Franklin
Valuemark
Funds
PROSPECTUS May 1, 1997
as supplemented June 1, 1997
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 contains information that investors should know before investing
in these Funds, including the risks associated with investing in each Fund.
Please keep it for future reference. The Trust has a Statement of Additional
Information ("SAI") dated May 1, 1997, which may be amended from time to time.
It contains more information about the Fund's procedures and policies. It has
been filed with the Securities and Exchange Commission and is incorporated by
reference into this prospectus. For a free copy, call 1-800/342-3863 or write
the Trust at the address shown.
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; and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. Government. 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, jurisdiction or country, 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
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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.
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. The Fund may
invest in foreign securities.
Income Securities Fund1,2 seeks to maximize income while maintaining prospects
for capital appreciation by investing primarily in a diversified portfolio of
domestic 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. The Fund may invest in foreign securities.
Mutual Shares Securities Fund ("Mutual Shares Fund")1,2 seeks capital
appreciation, with income as a secondary objective. The Fund invests primarily
in domestic equity securities trading at prices below their intrinsic values.
The Fund may also invest in securities of companies involved in corporate
restructuring, mergers, bankruptcies and liquidations, as well as debt
securities of any quality including "junk bonds," and defaulted securities, 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 primarily in securities of domestic issuers engaged
in the public utilities industry. The Fund may invest in foreign securities.
FUNDS SEEKING CAPITAL GROWTH
Capital Growth Fund ("Growth Fund")1 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, trading at
prices below their intrinsic values. The Fund may also invest in securities of
companies involved in corporate restructuring, mergers, bankruptcies and
liquidations, as well as debt securities of any quality including "junk bonds,"
and defaulted securities, all of which involve increased risks related to the
creditworthiness of their issuers. Foreign investing involves special risks.
Natural Resources Securities Fund ("Natural Resources Fund")1 seeks capital
appreciation with current income as a secondary objective, by concentrating its
investments in securities issued by companies in or related to the natural
resources sector. Prior to May 1, 1997, the Fund was named the Precious Metals
Fund and had different investment objectives and policies.
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.
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, Capital Growth, Developing Markets, Global Growth, Global
Income, Growth and Income, Income Securities, International Equity,
International Smaller Companies, Money Market, Mutual Discovery, Mutual Shares,
Pacific, Natural Resources, 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.............................. 5
INTRODUCTION...................................... 8
GENERAL INVESTMENT
CONSIDERATIONS................................... 8
FUND INVESTMENT OBJECTIVES
AND POLICIES..................................... 9
Stability of Principal and Income ................ 9
Money Market Fund................................ 9
Current Income ................................... 10
High Income Fund ................................ 10
Templeton Global Income Securities Fund ......... 11
U.S. Government Securities Fund.................. 13
Zero Coupon Funds, 2000, 2005, 2010.............. 14
Growth and Income ................................ 16
Growth and Income Fund .......................... 16
Income Securities Fund .......................... 17
Mutual Shares Securities Fund ................... 19
Real Estate Securities Fund ..................... 20
Rising Dividends Fund ........................... 22
Templeton Global Asset Allocation Fund .......... 22
Utility Equity Fund.............................. 24
Capital Growth ................................... 25
Capital Growth Fund ............................. 25
Mutual Discovery Securities Fund ................ 25
Natural Resources Securities Fund
(formerly Precious Metals Fund) ................. 28
Small Cap Fund................................... 29
Templeton Developing
Markets Equity Fund ............................. 31
Templeton Global Growth Fund .................... 32
Templeton International Equity Fund.............. 33
Templeton International
Smaller Companies Fund .......................... 34
Templeton Pacific Growth Fund ................... 35
HIGHLIGHTED RISK
CONSIDERATIONS .................................. 36
Foreign Transactions ............................ 36
General Considerations ......................... 36
Investments in Developing Markets .............. 38
Certain Restrictions ........................... 39
Currency Risks and their Management ............ 39
Interest Rate and Currency Swaps ............... 40
Investments in Depositary Receipts ............. 41
Lower Rated Debt Obligations .................... 42
