AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 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. 20
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21
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)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[X] on November 15, 1996 pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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 27, 1996.
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 "Summary of Fund Objectives";
"Introduction"; "General Investment
Considerations"; "Fund Investment
Objectives and Policies"; "Highlighted
Risk Considerations"; "Investment
Methods and Risks Common to More than
One Fund"; "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 of
Being Offered 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 "Introduction, (See also "Introduction";
and History and "General Information" in the
Prospectus)"; "Additional Information"
13. Fund Investment "Fund Investment Objectives and Policies"
Objectives and "Highlighted Risk Considerations";
Policies "Investment Methods and Risks Common to
More Than One Fund"; "Fundamental Investment
Restrictions";"Non- Fundamental Investment
Restrictions"; (See also "Fund Investment
Objectives and Policies"; "Highlighted Risk
Considerations"; "Investment Methods and
Risks Common to More Than One Fund" 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 "Introduction"; (See also "Introduction"
Other Securities and "General Information" in the
Prospectus)
19. Purchase, Redemption "Additional Information Regarding
and Pricing of Valuation and Redemption of Shares of the
Securities Being Funds"; (See also "Purchase Redemption
Offered 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 Financial Statements
Franklin
Valuemark
Funds
PROSPECTUS November 15, 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 November 15, 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
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.
Templeton Global Income Securities Fund ("Global Income Fund")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. Prior to May 1, 1996 the
Fund was known as the Global Income Fund.
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 Fund1 seeks capital appreciation, with current income return
as a secondary objective, by investing primarily in U.S. common stocks,
securities convertible into common stocks, and preferred stocks.
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.
Mutual Shares Securities Fund ("Mutual Shares Fund") 1,2 seeks capital
appreciation, with income as a secondary objective. The Fund invests primarily
in domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt securities of any
quality. Debt obligations include "junk bonds," defaulted securities and
indebtedness of companies in reorganizations, all of 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, including up to 25% in high yield, high risk,
lower rated debt obligations (commonly referred to as "junk bonds"), 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.
Mutual Discovery Securities Fund ("Mutual Discovery Fund") 1,2 seeks capital
appreciation. The Fund invests primarily in domestic and foreign equity
securities, including securities of small capitalization companies, as well as
debt obligations of any quality. Foreign investing involves special risks, and
smaller company investments may involve higher volatility. Debt obligations may
include "junk bonds," defaulted securities and indebtedness of companies in
reorganizations, all of which involve increased risks related to the
creditworthiness of their issuers.
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 Fund ("International Smaller Companies
Fund")1 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, Growth
and Income, Income Securities, International Equity, International Smaller
Companies, Money Market, Mutual Discovery, Mutual Shares, 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, Income Securities, Mutual Discovery and Mutual Shares 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
High Income 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
Mutual Shares Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
Utility Equity Fund
Capital Growth
Capital Growth Fund
Mutual Discovery Securities 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
Lower Rated Debt Obligations
Investments in Depository Receipts
Defaulted Debt Obligations
The Funds' Portfolios
Asset Composition Table
INVESTMENT METHODS AND
RISKS, COMMON TO MORE THAN
ONE FUND
Borrowing
Concentration
Convertible Securities
Debt Obligations
Corporate Debt Obligations
Money Market Instruments
Mortgage-Backed and
Asset-Backed Securities
Collateralized Mortgage Obligations
Stripped Mortgage-Backed Securities
Municipal Securities
U.S. Government Securities
Zero Coupon, Deferred Interest
and Pay-in-Kind Bonds
Derivatives
Diversification
Loan Participations
Loans of Portfolio Securities
Options and Futures Contracts
Portfolio Turnover
Repurchase and 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
[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 twenty-three separate investment portfolios or funds (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 Allianz Life Insurance Company of North America, or its wholly
owned subsidiary Preferred Life Insurance Company of New York, or their
affiliates ("Insurance Companies"), to fund the benefits under variable life
insurance policies and variable annuity contracts (collectively the "Contracts")
issued by the Insurance Companies. 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 Contracts
by the owners of the respective Contracts issued by the Insurance Companies
(collectively the "Contract Owners"). Some of the current Funds in the Trust may
not be available in connection with a particular Contract or in a particular
state. Contract Owners should consult the accompanying prospectus describing the
specific Contract or the appropriate Insurance Company for information on
available Funds and any applicable limitations.
General Investment Considerations
Each Fund has one or more investment objective and related investment policies
and uses various investment methods 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 Contract Owner 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 generally as defined by
the World Bank, specialized industry sectors, derivative instruments or complex
securities. These and other types of investments and investment methods common
to more than one Fund are described in greater detail, including the risks of
each and any limitations, in "Highlighted Risk Considerations," "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 "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
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
"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," "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 information about the
ratings of the debt obligations in the Fund during 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 rating 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 "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.
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), other business organizations,
and 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 either (i) rated below investment grade, or (ii) not rated
by U.S. rating agencies so that 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," "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 information about the
ratings of the debt obligations in the Fund during 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 "Investment
Methods and Risks Common to More than One Fund," "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 "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 "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") and
similar mortgage-backed securities issued or guaranteed by other agencies.
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 GNMAs 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 GNMA.
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 "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 Contract Owners who do not plan to have their purchase payments
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. The availability of Stripped Securities, other than Stripped
Treasury Securities, may be limited at times; during such periods, because the
Fund must meet annuity tax diversification rules, the Fund may invest in other
types of fixed-income securities.
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, contract 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 Contract Owners will be notified of such event.
Because each Fund will be primarily invested in zero coupon securities,
investors whose purchase payments 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 "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 "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 convertible securities. 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 "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 no more than 15% of
the Fund's total net assets, including ADRs. See "Highlighted Risk
Considerations - Foreign Transactions."
Other Investment Policies. The Fund currently intends to invest no more than 10%
of its assets in equity real estate investment trusts ("REITs") which are
described in the Real Estate Fund. The Fund currently does not intend to 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 "Highlighted Risk Considerations" "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, including
"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, in 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 "Investment Methods and Risks."
There are no restrictions as to the proportion of investments which may be made
in any particular type 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.
Currently, however, the Fund intends generally to 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," "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 information about
the ratings of the debt obligations in the Fund during 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 rating 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. The Fund currently intends to invest no more than 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; and currently intends to invest no more than 5% of its
assets in enhanced convertible securities. Under the policies discussed in
"Investment Methods and Risks," "Highlighted Risk Considerations," and in the
SAI, the Fund may also 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.
Mutual Shares Securities Fund
The investment objectives of the Mutual Shares Securities Fund are capital
appreciation, with income as a secondary objective. Capital appreciation may
occasionally be short-term.
Under normal market conditions, the Fund invests in domestic and foreign equity
securities, including common and preferred stocks and securities convertible
into common stocks, as well as debt obligations of any quality. Debt obligations
may include securities or indebtedness issued by corporations or governments in
any form, including notes, bonds, or debentures, as well as distressed mortgage
obligations and other debt secured by real property. The Manager has no pre-set
limits as to the percentages which may be invested in equity securities, debt
securities or Money Market Instruments. The Fund may invest in securities from
any size issuer, including smaller capitalization companies, which may be
subject to different and greater risks. See "Common Investment Methods and
Risks, Smaller Capitalization Issuers." It will tend to invest, however, in
securities of issuers with market capitalizations in excess of $500 million. It
may invest in securities that are traded on U.S. or foreign exchanges, NASDAQ
national market or in the over-the-counter market. It may invest in any industry
sector, although it will not concentrate in any one industry. From time to time,
the Fund may hold significant cash positions until suitable investment
opportunities are available, consistent with its policy on temporary
investments.
Selection of Portfolio Investments. The Fund's general policy is to invest in
securities which, in the opinion of the Manager, are available at prices less
than their intrinsic values. The Manager's opinions are based upon analysis and
research, taking into account, among other factors, the relationship of book
value to market value of the securities, cash flow, and multiples of earnings of
comparable securities. These factors are not applied mechanically, as the
Manager examines each security separately; the Manager has no general criteria
as to asset size, earnings or industry type which would make a security
unsuitable for purchase by the Fund.
The Fund also seeks to invest in equity securities and debt obligations of
domestic and foreign companies involved in mergers, consolidations, liquidations
and reorganizations or as to which there exist tender or exchange offers, and
may participate in such transactions. The Fund does not presently anticipate
investing more than 50% of its assets in such investments, but is not restricted
to that amount. The Fund may also invest in other forms of secured or unsecured
indebtedness ("Indebtedness"), including without limitation loan participations
and trade claims, of debtor companies involved in reorganization or financial
restructuring, some of which may have very long maturities. There can be no
assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and with the
time period contemplated.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Manager perceives that the Fund may benefit, the
Fund may itself seek to influence or control management or may invest in other
entities that purchase securities for the purpose of influencing or controlling
management, such as investing in a potential takeover or leveraged buyout or
investing in other entities engaged in such practices.
Credit Quality. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Manager's opinion, at prices less than their intrinsic values.
