reasons for such decisions and (iii) the extent to which
those decisions have been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Manager shall seek to
obtain the best net price and execution for the Fund, but this requirement
shall not be deemed to obligate the Manager to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set
forth in this section have been satisfied. The parties recognize that there
are likely to be many cases in which different brokers are equally able to
provide such best price and execution and that, in selecting among such
brokers with respect to particular trades, it is desirable to choose those
brokers who furnish research, statistical, quotations and other information
to the Fund and the Manager in accordance with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so and
so long as the Board of Trustees determines that the Fund will benefit,
directly or indirectly, by doing so, the Manager may place orders with a
broker who charges a commission for that transaction which is in excess of
the amount of commission that another broker would have charged for effecting
that transaction, provided that the excess commission is reasonable in
relation to the value of "brokerage and research services" (as defined in
Section 28(e) (3) of the Securities Exchange Act of 1934) provided by that
broker.
Accordingly, the Trust and the Manager agree that the
Manager shall select brokers for the execution of the Fund's transactions
from among:
(i) Those brokers and dealers who provide quotations
and other services to the Fund, specifically including
the quotations necessary to determine the Fund's net
assets, in such amount of total brokerage as may
reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its
affiliates which the Manager or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to securities,
actual or potential, of the Fund, or which place the
Manager in a better position to make decisions in
connection with the management of the Fund's assets and
securities, whether or not such data may also be useful
to the Manager and its affiliates in managing other
portfolios or advising other clients, in such amount of
total brokerage as may reasonably be required. Provided
that the Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the Fund may
also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio
transactions.
(c) When the Manager has determined that the Fund
should tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules
of any securities exchange or association of which Distributors may be a
member. Neither the Manager nor Distributors shall be obligated to make any
additional commitments of capital, expense or personnel beyond that already
committed (other than normal periodic fees or payments necessary to maintain
its corporate existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement. This Agreement
shall not obligate the Manager or Distributors (i) to act pursuant to the
foregoing requirement under any circumstances in which they might reasonably
believe that liability might be imposed upon them as a result of so acting,
or (ii) to institute legal or other proceedings to collect fees which may be
considered to be due from others to it as a result of such a tender, unless
the Trust on behalf of the Fund shall enter into an agreement with the
Manager and/or Distributors to reimburse them for all such expenses connected
with attempting to collect such fees, including legal fees and expenses and
that portion of the compensation due to their employees which is attributable
to the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the
Trust, not more frequently than quarterly, of how much total brokerage
business has been placed by the Manager, on behalf of the Fund, with brokers
falling into each of the categories referred to above and the manner in which
the allocation has been accomplished.
(e) The Manager agrees that no investment decision
will be made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Manager's paramount duty to obtain the
best net price and execution for the Fund.
C. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
D. Other Obligations and Services. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. Expenses of the Fund. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of the
Fund's net assets;
E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Manager
or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the purchase
and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;
J. Legal fees, including the legal fees related to the registration
and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not directors,
officers, employees or stockholders of the Manager or any of its affiliates;
L. Costs and expense of registering and maintaining the registration
of the Fund and its shares under federal and any applicable state laws;
including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. Compensation of the Manager. The Fund shall pay a management fee
in cash to the Manager based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services
rendered and obligations assumed by the Manager, during the preceding month,
on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the
net assets of the Fund shall be determined in the same manner as that Fund
uses to compute the value of its net assets in connection with the
determination of the net asset value of its shares, all as set forth more
fully in the Fund's current prospectus and statement of additional
information. The rate of the management fee payable by the Fund shall be
calculated at the following annual rates:
0.75% of the value of net assets up to and including
$500,000,000;
0.625% of the value of net assets over $500,000,000 up to
and including $1 billion; and
0.50% of the value of net assets over $1 billion.