Defaulted Debt Obligations...................... 43
The Funds' Portfolios........................... 44
Asset Composition Table......................... 44
INVESTMENT METHODS AND
RISKS, COMMON TO MORE
THAN ONE FUND.................................... 44
Borrowing ....................................... 44
Concentration ................................... 45
Convertible Securities........................... 45
Debt Obligations ................................ 46
Corporate Debt Obligations...................... 46
Money Market Instruments........................ 46
U.S. Government Securities .................... 46
Zero Coupon Bonds .............................. 47
Deferred Interest and Pay-in-Kind Bonds ........ 47
Derivatives ..................................... 47
Diversification ................................. 48
Loan Participations ............................. 48
Loans of Portfolio Securities ................... 48
Options and Futures Contracts ................... 48
Portfolio Turnover............................... 49
Repurchase and Reverse
Repurchase Agreements........................... 49
Restricted and Illiquid Securities .............. 49
"Rolls".......................................... 50
Small Capitalization Issuers .................... 50
Structured Notes................................. 51
Temporary Investments ........................... 51
Trade Claims..................................... 51
Warrants ........................................ 52
"When-Issued" and "Delayed
Delivery" Transactions.......................... 52
INVESTMENT RESTRICTIONS........................... 52
MANAGEMENT ....................................... 52
Trustees and Officers ........................... 52
Managers ........................................ 52
Management Services and Fees ................... 53
Portfolio Transactions ......................... 53
Operating Expenses ............................. 53
Subadvisor ...................................... 54
Fund Administrator............................... 54
Portfolio Operations ............................ 54
Biographical Information ........................ 55
PURCHASE, REDEMPTION, AND
EXCHANGE OF SHARES .............................. 60
INCOME DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS ..................... 61
DETERMINATION OF
NET ASSET VALUE ................................. 62
TAX CONSIDERATIONS ............................... 62
HOW THE TRUST MEASURES
PERFORMANCE ..................................... 62
GENERAL INFORMATION............................... 63
Custody of Assets ............................... 63
Distribution Plans .............................. 63
Reports.......................................... 63
Transfer Agent .................................. 63
Voting Privileges and Other Rights .............. 63
APPENDIX ......................................... 64
Description of Bond Ratings...................... 64
Description of Commercial Paper Ratings.......... 65
Financial Highlights
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This table summarizes the financial history of each Fund. The information has
been audited by Coopers & Lybrand L.L.P., the Trust's independent auditors. The
1997 information for the Mutual Discovery and Mutual Shares Funds, however, is
not audited. Coopers & Lybrand's audit report covering each of the most recent
five years, appears in the Trust's annual report for the fiscal year ended
December 31, 1996. The Annual Report to Contractholders includes the Trust's
annual report, as well as more information about each Fund's performance. For a
free copy, please call 1-800-342-3863.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------- ---------------------------------
Distri- Ratio of
Total butions Distri- ExpensesRatio of Net
Net Asset Net Net Realized From From Net butions Net Asset Net Assets to Investment
Year Value at Invest-& Unrealized Invest- Invest- from Total Value at End Average Income Portfolio Average
Ended Beginning ment Gain (Loss) ment ment Capital Distri-at End Total of Year Net to Average TurnoverCommission
Dec.31of Year Income on SecuritiesOperationsIncome Gains butionsof Year Return+(in 000's) Assets Net Assets Rate Rate***
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Growth Fund
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19961 $10.00$ .030 $ 1.330 $ 1.360 $-- $-- $-- $11.36 13.60% $44,667 .77%* .96%* 3.91% .0567
Growth and Income Fund
19892 10.00 .13 .16 .29 -- -- -- 10.29 2.90 17,850 --7 3.78 59.34 --
1990 10.29 .20 (.44) (.24) (.08) -- (.08) 9.97 (2.35) 53,902 .67 3.46 45.08 --
1991 9.97 .12 2.22 2.34 (.20) -- (.20) 12.11 23.63 117,944 .67 2.09 40.43 --
1992 12.11 .08 .72 .80 (.12) -- (.12) 12.79 6.73 231,659 .62 1.44 25.22 --
1993 12.79 .09 1.22 1.31 (.11) -- (.11) 13.99 10.32 371,484 .58 1.00 41.56 --
1994 13.99 .19 (.47) (.28) (.09) (.20) (.29) 13.42 (3.41) 517,877 .54 1.81 99.21 --
1995 13.42 .41 3.91 4.32 (.19) (.41) (.60) 17.14 32.83 889,487 .52 3.30 116.54 --
1996 17.14 .62 1.633 2.253 (.406) (1.437) (1.843) 17.55 14.19 1,077,989 .50 4.06 23.01 .0407
High Income Fund
19892 10.00 .38 (.25) .13 -- -- -- 10.13 1.30 7,513 --7 10.34 2.29 --
1990 10.13 1.00 (1.86) (.86) (.33) -- (.33) 8.94 (8.67) 10,768 .67 12.94 13.95 --
1991 8.94 .78 1.80 2.58 (.90) -- (.90) 10.62 30.15 23,675 .69 11.41 36.67 --
1992 10.62 .38 1.31 1.69 (.54) -- (.54) 11.77 16.21 67,991 .68 9.76 33.36 --
1993 11.77 .37 1.45 1.82 (.46) -- (.46) 13.13 15.71 196,972 .64 8.18 21.06 --