Consequently, the Manager's own analysis of a debt instrument exercises a
greater influence over the investment decision than the stated coupon rate or
credit rating. The Fund expects to invest in debt obligations issued by
reorganizing or restructuring companies, or companies which recently emerged
from, or are facing the prospect of a financial restructuring. It is under these
circumstances, which usually involve unrated or low rated securities that are
often in, or are about to, default, that the Manager seeks to identify
securities which are sometimes available at prices which it believes are less
than their intrinsic values. Although such debt securities may pose a greater
risk of loss of principal, the debt securities of reorganizing or restructuring
companies typically rank senior to the equity securities of such companies.
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's; 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. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. These securities may also be less liquid than higher rated securities,
or have no established markets, thereby increasing the degree to which judgment
plays a role in valuing such securities. 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. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT
OBLIGATIONS" AND "APPENDIX."
Defaulted Debt Obligations. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities, which may be considered speculative.
Foreign Investments. Although the Fund reserves the right to purchase securities
in any foreign country, developed or undeveloped, the Fund's current investment
strategy is to invest predominantly in domestic securities, with a substantial
portion of its total assets in foreign securities, including sponsored or
unsponsored Depository Receipts. The Fund presently does not intend to invest
more than 5% of its assets in developing markets securities. Foreign investments
may include both voting and non-voting securities, sovereign debt and
participation in foreign government deals. 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.
Currency Techniques. The Fund generally expects it will hedge against currency
risks to the extent that hedging is available. Currency hedging techniques may
include investments in foreign currency futures contracts, options on foreign
currencies or currency futures, forward foreign currency exchange contracts
("forward contracts") and currency swaps, all of which involve specialized
risks. See "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
Other Investment Policies. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" without limit. See the SAI for further
details concerning short sales.
Under the policies discussed in "Investment Methods and Risks," "Highlighted
Risk Considerations," and in the SAI, the Fund may also loan its portfolio
securities; enter into repurchase transactions; purchase debt obligations on a
"when-issued" or "delayed delivery" basis; invest in restricted or illiquid
securities; purchase and sell exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments; purchase and sell financial futures contracts and options thereon;
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," "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 "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 "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 25% 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 include defaulted debt obligations. Many
debt obligations of foreign issuers, and especially developing markets issuers,
are either (i) rated below investment grade or (ii) not rated by U.S. rating
agencies so that 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. However, as a non-fundamental policy, the Fund will limit its
investments in securities of Russian issuers to 5% of total assets. 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."
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 "Investment Methods
and Risks," "Highlighted Risk Considerations," and in the SAI, the Fund may also
invest in illiquid and restricted securities, purchase securities on a
"when-issued" basis, enter into repurchase transactions, loan its 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. The
Fund currently intends to invest no more than 5% of its assets in preferred
stocks or convertible preferred stocks issued by public utility issuers. Under
the policies discussed in "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.
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
convertible securities 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 currently intends to invest no more than 10% of its assets in foreign
securities, including Depository Receipts. See "Highlighted Risk Considerations
- - Foreign Transactions."
Convertible Securities. The Fund may invest in convertible securities. 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 "Investment
Methods and Risks."
Other Investments. The Fund currently intends to invest no 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 "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.
Mutual Discovery Securities Fund
The investment objective of the Mutual Discovery Securities Fund is capital
appreciation. Capital appreciation may occasionally be short-term.
Under normal market conditions, the Fund invests in domestic and foreign equity
securities, including common and preferred stocks and securities convertible
into common stocks, as well as debt obligations of any quality. Debt obligations
may include securities or indebtedness issued by corporations or governments in
any form, including notes, bonds, or debentures, as well as distressed mortgage
obligations and other debt secured by real property. The Manager has no pre-set
limits as to the percentages which may be invested in equity securities, debt
securities or Money Market Instruments. The Fund may invest in securities from
any size issuer, and may invest a substantial portion of its assets in
securities of small capitalization issuers, which have market capitalizations of
less than $1 billion. Securities of foreign or small cap issuers may be subject
to different and greater risks, as discussed below. The Fund may invest in
securities that are traded on U.S. or foreign exchanges, NASDAQ national market
or in the over-the-counter market. It may invest in any industry sector,
although it will not concentrate in any one industry. From time to time, the
Fund may hold significant cash positions until suitable investment opportunities
are available, consistent with its policy on temporary investments.
Selection of Portfolio Investments. The Funds general policy is to invest in
securities which, in the opinion of its Manager, are available at prices less
than their intrinsic values. The Manager's opinions are based upon analysis and
research, taking into account, among other factors, the relationship of book
value to market value of the securities, cash flow, and multiples of earnings of
comparable securities. These factors are not applied mechanically, as the
Manager examines each security separately; the Manager has no general criteria
as to asset size, earnings or industry type which would make a security
unsuitable for purchase by the Fund.
The Fund also seeks to invest in equity securities and debt obligations of
domestic and foreign companies involved in mergers, consolidations, liquidations
and reorganizations or as to which there exist tender or exchange offers, and
may participate in such transactions. The Fund does not presently anticipate
investing more than 50% of its assets in such investments, but is not restricted
to that amount. The Fund may also invest in other forms of secured or unsecured
indebtedness ("Indebtedness"), including without limitation loan participations
and trade claims, of debtor companies involved in reorganization or financial
restructuring, some of which may have very long maturities. There can be no
assurance that any such transaction proposed at the time of the Fund's
investment will be consummated or will be consummated on the terms and with the
time period contemplated.
The Fund generally purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, in
certain circumstances when the Manager perceives that the Fund may benefit, the
Fund may itself seek to influence or control management or may invest in other
entities that purchase securities for the purpose of influencing or controlling
management, such as investing in a potential takeover or leveraged buyout or
investing in other entities engaged in such practices.
Foreign Investments. The Fund may purchase securities in any foreign country,
developed or undeveloped, and currently expects to invest a substantial portion
(as much as 50% or more) of its total assets in foreign securities, including
sponsored or unsponsored Depository Receipts. The Fund presently does not intend
to invest more than 5% of its assets in developing markets securities. Foreign
investments may include both voting and non-voting securities, sovereign debt
and participation in foreign government deals. 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. INVESTORS SHOULD CONSIDER CAREFULLY
THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT
ARE HEIGHTENED IN DEVELOPING MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
FOREIGN SECURITIES" BELOW AND IN THE SAI.
Currency Techniques. The Fund generally expects it will hedge against currency
risks to the extent that hedging is available. Currency hedging techniques may
include investments in foreign currency futures contracts, options on foreign
currencies or currency futures, forward foreign currency exchange contracts
("forward contracts") and currency swaps, all of which involve specialized
risks. See "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
Risks Associated with Small Cap Investments. Securities of smaller companies,
particularly if they are unseasoned, present greater risks than securities of
larger, more established companies. The smaller companies in which the Fund
invests are often not well known, may often trade at a discount and may not be
followed by institutions. 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. See
"Investment Methods and Risks."
Credit Quality. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the very
highest to the very lowest categories (currently C for Moody's and D for S&P).
Medium and lower-rated debt obligations are commonly referred to as "junk
bonds." In general, it will invest in these instruments for the same reasons
underlying its investments in equity securities, i.e., that the instruments are
available, in the Manager's opinion, at prices less than their intrinsic values.
Consequently, the Manager's own analysis of a debt instrument exercises a
greater influence over the investment decision than the stated coupon rate or
credit rating. The Fund expects to invest in debt obligations issued by
reorganizing or restructuring companies, or companies which recently emerged
from, or are facing the prospect of a financial restructuring. It is under these
circumstances, which usually involve unrated or low rated securities that are
often in, or are about to, default, that the Manager seeks to identify
securities which are sometimes available at prices which it believes are less
than their intrinsic values. Although such debt securities may pose a greater
risk of loss of principal, the debt securities of reorganizing or restructuring
companies typically rank senior to the equity securities of such companies.
Higher yields are generally available from securities in the higher risk, lower
rating categories of S&P or Moody's 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. Moreover, securities rated
BB or lower by S&P or Ba or lower by Moody's are predominantly speculative with
respect to the issuer's ability to pay principal and interest and may be in
default. These securities may also be less liquid than higher rated securities,
or have no established markets, thereby increasing the degree to which judgment
plays a role in valuing such securities. 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. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT
OBLIGATIONS" AND "APPENDIX."
Defaulted Debt Obligations. The Fund may invest without limit in defaulted debt
obligations, subject to the Fund's restriction on investments in illiquid
securities, which may be considered speculative.
Other Investment Policies. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities subject to
the limitation that it will not purchase more than 3% of the voting securities
of another investment company. In addition, the Fund will not invest more than
5% of its assets in the securities of any single investment company and will not
invest more than 10% of its assets in investment company securities. Investors
should recognize that an investment in the securities of such investment
companies results in layering of expenses such that investors indirectly bear a
proportionate share of the expenses of such investment companies, including
operating costs, and investment advisory and administrative fees. The Fund may
also sell short securities it does not own up to 5% of its assets. Short sales
have risks of loss if the price of the security sold short increases after the
sale, but the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" without limit. See the SAI for further
details concerning short sales.