B. The management fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith and to the extent necessary to comply with
the limitations on expenses which may be borne by the Fund as set forth in
the laws, regulations and administrative interpretations of those states in
which the Fund's shares are registered. The Manager may waive all or a
portion of its fees provided for hereunder and such waiver shall be treated
as a reduction in purchase price of its services. The Manager shall be
contractually bond hereunder by the terms of any publicly announced waiver of
its fee, or any limitation of the Fund's expenses, as if such waiver or
limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued management fee shall be paid to the date of termination.
5. Activities of the Manager. The services of the Manager to the
Fund hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to
and in accordance with the Agreement and Declaration of Trust and By-Laws of
the Trust and Section 10(a) of the 1940 Act, it is understood that trustees,
officers, agents and shareholders of the Trust are or may be interested in
the Manager or its affiliates as directors, officers, agents or stockholders;
that directors, officers, agents or stockholders of the Manager or its
affiliates are or may be interested in the Trust as trustees, officers,
agents, shareholders or otherwise; that the Manager or its affiliates may be
interested in the Fund as shareholders or otherwise; and that the effect of
any such interests shall be governed by said Agreement and Declaration of
Trust, By-Laws and the 1940 Act.
6. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the
part of the Manager, the Manager shall not be subject to liability to the
Trust or the Fund or to any shareholder of the Fund for any act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security
by the Fund.
B. Notwithstanding the foregoing, the Manager agrees to
reimburse the Trust for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust in the preparation, printing
and distribution of proxy statements, amendments to its Registration
Statement, holdings of meetings of its shareholders or trustees, the conduct
of factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Manager or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the stock or control of the Manager
or its affiliates (or litigation related to any pending or proposed or future
transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or,
(ii) is within the control of the Manager or any of its affiliates or any of
their officers, directors, employees or stockholders. The Manager shall not
be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any
stockholder of the Manager or any of its affiliates from the sale of his
shares of the Manager, or similar matters. So long as this Agreement is in
effect, the Manager shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6(B) within 30 days after a bill or statement
has been received by the Manager therefor. This provision shall not be
deemed to be a waiver of any claim the Trust may have or may assert against
the Manager or others for costs, expenses or damages heretofore incurred by
the Trust or for costs, expenses or damages the Trust may hereafter incur
which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Manager, from liability in violation of Sections 17(h) and (i) of the 1940
Act.
7. Renewal and Termination.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless
sooner terminated as hereinafter provided and shall continue in effect
thereafter for periods not exceeding one (1) year so long as such
continuation is approved at least annually (i) by a vote of a majority of the
outstanding voting securities of each Fund or by a vote of the Board of
Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of
the Trust who are not parties to the Agreement (other than as Trustees of the
Trust), cast in person at a meeting called for the purpose of voting on the
Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment
of any penalty either by vote of the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Fund on 60
days' written notice to the Manager;
(ii) shall immediately terminate with respect to the
Fund in the event of its assignment; and
(iii) may be terminated by the Manager on 60 days'
written notice to the Fund.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in
writing addressed and delivered, or mailed post-paid, to the other party at
any office of such party.
8. Distribution Plan.
A. The provisions set forth in this paragraph 8 (hereinafter
referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under the
Act by the Trust, having been approved by a majority of the Trust's Board of
Trustees, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested Trustees"), cast in person at a
meeting called for the purpose of voting on such Plan. The Board of Trustees
concluded that the rate of compensation to be paid to the Manager by the Fund
was fair and not excessive, but that due solely to the uncertainty that may
exist from time to time with respect to whether payments made by the Fund to
the Manager or to other firms may nevertheless be deemed to constitute
distribution expenses, it was determined that adoption of the Plan would be
prudent and in the best interests of the Fund. The Trustees' approval
included a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders or
policyholders investing in the Fund.