1994 13.13 .88 (1.18) (.30) (.55) (.07) (.62) 12.21 (2.26) 255,036 .60 9.45 22.94 --
1995 12.21 1.06 1.30 2.36 (.91) -- (.91) 13.66 19.76 360,904 .56 9.63 20.65 --
1996 13.66 1.20 .564 1.764 (1.20) (.064) (1.264) 14.16 13.90 446,096 .54 9.63 27.16 --
Income Securities Fund
19892 10.00 .28 .62 .90 -- -- -- 10.90 9.00 16,369 --7 8.63 2.54 --
1990 10.90 .82 (1.62) (.80) (.21) -- (.21) 9.89 (7.42) 30,054 .67 10.39 5.53 --
1991 9.89 .77 3.06 3.83 (.90) -- (.90) 12.82 39.93 61,266 .67 8.91 29.65 --
1992 12.82 .40 1.26 1.66 (.59) (.24) (.83) 13.65 13.20 182,993 .67 7.44 12.59 --
1993 13.65 .33 2.18 2.51 (.31) (.05) (.36) 15.80 18.59 737,942 .56 6.66 10.12 --
1994 15.80 .82 (1.80) (.98) (.44) (.07) (.51) 14.31 (6.27) 1,000,002 .54 7.27 13.33 --
1995 14.31 1.16 1.96 3.12 (.89) (.07) (.96) 16.47 22.40 1,266,538 .51 8.05 33.14 --
1996 16.47 1.32 .438 1.758 (.873) (.145) (1.018) 17.21 11.28 1,350,659 .50 7.96 15.28 .0519
Money Market Fund
19892 1.00 .07 -- .07 (.07) -- (.07) 1.00 7.51 13,731 --7 7.18 -- --
1990 1.00 .07 -- .07 (.07) -- (.07) 1.00 7.62 66,524 .65 7.39 -- --
1991 1.00 .05 -- .05 (.05) -- (.05) 1.00 5.48 68,060 .67 5.43 -- --
1992 1.00 .03 -- .03 (.03) -- (.03) 1.00 3.06 86,907 .69 2.99 -- --
1993 1.00 .03 -- .03 (.03) -- (.03) 1.00 2.54 131,534 . 66 2.53 -- --
1994 1.00 .04 -- .04 (.04) -- (.04) 1.00 3.82 518,618 .467 4.05 -- --
1995 1.00 .06 -- .06 (.06) -- (.06) 1.00 5.74 429,547 .407 5.58 -- --
1996 1.00 .05 -- .05 (.05) -- (.05) 1.00 5.16 408,930 .437 5.04 -- --
Mutual Shares Securities Fund
199610 10.00 .019 .331 .350 -- -- -- 10.35 3.50 27,677 1.00* 2.56* 1.31 .0410
199711 10.35 .024 .046 .070 -- -- -- 10.42 .68 108,337 .86* 2.38* 12.04 .0238
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------- --------------------------------
Distri- Ratio of
Total butions Distri- ExpensesRatio of Net
Net Asset Net Net Realized From From Net butions Net Asset Net Assets to Investment
Year Value at Invest-& Unrealized Invest- Invest- from Total Value at End Average Income Portfolio Average
Ended Beginning ment Gain (Loss) ment ment Capital Distri-at End Total of Year Net to Average TurnoverCommission
Dec.31of Year Income on SecuritiesOperationsIncome Gains butionsof Year Return+(in 000's) Assets Net Assets Rate Rate***
- ------------------------------------------------------------------------------------------------------------------------------------
Mutual Discovery Securities Fund
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
199610 $10.00$ .016 $ .192 $ .210 $-- $-- $-- $10.21 2.10% $ 15,418 1.37%* 2.11%* .14% .0300
199711 10.21 .010 .468 .478 -- -- -- 10.69 4.70% 62,976 .79* 1.09* 7.98 .0501
Natural Resources Fund (formerly the Precious Metals Fund)
19892 10.00 .16 2.22 2.38 -- -- -- 12.38 23.80 2,352 --7 4.46 21.30 --
1990 12.38 .13 (1.84) (1.71) (.08) (.07) (.15) 10.52 (13.97) 10,926 .69 3.25 1.02 --
1991 10.52 .38 .02 .40 (.20) (.01) (.21) 10.71 3.86 9,049 .69 3.20 .25 --
1992 10.71 .10 (1.14) (1.04) (.31) -- (.31) 9.36 (10.13) 13,827 .69 2.23 -- --
1993 9.36 .03 5.16 5.19 (.09) -- (.09) 14.46 55.62 73,575 .68 1.58 .01 --
1994 14.46 .16 (.45) (.29) (.08) -- (.08) 14.09 (2.01) 125,078 .68 1.63 7.66 --
1995 14.09 .22 .111 .331 (.196) (.145) (.341) 14.08 2.35 105,109 .66 1.40 15.66 --
1996 14.08 .15 .436 .586 (.196) (.180) (.376) 14.29 4.00 109,579 .65 1.00 21.77 .0221
Real Estate Securities Fund
19892 10.00 .25 .23 .48 -- -- -- $10.48 4.80 808 --7 6.32 13.24 --
1990 10.48 .48 (1.72) (1.24) (.15) -- (.15) 9.09 (11.98) 1,963 .72 7.66 -- --
1991 9.09 .34 2.67 3.01 (.45) -- (.45) 11.65 33.47 4,810 .74 6.05 7.95 --
1992 11.65 .14 1.24 1.38 (.24) -- (.24) 12.79 12.12 14,859 .69 4.50 2.76 --
1993 12.79 .09 2.33 2.42 (.17) -- (.17) 15.04 19.01 92,678 .67 4.05 5.84 --
1994 15.04 .38 .06 .44 (.17) -- (.17) 15.31 2.89 195,697 .62 4.00 11.73 --
1995 15.31 .78 1.83 2.61 (.52) -- (.52) 17.40 17.53 213,473 .59 4.74 22.15 --
1996 17.40 .789 4.738 5.527 (.777) -- (.777) 22.15 32.82 322,721 .57 4.80 10.32 .0519
Rising Dividends Fund
19923 10.00 .06 .92 .98 -- -- -- 10.98 9.80 97,687 .677* 2.11* 5.22 --
1993 10.98 .14 (.52) (.38) (.03) -- (.03) 10.57 (3.48) 299,730 .79 2.31 13.58 --
1994 10.57 .26 (.69) (.43) (.17) -- (.17) 9.97 (4.08) 309,929 .80 2.71 24.07 --
1995 9.97 .27 2.66 2.93 (.24) -- (.24) 12.66 29.74 463,253 .78 2.72 18.72 --
1996 12.66 .250 2.769 3.019 (.279) -- (.279) 15.40 24.18 597,424 .76 1.96 27.97 .0505
Small Cap Fund
19954 10.00 .03 .21 .24 -- -- -- 10.24 2.30 13,301 .90* 2.70* 16.04 --
1996 10.24 .023 2.941 2.964 (.004) -- (.004) 13.20 28.95 170,969 .77 .63 63.72 .0518
Templeton Developing Markets Equity Fund
19945 10.00 .07 (.51) (.44) -- -- -- 9.56 (4.40) 98,189 1.53* 1.85* 1.15 --
1995 9.56 .09 .18 .27 (.04) (.01) (.05) 9.78 2.77 158,084 1.41 2.01 19.96 --
1996 9.78 .123 1.972 2.095 (.10) (.185) (.285) 11.59 21.59 272,098 1.49 1.68 12.42 .0025
Templeton Global Asset Allocation Fund
19956 10.00 .18 .52 .70 (.18) -- (.18) 10.52 7.01 14,729 .90* 3.84* 30.00 --
1996 10.52 .336 1.749 2.085 (.005) (.010) (.015) 12.59 19.84 56,269 .86 4.21 52.35 .0028
Templeton Global Growth Fund
19945 10.15 .07 .26 .33 -- -- -- 10.48 3.25 158,856 1.14* 2.49* 7.14 --
1995 10.48 .16 1.17 1.33 (.06) -- (.06) 11.75 12.72 338,755 .97 2.46 30.92 --
1996 11.75 .251 2.209 2.46 (.205) (.205) (.410) 13.80 21.28 579,877 .93 2.20 12.32 .0096
Templeton International Equity Fund
19923 10.00 .14 (.38) (.24) -- -- -- 9.76 (2.40) 13,662 1.77* 3.91* 21.78 --