Under the policies discussed in "Investment Methods and Risks," "Highlighted
Risk Considerations," and in the SAI, the Fund may also loan its portfolio
securities; enter into repurchase transactions; purchase debt obligations on a
"when-issued" or "delayed delivery" basis; invest in restricted or illiquid
securities; purchase and sell exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments; purchase and sell financial futures contracts and options thereon;
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
"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 currently does not intend to invest more than 10% of its assets in
convertible securities, which are discussed below in "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 "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 market issuers and sponsored
or unsponsored Depository Receipts. The Fund presently does not intend to 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. Currently, however, the Fund does not
intend to 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 currently does not intend to invest more than 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. Under the policies discussed in "Investment Methods
and Risks," "Highlighted Risk Considerations," and the SAI, the Fund may also
write covered put and call options on securities or financial indices; purchase
put and call options on securities or financial indices; purchase and sell
futures contracts or related options with respect to securities, indices and
currencies; 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. The Fund has the right to purchase securities in any foreign country,
developed or developing. However, as a non-fundamental policy, the Fund will
limit its investments in securities of Russian issuers to 5% of total assets.
Investments in foreign developing markets, including certain Eastern European
countries and Russia, involve heightened risks related to the small size and
lesser liquidity of these markets. These developing markets risks 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 AND THE SAI."
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. Determinations as to eligibility will be made by the
Investment Manager based on publicly available information and inquiries to the
companies. 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 lower
rated 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", "Investment
Methods and Risks" and the SAI, the Fund may also loan its portfolio securities;
engage in repurchase transactions; borrow money for investment purposes; 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. However, as a non-fundamental
policy, the Fund will limit its investments in securities of Russian issuers to
5% of total assets. 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 lower-rated 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 "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 be issued by (i) companies domiciled in
countries other than the U.S., or (ii) companies 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 lower-rated 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 "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, Bangladesh, Belgium, Brazil, Canada, Chile, China, Colombia, Czech
Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India,
Indonesia, Israel, Italy, Japan, Korea, Luxembourg, Malaysia, Mexico, Morocco,
the Netherlands, New Zealand, Norway, Pakistan, Peru, Philippines, Poland,
Portugal, Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland,
Taiwan, Thailand, Turkey, the United Kingdom, Uruguay and Venezuela.
Other Investment Policies. The Fund may invest up to 10% of its net assets in
illiquid securities. The Fund may also 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 "Investment Methods and Risks," "Highlighted Risk
Considerations," and in the SAI, the Fund may also write covered call and put
options on securities, purchase call and put 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 Fund may, from time to time, hold
significant cash positions until suitable investment opportunities are
available, consistent with its policy on temporary investments. 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 that of 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 "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 10% of its assets in securities of companies with
less than three years of continuous operation. See "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 has the right to purchase securities in any foreign country, developed
or undeveloped. However, as a non-fundamental policy, the Fund will limit its
investments in securities of Russian issuers to 5% of total assets. 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. 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. 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.
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 of any one issuer, exclusive of U.S. Government Securities.
For hedging purposes only, the Fund may enter into: transactions in options on
securities, securities indices, and foreign currencies; forward foreign currency
contracts; and futures contracts and related options. 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 "Investment Methods and
Risks, Options and Futures Contracts" and the SAI. Under the policies discussed
in "Investment Methods and Risks," "Highlighted Risk Considerations," and in the
SAI, the Fund may also enter into repurchase agreements, invest in illiquid
securities, 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 "Investment Methods and Risks."
Other Investment Policies. The Fund may invest up to 10% of its net assets in
illiquid securities. Currently the Fund intends to invest no more than 10% of
its net assets in warrants, including such warrants that are not listed on an
exchange. Under the policies discussed in "Investment Methods and Risks,"
"Highlighted Risk Considerations," and in the SAI, the Fund may also write
covered call and put options on securities, purchase called put 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 debt 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 foreign markets, including developing markets, are generally
higher than in the U.S. Such markets also 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. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. 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 generally considered to have developing markets are all countries that
are 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, including certain Eastern
European countries 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, including certain Eastern European countries 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 liquid 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. Russia's system of share registration
and custody creates certain risks of loss (including the risk of total loss)
that are not normally associated with investments in other securities markets.
These risks and other risks associated with the Russian securities market are
discussed more fully in the SAI under "Highlighted Risk Considerations" and
investors should read the section in detail. 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 Capital Growth, 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 15% 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, Mutual Discovery, Mutual
Shares, 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," "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
"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 rating 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 Manager, 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.
At December 31, 1995, the High Income and Income Securities Funds held one and
three positions, respectively, in 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 Global Income, High Income and Income Securities
Funds' assets invested in debt 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 respective portfolio compositions in
the fiscal year ended December 31, 1995. No other Fund had a 12-month weighted
average of more than 5% of its assets in debt obligations rated below investment
grade or determined by the Manager to be of comparable credit quality. 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 Moody's, have been included in
the Caa rating category.
High Global
Income Income
S&P Fund Fund
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%
**1.79% of these securities, which are unrated by S&P, have been included in the
B- rating category.
It should be noted that the above ratings are not necessarily indicative of
ratings of bonds at the time of purchase.
Investment Methods and Risks
Common to More than One Fund
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 methods will be used at all times. See "Table of
Contents" in front for a 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, Mutual Discovery, Mutual
Shares 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, Mutual Discovery, Mutual Shares 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 Asset Allocation Fund, Capital Growth Fund, Developing Markets Fund, Global
Growth Fund, Global Income Fund, Government Fund, Growth and Income Fund, High
Income Fund, Income Securities Fund, International Equity Fund, International
Smaller Companies Fund, Mutual Discovery Fund, Mutual Shares 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
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 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.
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, Deferred Interest
and Pay-In-Kind Bonds," below.
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 GNMA pools will be
prepaid thus reducing the effective yield.
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 investments 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.
Participations normally are made available only on a nonrecourse basis by
financial institutions, such as banks or insurance companies, or by governmental
institutions, such as the Resolution Trust Corporation or the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation or may include
supranational organizations such as the World Bank. When a Fund purchases a
participation interest it assumes the credit risk associated with the bank or
other financial intermediary as well as the credit risk associated with the
issuer of any underlying debt instrument.
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 Asset Allocation,
Developing Markets, International Equity, Mutual Discovery, Mutual Shares and
Pacific 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 and any
limitations noted in this section are qualified by the Funds' individual
policies as stated in the individual 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 the 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 permitted to
invest 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 Fund. See the "Investment Objectives and Policies" of the specific
Fund and the SAI 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 Templeton Global Income Securities Fund which may
exceed 100% per year. In May of 1995 the management strategy of the Growth and
Income Fund shifted to stock selection focusing on relative yield analysis in
addition to quantitative analysis supported by fundamental research. The
strategy shift significantly reduced the number of investment holdings as well
as reduced its weighting in smaller capitalization issuers in favor of mid and
larger capitalization issues. This reduction of investment holdings was
primarily responsible for the Fund's portfolio turnover rate of 116% for the
year ended December 31, 1995. The Manager does not expect future portfolio
turnover to exceed 100%.
The Templeton Global Income Securities Fund's turnover rate of 152.89% in 1995
was due to bond maturities, and to rebalancing the portfolio to keep interest
rate risk at desired levels and to keep country allocations at desired levels.
In addition the Fund experienced net redemptions in 1995 which resulted in
higher turnover.
Portfolio turnover rates for recent years are shown in the "Financial
Highlights." More information is in the SAI.
Repurchase and Reverse 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.
Certain Funds authorized to do so may also enter into reverse repurchase
agreements which may involve additional risks. See the SAI, "Common Investment
Methods and Risks."
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, Mutual Discovery and Mutual Shares Funds may invest up to 15%
in such investments. Illiquid investments include 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. For additional details, see the SAI.
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 net asset value of a Fund
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 ("benchmark"). 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 benchmark, 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
Instruments. 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, Developing Markets, Global Income, Global Growth,
International Equity, International Smaller Companies, Mutual Discovery, Mutual
Shares, and Pacific 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, Developing
Markets, Global Growth, International Smaller Companies, Mutual Discovery,
Mutual Shares and Rising Dividends 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.
Franklin Advisory Services, Inc., One Parker Plaza, Sixteenth Floor, Fort Lee,
New Jersey, 07024 ("Franklin New Jersey") replaced Advisers as the Manager for
the Rising Dividends Fund on July 1, 1996. Advisers and Franklin New Jersey are
both direct wholly owned subsidiaries of Franklin Resources, Inc.
The Manager for the Asset Allocation and Global Growth Funds is Templeton Global
Advisors Limited ("Templeton Nassau") formerly known as Templeton Galbraith &
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") 7
Temasek Boulevard, # 38-03, Suntec Tower One, Singapore, 038987, 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 Mutual Discovery Growth and the Mutual Shares Securities
Funds is Franklin Mutual Advisers, Inc. ("Franklin Mutual")51 John F. Kennedy
Parkway, Short Hills, New Jersey, 07078.
The Manager for the International Smaller Companies Fund is Templeton Florida.
Advisers acts as investment manager or administrator to 36 U.S. registered
investment companies (124 separate series) with aggregate assets of over $82
billion. (Advisers, Franklin Mutual, Franklin New Jersey, 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 4,500 employees
in 12 different countries and an extensive global network of investment research
sources.