B. No additional payments are to be made by the Fund as a
result of the Plan other than the payments the Fund is otherwise obligated to
make (i) to the Manager pursuant to paragraph 4 of this Agreement, (ii) to
the Transfer and Dividend Paying Agents or Custodian, pursuant to their
respective Agreements as in effect at any time, and (iii) in payment of any
expenses by the Fund in the ordinary course of its respective businesses that
may be deemed primarily intended to result in the sale of shares issued by
such Fund. However, to the extent any of such other payments by the Fund, to
or by the Manager, or to the Fund's Agents, are nevertheless deemed to be
payments for the financing of any activity primarily intended to result in
the sale of shares issued by the Fund within the context of Rule 12b-1 under
the Act, then such payments shall be deemed to have been made pursuant to the
Plan as set forth herein. The cost and activities, the payment of which are
intended to be within the scope of the Plan, shall include, but not
necessarily be limited to, the following:
(a) the costs of the preparation, printing and mailing of all
required reports and notices to shareholders or policyholders investing
in the Fund;
(b) the costs of the preparation, printing and mailing of all
prospectuses and statements of additional information;
(c) the costs of preparation, printing and mailing of any
proxy statements and proxies;
(d) all legal and accounting fees relating to the preparation
of any such reports, prospectuses, proxies and proxy statements;
(e) all fees and expenses relating to the qualification of
the Fund and/or its shares under the securities or "Blue Sky" laws of any
jurisdiction;
(f) all fees under the Securities Act of 1933 and the Act,
including fees in connection with any application for exemption
relating to or directed toward the sale of the Fund's shares;
(g) all fees and assessments of the Investment Company
Institute or any successor organization, irrespective of whether
some of its activities are designed to provide sales assistance;
(h) all costs of the preparation and mailing of confirmations
of shares sold or redeemed, and reports of share balances;
(i) all costs of responding to telephone or mail inquiries of
investors or prospective investors; and
(j) payments to dealers, financial institutions, advisers, or other
firms, any one of whom may receive monies in respect of the Fund's shares held
in accounts for policyholders for whom such firm is the dealer of record or
holder of record, or with whom such firm has a servicing relationship. Servicing
may include, among other things: (i) answering client inquiries regarding the
Fund; (ii) assisting clients in changing account designations and addresses;
(iii) performing sub- accounting; (iv) establishing and maintaining shareholder
or policyholder accounts and records; (v) processing purchase and redemption
transactions; (vi) providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by such firm; (vii) arranging
for bank wires; and (viii) such other services as the Fund may request, to the
extent such are permitted by applicable statute, rule or regulation.
C. The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of Trustees of the
Trust at least quarterly on payments for any of the activities in
subparagraph B of this paragraph 8, and shall furnish the Board of Trustees
of the Trust with such other information as the Board may reasonably request
in connection with such payments in order to enable the Board to make an
informed determination of whether the Plan should be continued.
(b) The Plan shall continue in effect for a period of more
than one year from the date written below only so long as such continuance is
specifically approved at least annually (from the date below) by the Trust's
Board of Trustees, including the non-interested Trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to the Fund at
any time by vote of a majority of non-interested Trustees or by vote of a
majority of such Fund's outstanding voting securities on not more than sixty
(60) days' written notice to any other party to the Plan, and the Plan shall
terminate automatically with respect to the Fund in the event of any act that
constitutes an assignment of this Management Agreements.
(d) The Plan may not be amended to increase materially the
amount deemed to be spent for distribution without approval by a majority of
the Fund's outstanding shares (as defined by the Act) and all material
amendments to the Plan shall be approved by the not-interested Trustees cast
in person at a meeting called for the purpose of voting on such amendment.
(e) So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested Trustees shall be committed to the
discretion of such non-interested Trustees.
(f) Any termination of the Plan shall not terminate this
Management Agreement or affect the validity of any of the provisions of this
Agreement other than this paragraph 8.
9. Severability. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
10. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the ___ day of ____________, 1996.
FRANKLIN VALUEMARK FUNDS
By:
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By:
Harmon E. Burns
Executive Vice President