19938 9.76 .18 2.60 2.78 (.04) -- (.04) 12.50 28.56 310,146 1.12 1.58 29.50 --
1994 12.50 .19 (.08) .11 (.03) (.07) (.10) 12.51 .87 785,124 .99 2.17 12.22 --
1995 12.51 .37 .94 1.31 (.22) (.28) (.50) 13.32 10.59 850,117 .92 2.87 16.42 --
1996 13.32 .400 2.575 2.975 (.380) (.465) (.845) 15.45 22.98 1,108,099 .89 3.07 27.52 .0140
Templeton International Smaller Companies Fund
19961 10.00 .091 1.159 1.250 -- -- -- 11.25 12.50 16,255 1.16* 2.51* -- .0031
Templeton Global Income Securities Fund
19892 10.00 .38 .55 .93 -- -- -- 10.93 9.30 3,077 --7 9.81 12.29 --
1990 10.93 .60 .45 1.05 (.20) -- (.20) 11.78 9.83 15,646 .69 10.82 61.52 --
1991 11.78 .42 .99 1.41 (.60) -- (.60) 12.59 12.34 39,265 .69 7.91 130.66 --
1992 12.59 .26 (.30) (.04) (.40) (.15) (.55) 12.00 (.40) 75,062 .67 4.72 92.22 --
1993 12.00 .50 1.47 1.97 (.50) (.16) (.66) 13.31 16.68 206,594 .73 7.56 59.98 --
1994 13.31 .86 (1.52) (.66) (.33) (.13) (.46) 12.19 (4.99) 254,311 .71 7.99 79.38 --
1995 12.19 .29 1.47 1.76 (.49) -- (.49) 13.46 14.68 243,194 .64 7.59 152.89 --
1996 13.46 1.018 .167 1.185 (1.035) -- (1.035) 13.61 9.56 221,722 .61 7.30 140.96 --
Templeton Pacific Growth Fund
19923 10.00 -- (.12) (.12) -- -- -- 9.88 (1.20) 5,788 1.317* -- 8.41 --
1993 9.88 .05 4.68 4.73 -- -- -- 14.61 47.87 215,882 1.14 1.29 12.36 --
1994 14.61 .22 (1.50) (1.28) (.03) (.06) (.09) 13.24 (8.79) 375,832 1.07 2.04 4.29 --
1995 13.24 .33 .71 1.04 (.26) (.11) (.37) 13.91 7.97 331,936 1.01 2.08 36.06 --
1996 13.91 .214 1.331 1.545 (.44) (.255) (.695) 14.76 11.10 356,759 .99 1.51 12.85 .0092
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------- ---------------------------------
Distri- Ratio of
Total butions Distri- ExpensesRatio of Net
Net Asset Net Net Realized From From Net butions Net Asset Net Assets to Investment
Year Value at Invest-& Unrealized Invest- Invest- from Total Value at End Average Income Portfolio Average
Ended Beginning ment Gain (Loss) ment ment Capital Distri-at End Total of Year Net to Average TurnoverCommission
Dec.31of Year Income on SecuritiesOperationsIncome Gains butionsof Year Return+(in 000's) Assets Net Assets Rate Rate***
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19899 $10.00$ .19 $ .35 $ .54 $-- $-- $-- $10.54 5.40% $ 12,116 --%7 7.16%* 1.34% --
1990 10.54 .48 .45 .93 (.11) -- (.11) 11.36 8.92 62,253 .69 8.40 5.15 --
1991 11.36 .41 1.35 1.76 (.40) -- (.40) 12.72 15.93 187,987 .65 7.76 11.69 --
1992 12.72 .52 .44 .96 (.43) (.01) (.44) 13.24 7.69 371,828 .59 7.07 28.64 --
1993 13.24 .50 .77 1.27 (.51) (.08) (.59) 13.92 9.71 684,303 .54 6.06 145.11 --
1994 13.92 .96 (1.59) (.63) (.67) (.05) (.72) 12.57 (4.55) 579,039 .53 6.87 18.25** --
1995 12.57 .93 1.46 2.39 (.96) -- (.96) 14.00 19.46 643,165 .52 6.72 18.68** --
1996 14.00 .750 (.308) .442 (.972) -- (.972) 13.47 3.62 843,858 .51 6.66 12.93** --
Utility Equity Fund
19892 10.00 .17 1.97 2.14 -- -- -- 12.14 21.40 15,151 --7 5.63 4.43 --
1990 12.14 .40 (.18) .22 (.10) -- (.10) 12.26 1.84 77,739 .68 6.53 -- --
1991 12.26 .35 2.60 2.95 (.35) -- (.35) 14.86 24.56 243,626 .63 5.92 2.01 --
1992 14.86 .35 .92 1.27 (.31) -- (.31) 15.82 8.69 667,118 .55 5.18 .13 --
1993 15.82 .38 1.28 1.66 (.34) -- (.34) 17.14 10.54 1,589,634 .51 4.47 4.80 --
1994 17.14 .95 (2.94) (1.99) (.62) (.11) (.73) 14.42 (11.56) 1,155,110 .52 5.58 11.74 --
1995 14.42 .84 3.54 4.38 (.90) -- (.90) 17.90 31.35 1,423,446 .50 5.14 13.27 --
1996 17.90 .910 .285 1.195 (.915) -- (.915) 18.18 7.07 1,202,290 .50 4.20 29.69 .0252
Zero Coupon Fund - 2000
19899 10.00 .21 .87 1.08 -- -- -- 11.08 10.80 2,056 --7 6.75* 158.01 --
1990 11.08 .43 .19 .62 (.13) (.17) (.30) 11.40 5.91 12,314 .377 8.55 180.49 --
1991 11.40 .57 1.67 2.24 (.38) -- (.38) 13.26 20.19 27,699 .257 7.88 19.15 --
1992 13.26 .57 .58 1.15 (.53) -- (.53) 13.88 9.04 48,217 .257 6.97 9.10 --
1993 13.88 .66 1.55 2.21 (.62) (.03) (.65) 15.44 16.15 76,916 .377 5.88 7.02 --
1994 15.44 .68 (1.71) (1.03) (.69) (.10) (.79) 13.62 (6.76) 94,230 .407 6.37 -- --
1995 13.62 .75 2.03 2.78 (.67) -- (.67) 15.73 20.67 137,357 .407 6.14 1.63 --
1996 15.73 .980 (.650) .330 (.861) (.009) (.87) 15.19 2.43 129,601 .407 6.14 .58 --
Zero Coupon Fund - 2005
19899 10.00 .20 1.33 1.53 -- -- -- 11.53 15.30 1,372 --7 7.79* 232.71 --
1990 11.53 .55 (.32) .23 (.14) (.47) (.61) 11.15 2.69 5,151 .387 8.56 164.90 --
1991 11.15 .54 1.65 2.19 (.43) -- (.43) 12.91 20.37 11,299 .257 8.00 4.54 --
1992 12.91 .65 .67 1.32 (.61) -- (.61) 13.62 10.81 18,295 .257 7.46 19.48 --
1993 13.62 .44 2.55 2.99 (.52) (.01) (.53) 16.08 22.21 42,998 .377 5.67 16.59 --
1994 16.08 .71 (2.24) (1.53) (.60) (.19) (.79) 13.76 (9.60) 51,499 .407 6.53 2.00 --
1995 13.76 .78 3.53 4.31 (.69) -- (.69) 17.38 31.76 83,222 .407 6.19 1.72 --
1996 17.38 .958 (1.127) (.169) (.861) -- (.861) 16.35 (0.50) 82,603 .407 6.15 2.06 --
Zero Coupon Fund - 2010
19899 10.00 .17 1.44 1.61 -- -- -- 11.61 16.10 2,387 --7 6.57* 193.14 --
1990 11.61 .59 (.57) .02 (.13) (.25) (.38) 11.25 .57 6,846 .407 8.70 178.75 --
1991 11.25 .56 1.58 2.14 (.55) -- (.55) 12.84 20.09 15,610 .257 8.05 22.44 --
1992 12.84 1.21 .03 1.24 (.73) -- (.73) 13.35 10.31 13,431 .257 7.64 54.50 --
1993 13.35 .50 2.81 3.31 (.94) (.04) (.98) 15.68 25.47 29,189 .257 5.89 36.63 --
1994 15.68 .55 (2.27) (1.72) (.63) (.31) (.94) 13.02 (10.97) 45,361 .407 6.57 4.34 --
1995 13.02 .76 4.75 5.51 (.49) -- (.49) 18.04 42.79 85,633 .407 6.41 31.45 --
1996 18.04 1.024 (1.658) (.634) (.878) (.238) (1.116) 16.29 (2.69) 78,816 .407 6.24 16.10 --
</TABLE>
*Annualized.