The Managers perform similar services for other funds and accounts and there may
be times when the actions taken with respect to the portfolio of a Fund in the
Trust will differ from those taken by the Managers on behalf of other funds or
accounts. Neither the Managers (including their affiliates) nor their officers,
directors or employees nor the officers and trustees of the Trust are prohibited
from investing in securities held by the Funds in the Trust or other funds or
accounts which are managed or administered by the Managers to the extent such
transactions comply with the Trust's Code of Ethics. Please see "Investment
Management and Other Services" and "Miscellaneous Information" in the SAI for
further information on securities transactions and a summary of the Trust's Code
of Ethics.
Management Fees. The management agreements provide for the management of each
Fund's portfolio and, except for the Asset Allocation, International Smaller
Companies, Mutual Discovery and Mutual Shares 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 Mutual Discovery and
Mutual Shares Funds are each obligated to pay Franklin Mutual a monthly fee
computed at the annual rate of (to be supplied at a later amendment__%) of the
value of the average daily net assets of each Fund. 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 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
whose fee arrangements are discussed above).
Management Fees
Growth and Income Fund .49%
High Income Fund .53%
Income Securities Fund .47%
Metals Fund .61%
Rising Dividends Fund .75%
Real Estate Fund .56%
Developing Markets Fund 1.25%
Asset Allocation Fund .65%
Global Income Fund .55%
Global Growth Fund .93%
International Equity Fund .83%
Pacific Fund .90%
Government Fund .49%
Utility Fund .47%
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 Fund Administration fees in
the case of the Asset Allocation, International Smaller Companies, Mutual
Discovery and Mutual Shares 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 agreements with the Managers, other than the cost of
securities purchased for the Funds and brokerage commissions in connection with
such purchases.
Fund Administrators
Templeton Global Investors, Inc., 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. Templeton Global Investors 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 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. Templeton Global Investors 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.
The fund administrator for the Mutual Discovery and Mutual Shares Funds is
Franklin Templeton Services, Inc., which is employed directly by the Funds and
receives a monthly fee equivalent on an annual basis to []% of the average daily
net assets of each Fund, reduced to []% of such assets in excess of $200
million, to[]% of such assets in excess of $700 million, and to []% of such
assets in excess of $1.2 billion. (Fees to be supplied in a future amendment)
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.
Capital Growth Fund
Conrad B. Herrmann
Vivian J. Palmieri
Growth and Income 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
Mutual Discovery Securities and
Mutual Shares Securities Funds
Michael Price
Peter Langerman
Jeffrey Altman
Robert Friedman
Raymond Garea
Lawrence Sondike
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
Templeton International Smaller Companies Fund
Mark Joseph
Mark 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
Jeffrey Altman
Portfolio Manager
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for Heine
Securities Corporation, the former investment advisor for the Fund, for at least
5 years. He joined Franklin Mutual in October 1996.
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 Advisory Services, 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 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 has managed 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 has managed 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.
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 1993.
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
Senior Vice President and Portfolio Manager
Templeton Global Advisors Limited.
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
Vice President and Portfolio Manager
Templeton Global Advisors Limited.
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.
Robert Friedman
Portfolio Manager
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to October 1996, Mr. Friendman was a Research
Analyst for Heine Securities Corporation, the former investment advisor for the
Fund, for at least 5 years. He joined Franklin Mutual in October 1996.
Raymond Garea
Portfolio Manager
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute of
Technology and a Masters in Business Administration the University of Michigan.
Prior to October 1996, he was a Research Analyst for Heine Securities
Corporation, the former investment advisor for the Fund, for at least 5 years.
He joined Franklin Mutual in October 1996. Mr. Garea is also a Manager
(Director) of MB Metroplis L.L.C. since 1994.
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 has
managed 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 Global Advisors Limited.
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 Investment Counsel Inc.
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 has
managed 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
Portfolio Manager and Analyst
Templeton Asset Management 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.
Peter Langerman
Portfolio Manager
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Standford University Law School. Prior to October 1996, he was a Research
Analyst for Heine Securities Corporation, the former investment advisor for the
Fund, for at least 5 years. He joined Franklin Mutual in October 1996. Mr.
Langerman is a director and Executive Vice President of the Fund, Director of
Sunbeam Oster since 1990, Lancer Industries since 1994 and Hexcel Corporation
N.M.M.S.p.A. since 1995 and Manager (Director) of MB Motori, L.L.C. since 1994
and MWCR L.L.C. since 1995.
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, and the Zero
Coupon Funds 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 Advisory Services, 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 Rising Dividends Fund since 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 Advisory Services, 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 Dividends since inception.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Asset Management 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 has managed the Capital
Growth Fund from inception.
Michael Price
Chief Executive Officer and Portfolio Manager
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to October 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, the former investment advisor for the
Fund, for at least 5 years. He became Chief Executive Officer of Franklin Mutual
in October 1996. He is Chairman of the Board and President of the Fund.
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.
Lawrence Sondike
Portfolio Manager
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to October 1996, he was a Research Analyst for Heine Securities
Corporation, the former investment advisor for the Fund, for at least 5 years.
He joined Franklin Mutual in October 1996. He is Vice President of the Fund.
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
Director,
Portfolio Manager, and Analyst
Templeton Asset Management 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 the Insurance Companies, to fund the benefits under their
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 Insurance Company Variable Account purchases shares of each Fund
using purchase payments allocated to one or more of the Sub-Accounts of each
Variable Account, as selected by the Contract Owners. All shares are sold at net
asset value without a sales charge. Shares are purchased by the variable account
at the net asset value of each respective Fund next determined after the Trust
receives the purchase 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 Contracts issued by the Insurance Company.
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:
Franklin Valuemark Funds Franklin Templeton Funds
Franklin Custodian Funds, Inc.:
Capital Growth Fund - Growth Series
High Income Fund High Income Fund, Inc.
Franklin Custodian Funds, Inc.:
Income Securities Fund - Income Series
Money Market Fund Franklin Money Fund
Franklin Mutual Series Inc.:
Mutual Shares Securities Fund Mutual Shares Fund
Mutual Discovery Securities Fund Mutual Discovery 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 Templeton Developing Markets Trust
Markets Equity Fund
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 - Franklin Global Government Income
Securities Fund Fund
(formerly "Global Income Fund")
Franklin Templeton International
Trust:
Templeton Pacific - Franklin Templeton Pacific
Growth Fund Growth Fund
U.S. Government Franklin Custodian Funds, Inc.:
Securities Fund U.S. Government Securities Series
Because of differences in portfolio size, the investments held, the timing of
purchases of similar investments, cash flows, minor differences in certain
investment policies, insurance product related tax diversification requirements,
state insurance regulations, 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
Each Insurance Company redeems shares of the applicable Fund to make benefit or
surrender payments under the terms of its Contracts. 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 Contract
Owner.
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 an Insurance Company 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, other entities, or individuals using programmed, large
and/or 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. Accounts under common ownership or control may be
aggregated for purposes of the transfer limits. 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 the Insurance Companies.
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 Contract Owners. 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 Contract Owners
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 appropriate insurance company
separate account prospectus and "Calculation of Performance Data" in the
appropriate insurance company separate account SAI.
General Information
Custody of Assets
Under a custody agreement with the Trust, the Bank of New York serves as the
custodian of the assets of all the Funds, except those for which Chase Manhattan
Bank serves as custodian; Chase Manhattan Bank serves as custodian for the Asset
Allocation, Developing Markets, Global Growth, Global Income, International
Equity, International Smaller Companies, and Pacific Funds. [Mutual Discovery
and Mutual Shares information to be supplied]
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 Contract Owners whose
purchase payments have indirectly been invested in each Fund. For further
details of these Plans, 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 Contract Owners,
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 Contract Owners, see the accompanying insurance company separate
account Prospectus, under "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.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Fitch's
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect on assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
FRANKLIN
VALUEMARK
FUNDS
STATEMENT OF ADDITIONAL INFORMATION
November 15, 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 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 November 15, 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 Risk
Considerations" in the Prospectus).....
Foreign Securities......................
Currency Management Techniques..........
Metals Fund - Special Considerations....
Zero Coupon Funds -
Special Considerations.................
INVESTMENT METHODS AND RISKS COMMON
TO MORE THAN ONE FUND (See also
"Investment Methods and Risks Common to
More than One Fund" in the Prospectus).
Convertible Securities..................
Illiquid Securities.....................
Interest Rate Swaps.....................
Inverse Floaters........................
Options and Futures.....................
Portfolio Turnover......................
Real Estate Fund........................
Repurchase Agreements...................
Reverse Repurchase Agreements...........
Short Sales.................
When-Issued Securities..................
FUNDAMENTAL INVESTMENT RESTRICTIONS.....
NON-FUNDAMENTAL INVESTMENT
RESTRICTIONS...........................
OFFICERS AND TRUSTEES...................
INVESTMENT MANAGEMENT AND
OTHER SERVICES (See also
"Management" in the Prospectus)........
Fund Administrators.....................
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, or its wholly owned subsidiary
Preferred Life Insurance Company of New York, or their affiliates ("Insurance
Companies") to fund the benefits under variable life insurance policies and
variable annuity contracts (collectively the "Contracts") issued by the
Insurance Companies. 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 Contracts, by the owners of
the respective Contracts issued by the Insurance Companies (collectively the
"Contract owners"). 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 Contract or in a particular state.
Contract owners should consult the insurance product prospectus accompanying the
Trust prospectus which describes the specific Contract or the appropriate
Insurance Company 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 their 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
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.
TEMPLETON GLOBAL INCOME SECURITIES FUND ("Global Income Fund")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. Prior to May 1, 1996 the
Fund was known as the Global Income Fund.
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 FUND1 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. Prior to May 1,
1995, the Growth and Income Fund was known as the Equity Growth Fund.
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.
MUTUAL SHARES SECURITIES FUND ("Mutual Shares Fund") 1,2 seeks capital
appreciation, with income as a secondary objective. The Fund invests primarily
in domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt securities of any
quality. Debt obligations include "junk bonds," defaulted securities and
indebtedness of companies in reorganizations, all of 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, including up to 25% in high yield, high risk,
lower rated debt obligations (commonly referred to as "junk bonds"), 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.
MUTUAL DISCOVERY SECURITIES FUND ("Mutual Discovery Fund") 1,2 seeks capital
appreciation. The Fund invests primarily in domestic and foreign equity
securities, including securities of small capitalization companies, as well as
debt obligations of any quality. Foreign investing involves special risks, and
smaller company investments may involve higher volatility. Debt obligations may
include "junk bonds," defaulted securities and indebtedness of companies in
reorganizations, all of which involve increased risks related to the
creditworthiness of their issuers.
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. Prior to October
15, 1993, the Templeton International Equity Fund was known as the International
Equity Fund.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND ("International Smaller Companies
Fund")1 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. Prior to October 15,
1993, the Templeton Pacific Growth Fund was known as the Pacific Growth Fund.
1THE ASSET ALLOCATION, DEVELOPING MARKETS, GLOBAL GROWTH, GLOBAL INCOME, GROWTH
AND INCOME, INCOME SECURITIES, INTERMEDIATE BOND, INTERNATIONAL EQUITY,
INTERNATIONAL SMALLER COMPANIES, MONEY MARKET, MUTUAL DISCOVERY, MUTUAL SHARES,
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, INCOME SECURITIES, MUTUAL DISCOVERY AND MUTUAL SHARES 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,
derivative instruments or complex securities. THESE AND OTHER TYPES OF
INVESTMENTS AND INVESTMENT TECHNIQUES COMMON TO MORE THAN ONE FUND, AS STATED IN
THE INDIVIDUAL FUND DESCRIPTIONS IN THE TRUST PROSPECTUS, ARE DESCRIBED IN
GREATER DETAIL, INCLUDING THE RISKS OF EACH AND ANY LIMITATIONS, IN THE TRUST
PROSPECTUS, THIS SECTION OF THE SAI AND IN "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.
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.
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.
Investments in Eastern European countries may 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.
Investing in securities of Russian issuers, for the Funds that are permitted to
invest in Russia, involves a high degree of risk and special considerations not
typically associated with investing in the United States securities markets, and
should be considered highly speculative. Such risks include: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's unique
system of share registration and custody; (b) the risk that it may be impossible
or more difficult than in other countries to obtain and/or enforce a judgment;
(c) pervasiveness of corruption and crime in the Russian economic system; (d)
currency exchange rate volatility and the lack of available currency hedging
instruments; (e) higher rates of inflation (including the risk of social unrest
associated with periods of hyper-inflation); (f) controls on foreign investment
and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on the Fund's
ability to exchange local currencies for U.S. dollars; (g) the risk that the
government of Russia or other executive or legislative bodies may decide not to
continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (h) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (i)
dependency on exports and the corresponding importance of international trade;
(j) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (k) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for the Fund to lose its
registration through fraud, negligence or even mere oversight. While the Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent the Fund from
investing in the securities of certain Russian companies deemed suitable by the
Manager. Further, this also could cause a delay in the sale of Russian company
securities by the Fund if a potential purchaser is deemed unsuitable, which may
expose the Fund to potential loss on the investment.
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 may 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.
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.
One of the largest national producers of gold bullion and platinum is the
Republic of South Africa. Changes in political and economic conditions affecting
South Africa 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 and state law applicable to variable insurance and
annuity contracts.
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).
<TABLE>
<CAPTION>
TOTAL ENDING VALUE ON A $1,000 INVESTMENT
COUPON INITIAL YIELD (REALIZED YIELD) IF REINVESTMENT RATES ARE:
<S> <C> <C> <C> <C> <C> <C> <C>
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%)
</TABLE>
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 Contract owners 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.
INVESTMENT METHODS AND RISKS
COMMON TO MORE THAN ONE FUND
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, except that the International Smaller Companies, Mutual Discovery
and Mutual Shares Funds reserve the right to invest up to 15% in such
investments. 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 Managers to treat a restricted security as liquid on
a regular basis, including the Managers' 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
Certain Funds, as described in the Trust's Prospectus, may write covered put or
call options, or purchase put and call options.
WRITING OPTIONS. 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 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.
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. 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.
PURCHASING 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.
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.
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.
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. 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.
COMBINING OPTION TRANSACTIONS
Certain Funds may also (i) buy puts and write calls on the same portfolio
security in "forward conversion" transactions; (ii) engage in "spread"
transactions in which a Fund purchases and writes a put or call option on the
same security with the options having different exercise prices and/or
expiration dates; (iii) engage in "straddles" in which the Fund may purchase or
write combinations of put and call options on the same security; and (iv)
purchase a security and then write a call option against that security in a
"buy-and-write" transaction. Spread and straddle transactions may involve a
limited degree of investment leverage, and a Fund will not engage in spreads or
straddles if, as a result, more than 5% of its net assets will be invested in
such option transactions.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. 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.
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.
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.
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.
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.
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, EACH 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.
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. Global or international fixed income
securities funds may have higher turnover rates because of maturing debt
securities, rebalancing of the portfolio to keep interest rate risk at desired
levels and the rebalancing of the portfolio to keep country allocations at
desired levels; if the Manager's allocation target changes, additional turnover
may result.
In addition, redemptions or exchanges by investors may require the liquidation
of portfolio securities. 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 AGREEMENTS
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.
REVERSE REPURCHASE AGREEMENTS
Certain Funds may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by a Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive dividend payments on these
securities.
When effecting reverse repurchase transactions, each Fund will establish a
segregated account with its custodian bank in which it will maintain cash, U.S.
Government securities or other liquid high grade debt obligations equal in value
to its obligations with respect to reverse repurchase agreements. Reverse
repurchase agreements involve the risk that the market value of the securities
retained by a Fund may decline below the price of the securities the Fund has
sold but is obligated to repurchase under the agreement. In the event the buyer
of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, a Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements are considered borrowings by the Funds and as such
are subject to the investment limitations discussed below under "Fundamental
Investment Restrictions" or in the prospectus under "Investment Methods and
Risks, Common to More Than One Fund."
These transactions may increase the volatility of a Fund's income or net asset
value. The Fund carries the risk that any securities purchased with the proceeds
of the transaction will depreciate or not generate enough income to cover the
Fund's obligations under the reverse repurchase transaction. These transactions
also increase the interest and operating expenses of a fund.
SHORT SALES
Certain Funds may make short sales of securities. A short sale is a transaction
in which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. Each Fund expects to make short
sales as a form of hedging to offset potential declines in long positions in
similar securities, in order to maintain portfolio flexibility and for profit.
When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
Fund will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current value of the
security sold short.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a gain. Any gain
will be decreased, and any loss increased, by the transaction costs described
above. Although the Fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited.
The Mutual Discovery and Mutual Series Funds may make short sales, but will not
make a short sale if, after giving effect to such sale, the market value of all
securities sold short exceeds 5% of the value of the Fund's total assets or the
Fund's aggregate short sales of a particular class of securities exceeds 25% of
the outstanding securities of that class. These Funds may also make short sales
"against the box" without respect to such limitations. In this type of short
sale, at the time of the sale, the Funds own or have the immediate and
unconditional right to acquire at no additional cost the identical security.
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 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, Mutual Discovery, Mutual Shares and Small Cap
Funds). The Asset Allocation, Developing Markets, International Smaller
Companies, Mutual Discovery, Mutual Shares 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, Mutual Discovery or Mutual Shares
Funds);
6. invest in securities for the purpose of exercising management or control of
the issuer (not applicable to the Mutual Discovery or Mutual Shares Funds);
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, the Mutual Discovery Fund, the Mutual Shares 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, Mutual Discovery Fund, Mutual Shares 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, (ii) Mutual Discovery and Mutual Shares Funds may
engage in short sales to the extent described in the Prospectus and SAI, and
(iii) the Global Income Fund, the Global Growth Fund, the Developing Markets
Fund, the Asset Allocation Fund, the International Equity Fund, the
International Smaller Companies Fund, the Pacific Fund, the Mutual Discovery
Fund, the Mutual Shares 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
Mutual Discovery Fund, the Mutual Shares Fund and the Small Cap 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.