**The portfolio turnover rate excludes mortgage dollar roll transactions.
***Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
+Total return measures the change in value of an investment over the periods
indicated. It assumes reinvestment of dividends and capital gains, if any, at
net asset value and is not annualized.
1For the period May 1, 1996 (effective date) to December 31, 1996.
2For the period January 24, 1989 (effective date) to December 31, 1989.
3For the period January 27, 1992 (effective date) to December 31, 1992.
4For the period November 1, 1995 (effective date) to December 31, 1995.
5For the period March 15, 1994 (effective date) to December 31, 1994.
6For the period April 19, 1995 (effective date) to December 31, 1995.
7During the periods indicated Franklin Advisers, Inc., the investment manager,
agreed in advance to waive a portion of its management fees and made payments of
other expenses incurred by the Funds. Had such action not been taken, ratios of
operating expenses to average net assets would have been as follows:
Fiscal Ratio of Expenses to
Fund Name Year Average Net Assets
- --------------------------------------------------------------------------------
Money Market Fund 19892 0.95%
1994 0.54
1995 0.53
1996 0.53
Growth and Income Fund 19892 1.01
Templeton Global Income Securities Fund 19892 1.06
High Income Fund 19892 1.02
Income Securities Fund 19892 1.01
Templeton Pacific Growth Fund 19923 2.57*
Natural Resources Securities Fund
(formerly, Precious Metals Fund) 19892 1.11
Real Estate Securities Fund 19892 1.24
Rising Dividends Fund 19923 0.76*
U.S. Government Securities Fund 19899 0.85*
Utility Equity Fund 19892 1.01
Zero Coupon Fund - 2000 19899 0.93*
1990 0.70
1991 0.68
1992 0.68
1993 0.67
1994 0.66
1995 0.63
1996 0.62
Fiscal Ratio of Expenses to
Fund Name Year Average Net Assets
- --------------------------------------------------------------------------------
Zero Coupon Fund - 2005 19899 1.02*
1990 0.71
1991 0.71
1992 0.69
1993 0.67
1994 0.68
1995 0.66
1996 0.65
Zero Coupon Fund - 2010 19899 0.93*
1990 0.68
1991 0.70
1992 0.69
1993 0.68
1994 0.68
1995 0.66
1996 0.65
8Per share amounts have been calculated using the average shares outstanding
during the period.
9For the period March 13, 1989 (effective date) to December 31, 1989.
10For the period November 8, 1996 (effective date) to December 31, 1996.
11For the period ended March 31, 1997 (unaudited).
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"). 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 by the owners of the Contracts (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 with respect to their investment options.
General Investment Considerations
- --------------------------------------------------------------------------------
Each Fund has one or more investment objectives 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 ("junk bonds"), 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 follows certain procedures required by federal securities laws with
respect to the quality, maturity and diversification of its investments. These
procedures are designed to help maintain a stable $1.00 share price. The Fund
limits its investments to 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 Investments"), 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, PARTICULARLY INDEVELOPINGMARKETS, 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 1996.
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. The Fund may invest up to 10% in foreign securities,
including developing markets, which involve special risks including currency
fluctuations and political uncertainty. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
FOREIGN TRANSACTIONS" AND THE SAI. Under the policies discussed in "Investment
Methods and Risks," "Highlighted Risk Considerations," and the SAI, the Fund may
also 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, and engage in other activities specifically identified for
this Fund.
Templeton Global Income Securities 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 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 1996.
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 federal securities laws, 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 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 diversification purposes under federal securities laws. 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."
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.
Portfolio Investments. 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 mortgage backed securities, adjustable-rate mortgage-backed
securities ("ARMS"), or a hybrid of the two. See "Investment Methods and
Risks-Debt Obligations." Some government agency obligations or guarantees 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.
Government National Mortgage Association. 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.
Adjustable Rate Securities. In addition to ARMS, the Fund may also invest in
adjustable rate U.S. Government securities, which may include securities backed
by other types of assets, including business loans guaranteed by the U.S. Small
Business Administration ("SBA").
The ARMS in which the Fund invests are issued primarily by the Government
National Mortgage Association ("Association"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"),
and are actively traded in the secondary market. The underlying mortgages which
collateralize ARMS issued by the Association are fully guaranteed by the Federal
Housing Administration or the Veterans Administration, while those
collateralizing ARMS issued by the FNMA or the FHLMC are typically conventional
residential mortgages conforming to standard underwriting size and maturity
constraints.
ARMS allow the Fund to participate in increases in interest rates through
periodic adjustments in the coupon rates of the underlying mortgages, resulting
in both higher current yields and lower price fluctuations.
The Fund will not, however, benefit from increases in interest rates to the
extent that interest rates rise to the point where they cause the current coupon
of adjustable rate mortgages held to exceed the maximum annual or lifetime reset
limits (or "cap rates"). Fluctuations in interest rates above these levels could
cause such ARMS to behave more like long-term, fixed-rate debt obligations. See
the SAI for additional details.
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 shares of 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 Fund reserves the right to invest
up to 10% 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 risks including currency
fluctuations and political uncertainty. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
FOREIGN SECURITIES" AND THE SAI.
Structured Notes. Although each Fund reserves the right to invest up to 10%,
each Fund currently does not intend to invest more than 5% of its assets in
certain structured notes. These notes are comparable to zero coupon bonds in
terms of credit quality, interest rate volatility, and yield. 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 although typically the actual amount is substantially less.
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 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. Stocks and other equity securities
representing ownership interests in corporations, have historically outperformed
other asset classes over the long term but tend to fluctuate more dramatically
over the short term.
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, enhanced convertible
securities, 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.
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 20% of
the Fund's total net assets, including ADRs. 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, PARTICULARLYIN DEVELOPING MARKETS, INVOLVE SPECIAL AND ADDITIONAL
RISKS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" AND THE SAI.
Convertible Securities. The Fund may invest in convertible securities. The
convertible debt obligations in which the Fund may invest 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."
REITS. The Fund currently intends to invest no more than 10% of its assets in
equity real estate investment trusts ("REITs"). REITs may provide an attractive
alternative to direct investments in Real Estate, but are subject to risks
related to the skill of their management, changes in value of the properties
owned by the REITs, the quality of any credit extended by the REITs, and other
factors. See "Real Estate Securities Fund."
Other Investment Policies. 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 1996.