Securities or other instruments backed by commodities are not considered
commodities or commodity contracts for the purpose of this restriction;
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, or in first mortgage loans or other direct obligations secured
by real estate;
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 Mutual Discovery Fund, the Mutual
Shares 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, Mutual Discovery or Mutual
Shares Funds);
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. invest more than 10% of its assets in illiquid securities (including
illiquid equity securities, repurchase agreements of more than seven days
duration, over-the-counter options and assets used to cover such options, and
other securities which are not readily marketable), as more fully described in
the prospectus and SAI. This policy shall not apply to the International Smaller
Companies, Mutual Discovery or Mutual Shares Funds.
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 Funds 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, except the Mutual Discovery and Mutual Shares Funds, (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 (including the Mutual
Discovery and Mutual Shares 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
will not invest more than 15% of its 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.
The International Smaller Companies Fund may not invest more than 5% of its
respective assets in warrants, whether or not listed on the New York or American
Exchange, including no more than 2% of its 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.
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(*).
Position Occupation
Name, Address and Age With Trust for the Last Five Years
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
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.
*Lowell C. Anderson (59) 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.
Harris J. Ashton (64) 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.
Harmon E. Burns (51) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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 61 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (64) 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.
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.
*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.
*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.
*Rupert H. Johnson, Jr. (56) Vice President and Trustee
777 Mariners Island Blvd.
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 61 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.
Gordon S. Macklin (68) 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 (36) 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.
Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and
officer of 61 of the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal Accounting Officer
San Mateo, CA 94404
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (59) 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.
The preceding table also indicates those officers and trustees who are also
affiliated persons of the Managers.
Trustees not affiliated with the Managers or the Insurance Companies ("non
affiliated trustees") are currently paid fees of $550 per month plus $183 per
meeting attended. As indicated above, certain of the nonaffiliated trustees
serve as directors, trustees or managing general partners of other investment
companies in the Franklin Group of Funds(R) and the Templeton Group of Funds
("Franklin Templeton Funds"). The following table shows the total fees paid, for
the fiscal year ended December 31, 1995, to non affiliated trustees by the Trust
and by other Franklin Templeton Funds.
<TABLE>
<CAPTION>
Aggregate Number of Franklin Total Compensation from
Compensation Templeton Funds Boards Franklin Templeton Funds,
Name from Trust+ on Which Each Serves** including the Trust+
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
+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 approximately 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.
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, Developing Markets
Fund, Mutual Discovery Fund, Mutual Shares Fund and the Rising Dividends 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 Global Income Fund). The Manager for the
Rising Dividends Fund is Franklin Advisory Services, Inc. ("Franklin New
Jersey") One Parker Plaza, Sixteenth Floor, Ft. Lee, New Jersey, 07024. The
Manager for the Mutual Discovery and Mutual Shares Funds is Franklin Mutual
Advisers, Inc., ("Franklin Mutual") 51 John F. Kennedy Parkway, Short Hills, New
Jersey, 07078. The Manager of the International Smaller Companies Fund is
Templeton Florida. The Manager for the Asset Allocation and Global Growth Funds
is Templeton 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 Ltd., formerly
known as Templeton Investment Management (Singapore) Pte Ltd. ("Templeton
Singapore") 7 Temasek Boulevard, #38-03, Suntec Tower One, 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,
Templeton Florida, Franklin New Jersey and Franklin Mutual may be referred to as
the "Manager" or "Managers" throughout the SAI and Prospectus.
The Managers also provide management services to numerous other investment
companies or funds and other accounts pursuant to management agreements with
each fund or other account. The Managers may give advice and take action with
respect to any of the other funds or accounts they manage, or for their own
accounts, which may differ from action taken by the Managers on behalf of the
Funds. Similarly, with respect to the Funds, the Managers are not obligated to
recommend, purchase or sell, or to refrain from recommending, purchasing or
selling any security that the Managers and access persons, as defined by the
1940 Act, may purchase or sell for their own accounts or for the accounts of any
other fund or account. Furthermore, the Managers are not obligated to refrain
from investing in securities held by the Fund or other funds or accounts which
they manage or administer. Of course, any transactions for the accounts of the
Managers and other access persons will be made in compliance with the Fund's
Code of Ethics.
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 Mutual Discovery Fund, the Mutual Shares 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, 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.
The Rising Dividends Fund is obligated to pay Franklin New Jersey 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.
The Mutual Discovery Fund and Mutual Shares Fund are obligated to pay Mutual
Advisers a monthly fee, based upon each Fund's average daily net assets,
computed at the annual rate of [] of 1% of average daily net assets.
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. With respect
to the Money Fund, during 1995, Advisors 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.
Expense reductions have not been necessary based on state requirements.
Except as indicated below, the management and subadvisory agreements with the
Managers are in effect until April 30, 1997, 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), International Smaller Companies (dated January 18, 1996),
Mutual Discovery (dated [ ]) and Mutual Shares (dated [ ]) 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 Fund Administrator, 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 Fund Administrator. The Managers are covered by fidelity insurance
on their officers, directors and employees for the protection of the Trust. 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 Fund Administrators and the management
fees actually paid by the Funds for the fiscal years ended December 31, 1995,
1994 and 1993.
<TABLE>
<CAPTION>
Management Management
and Fund and Fund
Administration Administration
Fees Accrued Fees Paid
--------------------------------
1995
<S> <C> <C>
Money Market Fund............................................. $2,295,252 $1,700,943
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
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
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
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
Money Market Fund............................................. $ 638,179 $ 638,179
Templeton Global Income Securities Fund
(formerly the "Global Income Fund").......................... 703,801 703,801
High Income Fund.............................................. 752,653 752,653
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
</TABLE>
Please refer to the "Officers and Trustees" table which indicates officers and
trustees who are affiliated persons of the Trust, the Managers and the Insurance
Companies.
FUND ADMINISTRATORS
Templeton Global Investors, Inc., 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. Templeton
Global Investors 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 Equity, and Pacific Funds.
The fund administrator for the Mutual Discovery and Mutual Shares Funds is
Franklin Templeton Services, Inc., which is employed directly by the 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. [Mutual Discovery and Mutual Shares information to be supplied]
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
net price and 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 may decide to execute transactions through
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 through brokers who supply research, statistical and other
data to the Funds and the Managers in such amount of total brokerage as may
reasonably be required.
Since most purchases by certain of the Funds are principal transactions at net
prices, these Funds incur little or no brokerage costs. The Funds deal directly
with the selling or purchasing principal or market maker without incurring
charges for the services of a broker on their behalf, unless it is determined
that a better price or execution may be obtained by utilizing the services of a
broker. 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 prices. The Funds
seek to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and statistical
information, as well as for special services rendered by such dealers in the
execution of orders.
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 Contracts 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, transactions in such
securities will be allocated among the several investment companies and clients
in a manner deemed equitable to all, by the Managers, 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.
During the past three fiscal years ended December 31, 1995, or since inception,
each Series paid brokerage commissions as follows:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
<S> <C> <C> <C>
Money Market Fund......................................... $ 0 $ 0 $ 0
Templeton Global Income Securities Fund................... 0 0 0
High Income Fund.......................................... 0 0 0
Government Fund........................................... 0 0 0
Zero Coupon Fund - 2000................................... 0 0 0
Zero Coupon Fund - 2005................................... 0 0 0
Zero Coupon Fund - 2010................................... 0 0 0
Growth and Income Fund.................................... 438,511 1,466,719 2,368,736
Income Securities Fund.................................... 157,656 273,276 175,429
Real Estate Fund.......................................... 101,023 211,890 182,818
Rising Dividends Fund..................................... 258,712 220,185 272,848
Global Asset Allocation Fund.............................. -- -- 24,490
Utility Fund.............................................. 1,303,579 442,406 652,221
Metals Fund............................................... 159,245 150,503 111,982
Small Cap Fund............................................ -- -- 9,622
Templeton Developing Markets Equity Fund ................-- 419,518 589,426
Global Growth Fund........................................ -- 206,009 956,434
International Equity Fund................................. 863,636 1,541,506 824,409
Pacific Growth Fund....................................... 640,371 961,503 1,040,361
</TABLE>
As of December 31, 1995, the Growth and Income Fund owned a security issued by
BankAmerica Corp. and the Templeton Global Growth Fund owned securities issued
by A.G. Edwards and Merrill Lynch & Co., Inc. which were valued in the aggregate
at $2,751,875, $2,124,870 and $2,142,000 respectively. Except as stated above,
no Fund owned any securities issued by its regular broker-dealers as of the end
of such fiscal year.
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 Funds' net asset value are 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.
Generally, trading in corporate bonds, U.S. government securities and Money
Market Instruments is substantially completed each day at various times prior to
the scheduled close of the Exchange. The value of these securities used in
computing the net asset value of the Funds' shares is determined as of such
times. Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the scheduled close of the
Exchange which will not be reflected in the computation of the Funds' net asset
values. If events materially affecting the values of these securities occur
during such period, then the securities will be valued at their fair value as
determined in good faith by the Board.
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. With the approval of the Board of
Trustees, the Fund may utilize a pricing service, bank or securities dealer to
perform any of the above described functions.
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 net asset value per share of the Fund is calculated by adding the value of
all securities and other assets in the Fund's portfolio (i.e., share of the
Portfolio), deducting the Fund's liabilities, and dividing by the number of
shares outstanding.
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 opposite 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 this rule 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 not 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. Contract owners 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 April 1, 1996, Allianz Life Variable Account A, Allianz Life Variable
Account B and Preferred Life Variable Account C owned, .11%, 92.11%, and 7.78%
respectively, of the issued and outstanding shares of the Trust.
Contract owners will be informed of each Fund's progress through periodic
reports. Financial statements certified by independent public auditors will be
available at least annually.
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations must be sent
to a 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; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and 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.
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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Trust's Annual Report for the
fiscal year ended December 31, 1995, including the auditor's report, and the
unaudited financial statements contained in the Trust's Semi-Annual Report dated
June 30, 1996, are incorporated herein by reference.
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(v),
5(xi), 5(xiii), 5(xvi), and 27, which are attached.
(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
Advisory Services, Inc. dated July 1, 1996
(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 October 11, 1995
(xii) Investment Management Agreement between
Registrant, on behalf of Templeton Developing
Markets Equity 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) 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.
Filing: Post-Effective Amendment No. 18
to Registration Statement of Registrant
on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xv) Management Agreement between Registrant, on
behalf of Capital Growth Fund and Franklin
Advisers dated January 18, 1996.
Filing: Post-Effective Amendment No. 18
to Registration Statement of Registrant
on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xvi) Amendment to Management Agreement between
Registrant and Franklin Advisers, Inc. dated
August 1, 1995
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) Master Custody Agreement between the Registrant,
the Bank of New York, dated February 16, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(vi) Terminal Link Agreement between Registrant and
Bank of New York dated February 16, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(vii) Form of Amendment to Global Custody Agreement
between Franklin Valuemark Funds and The Chase
Manhattan Bank, N.A. dated April 1, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(viii) Form of Amendment to Master Custody Agreement
between Franklin Valuemark Funds and the Bank Of
New York, dated April 1, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(ix) Letter Agreement between Franklin Valuemark Funds
and the Bank Of New York, dated April 22, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(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;
(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
(iii) Letter of Understanding dated April 4, 1996
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 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
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 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 July 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 16 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 as 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.
(e) Franklin Advisory Services, Inc.
Franklin Advisory Services, Inc. ("Franklin New Jersey"), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to the Rising
Dividends Fund. For information please see Part B and Schedules A and D of Form
ADV of Franklin New Jersey (SEC File [801-51967]), incorporated herein by
reference, which set forth the officers and directors of Franklin New Jersey 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.
(f) Franklin Mutual Advisers, Inc.
Franklin Mutual Advisers, Inc. ("Mutual Advisers"), an indirect, wholly owned
subsidiary of Resources, will serve as investment manager to the Mutual
Discovery Growth Fund and the Mutual Series Securities Fund. For information
please see Part B and Schedules A and D of Form ADV of Mutual Advisers (Further
information will be supplied by later amendment.), incorporated herein by
reference, which set forth the officers and directors of Mutual Advisers 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,
Mutual Discovery Securities Fund (Effective November 15, 1996), and Mutual
Shares Securities Fund (effective date November 15, 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 29th day of August, 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: August 29, 1996
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: August 29, 1996
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: August 29, 1996
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: August 29, 1996
LOWELL C. ANDERSON Trustee
Lowell C. Anderson Dated: August 29, 1996
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: August 29, 1996
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: August 29, 1996
DAVID W. GARBELLANO Trustee
David W. Garbellano Dated: August 29, 1996
CHARLES B. JOHNSON Trustee
Charles B. Johnson Dated: August 29, 1996
RUPERT H. JOHNSON Trustee
Rupert H. Johnson Dated: August 29, 1996
*By
/s/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 Attached
behalf of Franklin Rising Dividends, and
Franklin Advisory Services, Inc. dated July
1, 1996
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 Attached
Registrant, on behalf of Small Cap Fund dated
October 11, 1995
EX-99.B5(xii) Business Management Agreement between *
Registrant, on behalf of Development Markets
Fund
EX-99.B5(xiii) Business Management Agreement between Attached
Registrant, on behalf of International
Smaller Companies Fund dated January 18, 1996
EX-99B5(xiv) Investment Management Agreement between *
Registrant, on behalf of International
Smaller Companies Fund dated January 18, 1996
EX-99B5(xv) Management Agreement between Registrant, on *
behalf of Capital Growth Fund dated January
18, 1996
EX-99B5(xvi) Amendment to Management Agreement between Attached
Registrant and Franklin Advisers, Inc. dated
August 1, 1995
EX-99.B8(i) Custodian Agreement between Registrant and *
Bank of America NT & SA dated September 17,
1991
EX-99.B 8(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
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "Agreement") made between the RISING
DIVIDENDS FUND (hereinafter called the "Fund") a series of the Franklin
Valuemark Funds, a Massachusetts business trust (hereinafter called the
"Trust"), and FRANKLIN ADVISORY SERVICES, INC., a Delaware corporation,
(hereinafter called the "Manager").
W I T N E S S E T H
WHEREAS, the Trust is an open-end management investment company, registered
as such under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, and is engaged in the business of
supplying investment advice, investment management and administrative
services, as an independent contractor; and
WHEREAS, the Trust desires to retain the Manager to render advice and
services to the Fund pursuant to the terms and provisions of this
Agreement, and the Manager is interested in furnishing said advice and
services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound
hereby, mutually agree as follows:
l. The Trust hereby employs the Manager and the Manager hereby accepts such
employment, to render investment advice and investment management services
with respect to the assets of the Fund, subject to the supervision and
direction of the Trust's Board of Trustees. The Manager shall, except as
otherwise provided for herein, render or make available all administrative
services needed for the management and operation of the Fund, and shall, as
part of its duties hereunder, (i) furnish the Fund with advice and
recommendations with respect to the investment of the Fund's assets and the
purchase and sale of its portfolio securities, including the taking of such
other steps as may be necessary to implement such advice and
recommendations, (ii) furnish the Fund with reports, statements and other
data on securities, economic conditions and other pertinent subjects which
the Trust's Board of Trustees may request, (iii) furnish such office space
and personnel as is needed by the Fund, and (iv) in general super intend
and manage the investments of the Fund, subject to the ultimate supervision
and direction of the Trust's Board of Trustees.
2. The Manager shall use its best judgment and efforts in rendering the
advice and services to the Fund as contemplated by this Agreement.
3. The Manager shall, for all purposes herein, be deemed to be an
independent contractor, and shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent the Fund in any way,
or in any way be deemed an agent for the Fund. It is expressly understood
and agreed that the services to be rendered by the Manager to the Fund
under the provisions of this Agreement are not to be deemed exclusive, and
the Manager shall be free to render similar or different services to others
so long as its ability to render the services provided for in this
Agreement shall not be impaired thereby.
4. The Manager agrees to use its best efforts in the furnishing of such
advice and recommendations to the Fund, in the preparation of reports and
information, and in the management of the Fund's assets, all pursuant to
this Agreement, and for this purpose the Manager shall, at its own expense,
maintain such staff and employ or retain such personnel and consult with
such other persons as it shall from time to time determine to be necessary
to the performance of its obligations under this Agreement. Without
limiting the generality of the foregoing, the staff and personnel of the
Manager shall be deemed to include persons employed or retained by the
Manager to furnish statistical, research, and other factual information,
advice regarding economic factors and trends, information with respect to
technical and scientific developments, and such other information, advice
and assistance as the Manager may desire and request.
5. The Fund will from time to time furnish to the Manager detailed
statements of the investments and assets of the Fund and information as to
its investment objectives and needs, and will make available to the Manager
such financial reports, proxy statements, legal and other information
relating to its investments as may be in the possession of the Fund or
available to it and such other information as the Manager may reasonably
request.
6. The Manager shall bear and pay the costs of rendering the services to be
performed by it under this Agreement including the fees and costs of any
sub-adviser with which the Manager has contracted. The Fund shall bear and
pay for all other expenses of its operation, including, but not limited to,
expenses incurred in connection with the issuance, registration and
transfer of its shares; fees of its custodian, transfer and shareholder
servicing agent; costs and expenses of pricing and calculating its daily
net asset value and of maintaining its books of account required by the
1940 Act; expenditures in connection with meetings of the Fund's
Shareholders and Board of Trustees, except those called solely to
accommodate the Manager; salaries of officers and fees and expenses of
Board of Trustees or members of any advisory board or committee of the Fund
who are not members of, affiliated with or interested persons of the
Manager; salaries of personnel (who may be employed by the Manager)
involved in placing orders for the execution of the Fund's portfolio
transactions or in maintaining registration of its shares under applicable
securities laws; insurance premiums on property or personnel of the Fund
which inure to its benefit; the cost of preparing and printing reports,
proxy statements, prospectuses and statements of additional information of
the Fund or other communications for distribution to its shareholders;
expenses incurred in the distribution of the Fund's shares pursuant to the
Rule l2b-l Distribution Plan as set forth in section 15 below; legal,
auditing and accounting fees; trade association dues; fees and expenses of
registering and maintaining registration of its shares for sale under
federal and applicable state and foreign securities laws; and all other
charges and costs of its operation plus any extraordinary and non-recurring
expenses, except as herein otherwise prescribed.