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 Depositary 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. Investments in foreign developing markets
involve heightened risks related to the smaller size and lesser liquidity of
these markets. INVESTMENTS IN FOREIGN SECURITIES, PARTICULARLY 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 principal investment objective of the Mutual Shares Securities Fund is
capital appreciation, with income as a secondary objective.
Portfolio Investments. Under normal market conditions, the Fund invests
primarily in domestic 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, consistent with its policy on temporary investments,
until suitable investment opportunities are available.
The Fund also seeks to invest in securities 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. 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 within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("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. Some of the Indebtedness is illiquid.
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 formulaically, 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 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. The purchase of Indebtedness of a troubled company
always involves a risk as to the creditworthiness of the issuer and the
possibility that the investment may be lost. However, 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 LOWER- RATED OR UNRATED, 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 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. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations.
Foreign Investments. Although the Fund reserves the right to purchase securities
in any foreign country without percentage limitation, the Fund's current
investment strategy is to invest primarily in domestic securities, with no more
than 10-15% of its total assets in foreign securities, including sponsored or
unsponsored Depositary Receipts. The Fund presently does not intend to invest
more than 5% of its assets in securities of developing markets, including
Eastern European countries and Russia. 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, and political uncertainty. 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" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) 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 securities and 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.
The Fund will typically invest predominately in securities issued by mid-cap or
smaller cap U.S. companies which have market capitalizations of $5 billion and
$1 billion or less, respectively, because that is reflective of the industry
itself. Small cap companies can be subject to different and greater risks than
mid or larger cap issuers. See "Investment Methods and Risks-Small
Capitalization Issuers."
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. The Fund may invest up to 10% in foreign securities,
including developing markets, which involve special risks including currency
fluctuations and political uncertainty. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
FOREIGN TRANSACTIONS" AND THE SAI. Under the policies discussed in "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 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:
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. This criterion applies only at the time of purchase.
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.
Following these policies, the Fund will typically 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 to a lesser degree in
smaller capitalization companies, which are subject to different and greater
risks. See "Common Investment Objectives and Risks, Smaller Capitalization
Issuers."
Other Investment Policies. The Fund may invest up to 10% in foreign securities,
including developing markets, which involve special risks including currency
fluctuations and political uncertainty. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
FOREIGN TRANSACTIONS" AND THE SAI. Under the policies discussed in "Investment
Methods and Risks," and in the SAI, the Fund may also loan its portfolio
securities, enter into repurchase transactions, write covered call options, 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, equity real estate investment trusts
("REITs"), and securities representing underlying international securities such
as depositary receipts. The Fund may purchase sponsored or unsponsored
depositary 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. Depositary receipts may not necessarily be denominated in the same
currency as the underlying securities 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," "INVESTMENT METHODS AND RISKS,"
THE SAI FOR ADDITIONAL INFORMATION, AND THE "APPENDIX" FOR A DISCUSSION OF THE
RATING CATEGORIES.
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.
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.
Defaulted Debt Obligations. The Fund may invest up to 10% of its assets in
defaulted debt obligations, which may be considered speculative.
Foreign Securities. The Fund has an unlimited right to purchase securities in
any foreign country, developed or emerging, 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. Investments in
foreign developing markets involve heightened risks related to the smaller size
and lesser liquidity of these markets. 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 Depositary Receipts and those of developing
markets issuers. 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.
Investments in foreign developing markets involve heightened risks related to
the smaller size and lesser liquidity of these markets. INVESTMENTS IN FOREIGN
SECURITIES, PARTICULARLYIN 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. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS," "INVESTMENT
METHODS AND RISKS, DEBT OBLIGATIONS," AND "APPENDIX." 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. Stocks and other equity securities representing
ownership interests in corporations have historically outperformed other asset
classes over the long term, but tend to fluctuate more dramatically over the
short term.
The Manager will generally make long-term investments in equity securities which
have been selected based upon fundamental and quantitative analysis. Following
these policies, the Fund will typically 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 to a lesser degree 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."
Foreign Securities. As an operating policy, the Fund currently intends to invest
no more than 15% of its assets in foreign securities, including Depositary
Receipts which involve special risks including currency fluctuations and
political uncertainty. SEE "HIGHLIGHTED RISK CONSIDERATIONS - FOREIGN
TRANSACTIONS" ANDTHESAI.
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. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER
RATED DEBT OBLIGATIONS," "INVESTMENT METHODS AND RISKS, DEBT OBLIGATIONS," AND
"APPENDIX." The Fund may invest in convertible preferred stocks, which 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." 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.
Portfolio Investments. 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.
The Fund also seeks to invest in securities 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. 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 within
the time period contemplated. The Fund may also invest in other forms of secured
or unsecured indebtedness or participations ("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. Some of the Indebtedness is illiquid.
Selection of Portfolio Investments. The Fund's 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 formulaically, 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 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 up to 50% or more of
its total assets in foreign securities, including sponsored or unsponsored
Depositary Receipts. The Fund presently does not intend to invest more than 5%
of its assets in securities of developing markets including Eastern European
countries and Russia. 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 developing markets involve heightened risks related to the smaller size
and lesser liquidity of those markets. 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 to 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 may
invest 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. The purchase of Indebtedness of a troubled company
always involves a risk as to the creditworthiness of the issuer and the
possibility that the investment may be lost. However, 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 LOWER-RATEDORUNRATED, 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 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. Defaulted debt obligations may be considered speculative. See the
discussion above under "Credit Quality" for the circumstances under which the
Fund generally invests in defaulted debt obligations.
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" (i.e., securities which the Fund owns or has
the immediate and unconditional right to acquire at no additional cost) 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 securities and 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.
Natural Resources Securities Fund
Effective May 1, 1997, the Fund's name changed from "Precious Metals Fund" to
"Natural Resources Securities Fund," to reflect the changes approved by
shareholders in the Fund's investment objective, industry concentration policy
and related fundamental and non-fundamental investment policies.
The Natural Resources Securities Fund's investment objective is capital
appreciation with current income as a secondary objective. The Fund seeks to
achieve its objective by concentrating its investments in securities issued by
companies in or related to the natural resources sector.
Portfolio Investments. Under normal market conditions, the Fund will invest
primarily (at least 65% of assets) in securities issued by companies in or
related to the natural resources sector. Companies in the natural resources
sector may own, produce, refine, process or market natural resources, or provide
support services for natural resources companies (e.g., develop technologies or
provide services, supplies or equipment directly related to the production of
natural resources). The natural resources sector includes, but is not limited
to, the following industries: integrated oil; oil and gas exploration and
production; gold and precious metals; steel and iron ore production; aluminum
production; forest products; farming products; paper products; chemicals;
building materials; energy services and technology; environmental services; and
energy generation and distribution.
The Fund may invest in common stocks (including preferred or debt securities
convertible into common stocks), preferred stocks and debt obligations. While
the Fund normally expects to invest primarily in equity securities, the mixture
of common stocks, preferred stocks and debt obligations may vary from time to
time based upon the Manager's assessment as to whether investments in each
category will contribute to meeting the Fund's investment objective.
Risks of Investing in Natural Resources Sector. Due to the Fund's policy of
concentrating its investments in the natural resources sector, 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. In addition, at
the Manager's discretion, the Fund may from time to time invest up to 25% of its
assets in any industry or group of industries within the natural resources
sector; such a strategy may expose the Fund to greater investment risk than a
more diversified strategy within the sector.
Certain of the natural resources industries' commodities are subject to limited
pricing flexibility as a result of similar supply and demand factors. Others are
subject to broad price fluctuations, reflecting the volatility of certain raw
materials' prices and the instability of supplies of other resources. These
factors can affect the overall profitability of an individual company operating
within the natural resources sector. While the Manager may strive to diversify
among the industries within the natural resources sector to reduce this
volatility, there will be occasions where the value of an individual company's
securities will prove more volatile than the broader market. In addition, many
of these companies operate in areas of the world where they are subject to
unstable political environments, currency fluctuations and inflationary
pressures.
Foreign Investments. While the Fund will normally invest a greater percentage of
its assets in securities of U.S. issuers than in securities of issuers in any
other single country, the Fund may invest 50% or more of its assets in foreign
securities, including Depositary Receipts, of issuers in both developed and
developing markets. Foreign securities include both equity securities and debt
obligations.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 developing markets involve heightened risks
related to the smaller size and lesser liquidity of these markets. 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."
Small Cap Investments. The Fund may invest without minimum or maximum limitation
in small capitalization companies ("small cap companies") which have market
capitalizations of $1 billion or less at the time of purchase. These may include
investments in small mining or oil and gas exploration concerns which are
believed to have significant potential for appreciation, but are subject to the
risk that their exploration efforts will not be successful. The Fund will not
invest more than 10% of its assets in securities of companies with less than
three years of continuous operation. Due to these and other factors, small cap
and unseasoned 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, these
stocks may fluctuate independently of larger company stocks. See "Investment
Methods and Risks."
Debt Obligations and Credit Quality. The Fund may invest in debt obligations
issued by domestic or foreign corporations or governments.
The Fund may invest, without percentage limitation, in debt obligations rated as
"investment grade" by Moody's or S&P, or in unrated debt obligations of similar
quality as determined by the Manager. The Fund may also invest up to 15% of its
total assets in debt obligations rated BB or lower by S&P or Ba or lower by
Moody's, so long as they are not rated lower than B by Moody's or S&P, or in
unrated debt obligations of similar quality as determined by the Manager. The
Manager does not currently expect investments in lower rated debt obligations to
exceed 5% of the Fund's assets. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER
RATED DEBT OBLIGATIONS," "INVESTMENT METHODS AND RISKS, DEBT OBLIGATIONS," AND
"APPENDIX."
Other Investment Policies. The Fund may invest up to 35% of its assets in equity
securities or debt obligations of foreign or domestic issuers outside the
natural resources sector, which may include REITs. Some of these issuers may be
in industries related to the natural resources sector and, therefore, may be
subject to similar risks. The Fund may invest up to 5% of its assets in
commodities (including gold bullion or gold coins) or futures on commodities
related to the natural resources sector as defined above. Under the policies
discussed in "Investment Methods and Risks," "Highlighted Risk Considerations,"
and in the SAI, the Fund may also make temporary defensive investments, purchase
debt obligations on a "when-issued" or "delayed delivery" basis, write covered
call options, loan its portfolio securities, enter into repurchase transactions,
borrow money, invest in restricted or illiquid securities, 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. Although the Fund may invest up to 25% of its total assets
in foreign securities, including those of developing market issuers and
sponsored or unsponsored Depositary Receipts, it currently has no intention of
investing more than 15%. 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. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS," "INVESTMENT
METHODS AND RISKS, DEBT OBLIGATIONS," AND "APPENDIX."
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. 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." From time to time, the Fund
may hold significant cash positions until suitable investment opportunities are
available, consistent with its policy on temporary investments.
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 Depositary Receipts such
as American Depositary Receipts, European Depositary Receipts, and Global
Depositary Receipts. Determinations as to eligibility will be made by the
Investment Manager based on publicly available information and inquiries to the
companies. Depositary 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. 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 emerging. 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.
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 developing markets including certain Eastern European
countries and Russia, involve heightened risks related to the smaller size and
lesser liquidity of these markets. 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. 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. Following these
policies, the Fund will typically 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 to a lesser degree in smaller
capitalization companies, which are subject to different and greater risks. See
"Common Investment Objectives and Risks, Smaller Capitalization Issuers."
The Fund has the right to purchase securities in any foreign country, developed
or emerging. Normally, the Fund will invest at least 65% of its total assets in
securities traded in at least three foreign countries. 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. Investments in foreign developing markets including
certain Eastern European countries and Russia, involve heightened risks related
to the smaller size and lesser liquidity of these markets. 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. 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 Depositary Receipts. See "Investment Methods and Risks."
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 emerging. 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. 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. 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. 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 include Australia, China,
Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, the
Philippines, 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.
Although the Fund will not invest more than 25% of its assets in any one
industry or the government of any one country, the Fund may invest more than 25%
of its assets in the securities of issuers in one or more countries. Investors
should consider the greater risk of this policy versus the safety that may come
with an investment that involves a wider range of geographic localities and
countries. In addition, 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 Depositary 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.
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.
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 Funds' 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 Funds 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.
Hong Kong reverted back to the sovereignty of China on July 1, 1997. As with any
major political transfer of power, this could result in political, social,
economic, market or other developments in Hong Kong, China or other countries
that could affect the value of Fund investments.
Certain Restrictions. The U.S. Government Securities Fund does not invest in
foreign securities. The 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. Other Funds may
invest in foreign securities above 10% of their assets, as noted in the
individual fund descriptions.
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 federal securities laws. Consistent with federal securities
laws 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.
The Asset Allocation, Developing Markets, Global Growth, Global Income,
International Equity, International Smaller Companies, Mutual Discovery, Mutual
Shares, Natural Resources 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 any single foreign
country. 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 segregate liquid assets 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 Depositary Receipts. Many securities of foreign issuers are
represented by American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs"), and Global Depositary Receipts ("GDRs") (collectively
"Depositary 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, Depositary Receipts
in registered form are designed for use in the U.S. securities market and
Depositary 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.