7. (a) The Fund agrees to pay to the Manager, and the Manager agrees to
accept, as full compensation for all administrative and investment
management services furnished or provided to the Fund and as full
reimbursement for all expenses assumed by the Manager, a management fee
computed at the rate of 0.75% per annum on the first $500 million of the
average daily net assets of the Fund, 0. 625% per annum on the next $500
million of the average daily net assets of the Fund, and 0.50% per annum on
the average daily net assets of the Fund in excess of $1 billion.
(b) The management fee shall be accrued daily by the Fund and paid to the
Manager on the first business day of the succeeding month. The initial
monthly fee under this Agreement shall be payable on the first business day
of the first month following the effective date of this Agreement. The fee
to the Manager shall be prorated for the portion of any month in which this
Agreement is in effect which is not a complete month according to the
proportion which the number of calendar days in the month during which the
Agreement is in effect bears to the number of calendar days in the month.
If this Agreement is terminated prior to the end of any month, the fee to
the Manager shall be payable within ten (l0) days after the date of
termination.
(c) To the extent that the gross operating costs and expenses of the Fund
(excluding any interest, taxes, brokerage commissions, amortization of
organization expense, and, with the prior written approval of any state
securities commission requiring same, any extraordinary expenses, such as
litigation), exceed the most stringent expense limitation requirements of
the states in which shares of the Fund are qualified for sale, the Manager
shall reimburse the Fund for the amount of such excess.
(d) The Manager may waive any portion of the compensation or reimbursement
of expenses due to it pursuant to this Agreement. Any such waiver shall be
applicable only with respect to the specific items waived and shall not
constitute a waiver of any future compensation or reimbursement due to the
Manager hereunder.
8. The Manager agrees that neither it nor any of its officers or employees
shall take any short position in the shares of the Fund. This prohibition
shall not prevent the purchase of such shares by any of the officers and
directors or bona fide employees of the Manager or any trust, pension,
profit sharing or other benefit plan for such persons or affiliates
thereof, at a price not less than the net asset value thereof at the time
of purchase, as allowed pursuant to rules promulgated under the 1940 Act.
9. Nothing herein contained shall be deemed to require the Fund to take any
action contrary to its Declaration of Trust or By-Laws or any applicable
statute or regulation, or to relieve or deprive the Board of Trustees of
the Trust of its responsibility for and control of the conduct of the
affairs of the Fund.
10. (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 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 Fund
for any and all costs, expenses, and counsel fees reasonably incurred by
the Fund in the preparation, printing and distribution of proxy statements,
amendments to its Registration Statement, the holding of meetings of the
shareholders, or Board of 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 Fund incurs as the result of action or inaction of the Manager or
any of its shareholders where the action or inaction necessitating such
expenditures (i) is directly or indirectly related to any transactions or
proposed transaction in the shares or control of the Manager or its
affiliates (or litigation related to any pending or proposed 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 sole control of the Manager or any of its affiliates or
any of their officers, directors, employees or shareholders. The Manager
shall not be obligated pursuant to the provisions of this Subparagraph
10(b), to reimburse the Fund for any expenditures related to the
institution of an administrative proceeding or civil litigation by the Fund
or a Fund shareholder seeking to recover all or a portion of the proceeds
derived by any shareholder 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 Fund the amount due
for expenses subject to this Subparagraph 10(b) within thirty (30) days
after a bill or statement has been received by the Fund therefor. This
provision shall not be deemed to be a waiver of any claim the Fund may have
or may assert against the Manager or others for costs, expenses, or damages
heretofore incurred by the Fund or for costs, expenses, or damages the Fund
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 officer, director or employee of the
Manager, from liability in violation of Sections 17(h) and (i) of the 1940
Act.
11. This Agreement shall remain in effect for a period of two years from
its effective date, unless sooner terminated as hereinafter provided, and
shall continue in effect thereafter for periods not exceeding one year so
long as such continuation is approved at least annually by (i) the Board of
Trustees of the Trust or by the vote of a majority of the outstanding
voting securities of the Trust, and (ii) the vote of a majority of the
Trustees of the Trust who are not parties to this Agreement or interested
persons thereof, cast in person at a meeting called for the purpose of
voting on such approval.
12. This Agreement may be terminated at any time, without payment of any
penalty, by the Board of Trustees of the Trust or by vote of a majority of
the outstanding voting securities of the Fund, upon sixty (60) days'
written notice to the Manager, and by the Manager upon sixty (60) days'
written notice to the Trust.
13. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the 1940 Act.
14. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged without the affirmative vote or written consent of
the holders of a majority of the outstanding voting securities of the Fund.
15. The provisions set forth in this section number 15 (hereinafter
referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under
the 1940 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.
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 section 7 of this Agreement, (ii) to its Transfer and
Dividend Paying Agents or Custodian, pursuant to the Agreements with each
such party as in effect at any time, and (iii) in payment of any expenses
of the Fund in the ordinary course of business that may be deemed primarily
intended to result in the sale of shares issued by the 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 1940
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 1940 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.
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 the second subparagraph
of this section number 15, 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 of this Agreement only so long as such continuance is
specifically approved at least annually (from the date of this Agreement)
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 with respect to the Fund 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 1940 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 section 15.
16. This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
17. 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.
18. The term "majority of the outstanding voting securities" of the Fund
shall have the meaning as set forth in the 1940 Act.
19. In consideration of the execution of this Agreement, the Manager hereby
grants to the Fund and to the Trust the right to use the name "Franklin" as
part of their names. The Trust agrees that in the event this Agreement is
terminated, the Fund shall immediately take such steps as are necessary to
remove the reference to "Franklin" from its name.
20. The Manager acknowledges that it has received notice of and accepts the
limitations of liability set forth in the Declaration of Trust of the
Trust, and it agrees that the Fund's obligations hereunder shall be limited
to the Fund and the assets of the Fund, and no party shall seek
satisfaction of any such obligation from any shareholder, Trustee, officer,
employee or agent of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 1st day of July, 1996.
FRANKLIN VALUEMARK FUNDS
on behalf of the RISING DIVIDENDS FUND
By:___________________________
/s/Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISORY SERVICES, INC.
By:____________________________
/s/Harmon E. Burns
Executive Vice President
Termination of Agreement
Franklin Valuemark Funds and Franklin Advisers, Inc., hereby agree that the
Management Agreement between them dated January 27, 1992, regarding the
Franklin Rising Dividends Fund, is terminated effective as of the date of
the Management Agreement above.
FRANKLIN VALUEMARK FUNDS
By:___________________________
/s/Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By:_________________________
/s/Harmon E. Burns
Executive Vice President
FRANKLIN VALUEMARK FUNDS
on behalf of SMALL CAP FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN VALUEMARK FUND, a
Massachusetts business trust (the "Trust"), on behalf of SMALL CAP FUND
(the "Fund"), a series of the Trust, and FRANKLIN ADVISERS, INC., a
California corporation, (the "Manager"). This Management Agreement shall
supersede the "Addendum to the Investment Management Agreement by and
between Franklin Valuemark Funds and Franklin Advisers Inc., on behalf of
the Small Cap Fund," dated July 19, 1995.
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 11th day of October, 1995.
FRANKLIN VALUEMARK FUNDS
By:
/s/Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By:
/s/Harmon E. Burns
Executive Vice President
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of January 18, 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:/s/Deborah R. Gatzek
Vice President & Secretary
TEMPLETON INVESTMENT COUNSEL, INC.
By:/s/Martin L. Flanagan
Executive Vice President, COO
AMENDMENT TO MANAGEMENT AGREEMENT
This Amendment dated as of August 1, 1995, is to the Management Agreement
dated January 24, 1989, as amended March 14, 1989, by and between FRANKLIN
VALUEMARK FUNDS, a Massachusetts business trust (the "Trust"), on behalf of
its series now or hereafter subject to the Management Agreement, (the
"Funds"), and FRANKLIN ADVISERS, INC., a California corporation (the
"Manager"). The undersigned parties, intending to be legally bound, hereby
agree as follows:
(1) Paragraph 4 B. is amended to read:
B. The management fee payable by a Fund shall be reduced or eliminated to
the extent that Distributors has actually received cash payments of tender
offer solicitation fees less certain cost and expenses incurred in
connection therewith as set forth in paragraph 2.B.(c) of this Agreement.
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 bound hereunder by the terms
of any publicly announced waiver of its fee, or any limitation of a Fund's
expenses, as if such waiver or limitation were full set forth herein.
(2) All other provisions of the Management Agreement dated January 24,
1989, remain in full force and effect.
IN WITNESS WHEREOF, we have signed this Amendment as of the date and year
first above written.
FRANKLIN VALUEMARK FUNDS
By ______________________
FRANKLIN ADVISERS, INC.
By ______________________