Depositary 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 Depositary 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 Depositary Receipts.
Depositary Receipts do not eliminate all the risk inherent in investing in the
securities of foreign issuers. To the extent that a Fund acquires Depositary
Receipts through banks which do not have a contractual relationship with the
foreign issuer of the security underlying the Depositary Receipt to issue and
service such Depositary 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
Depositary 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 future.
A Fund may also invest in debt obligations which are in default or about to
default, where the Manager believes that the debt obligation's price is less
than its intrinsic value, due to a recent or pending restructuring of the issuer
or other factors.
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 imputed 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, 1996, the High Income and Income Securities Funds each held one
position, and the Mutual Shares and Mutual Discovery Funds each held two
positions, 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 dollar weighted average of the respective portfolio
compositions in the fiscal year ended December 31, 1996. No other Fund had a
12-month dollar 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
Moody's Securities Fund
Aaa ....................................... 5.60%
Aa ........................................ 1.02%
A ......................................... 0.00%
Baa ....................................... 3.84%
Ba ........................................ 5.43%
B ......................................... 29.91%
Caa ....................................... 5.17*
Ca ........................................ 0.51%
C ......................................... 0.15%
*1.02% of these securities, which are unrated by Moody's, have been included in
the Caa rating category.
High Global
S&P Income Fund Income Fund
- --------------------------------------------------------------------------------
AAA ........................ 87.25%***
AA+ ........................ 0.0%
AA ......................... 0.0%
A .......................... 0.44%***
BBB+ ....................... 0.386%
BBB ........................ 1.571% 0.24%***
BBB- ....................... 3.923% 0.00%
BB+ ........................ 5.250% 0.00%
BB ......................... 5.909% 12.07%
BB- ........................ 12.161% 0.00%
B+ ......................... 13.441% 0.00%
B .......................... 28.537% 0.00%
B- ......................... 15.020%** 0.00%
CCC+ ....................... 1.695% 0.00%
CCC- ....................... 1.046% 0.00%
CC ......................... .016% 0.00%
**1.971% of these securities, which are unrated by S&P, have been included in
the B- rating category.
***Securities, which are unrated by S&P, have been included as follows: .08%
AAA, .04% in A, and .24% in BBB.
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 331/3% of the value of their respective total
net assets from banks to increase their holdings of portfolio securities or for
temporary purposes.
Under federal securities laws, 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.
Concentration
The Real Estate Fund, Utility Equity Fund, and the Natural Resources Fund will
concentrate in a particular industry or sector, or in U.S. Government
Securities, as indicated in the separate discussions above for each respective
Fund. The other Funds will not invest more than 25% of the value of their
respective total assets in any one particular industry (excluding the U.S.
government).
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.
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 Bonds," below.
U.S. Government Securities include 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. For more information, See "U.S. Government Securities
Fund," above.
Small Business Administration ("SBA") securities are pools of loans to small
businesses which are guaranteed as to principal and interest by the SBA, and
supported by the full faith and credit of the U.S. Government. SBA loans
generally have variable interest rates which are set at a premium above the
prime rate, and generally have no interest rate caps or floors. The terms on SBA
loans currently range from 7 to 25 years at the time of issue. As with
mortgage-backed securities such as GNMAs, prepayments can greatly change
realized yields. While the prepayment rate of mortgage-backed securities has
generally been a function of market interest rates, the prepayment rate of SBA
securities has historically depended more on the purpose and term of the loan
and the rate of borrower default. Shorter-term SBA loans have had the highest
prepayment rates, particularly if the loans were for working capital; long-term,
real-estate backed SBA loans prepay much more slowly. SBA securities are
sometimes offered at a premium above their principal amount, which increases the
risks posed by prepayment.
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."
Zero Coupon 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.
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 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.
Deferred Interest and Pay-In-Kind Bonds. 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
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. This accrued
income from both deferred interest and pay-in-kind bonds 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.
Lower-rated deferred interest and pay-in-kind bonds also share the special
credit risk considerations described under "Zero Coupon Bonds," above.
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; re-securitized government project loans;
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, except the Global Income Fund, will operate as a diversified fund
under federal securities law. 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 addition, each Fund intends to diversify its investments to meet the
requirements under federal tax laws relating to regulated investment companies
and variable contracts issued by insurance companies. In order to comply with
the diversification requirements related to regulated investment companies, each
Fund will limit its investments so that, at the close of each quarter of the
taxable year, (i) 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, and (ii) not more
than 25% of the market value of each Fund's total assets will be invested in the
securities of a single issuer.
In order to comply with the diversification requirements related to variable
contracts issued by insurance companies, 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.
Loan Participations
Certain Funds may acquire loan participations and other direct or indirect bank
obligations ("Loan Participations"), in which a Fund will purchase from a lender
a portion of a larger loan which it has made to a borrower. Generally Loan
Participations 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, however, enable a Fund to acquire an interest in
a loan from a financially strong borrower which it could not do directly. While
Loan Participations generally trade at par value, certain Funds may buy Loan
Participations that sell at a discount because of the borrower's credit
problems. To the extent the borrower's credit problems are resolved, Loan
Participations may appreciate in value. Loan Participations may have speculative
characteristics, and may be illiquid and/or in default.
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 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. The Templeton Global Income Securities Fund's turnover
rate of 140.96% in 1996 was primarily due to bond maturities, and the
rebalancing of the portfolio to keep interest rate risk and country allocations
at desired levels.
The Natural Resources Securities Fund will probably experience higher portfolio
turnover, which may exceed 100%, as the portfolio managers sell precious metals
securities and purchase securities in the broader natural resources sector.
After that, it is not expected that the Natural Resources Securities Fund will
have portfolio turnover exceeding 100%.
Higher portfolio turnover rates generally increase transaction costs, which are
fund expenses, but would not create capital gains for investors because of the
tax-deferred status of variable annuity and variable life insurance investments.
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 upon price and date. The transaction requires the collateralization of
the seller's obligation by U.S. Government Securities held with a custodian of
the Fund, 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 federal securities laws, 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 the 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 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. If permitted by a Fund's investment
policies, 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.
For purchasers such as a Fund, trade claims offer the potential for profits
since they are often purchased at a significantly discounted value and,
consequently, may generate capital appreciation if the value of the claim
increases as the debtor's financial position improves.
If the debtor is able to pay the full obligation on the face of the claim as a
result of a restructuring or an improvement in the debtor's financial condition,
trade claims offer the potential for higher income due to the difference in the
face value of the claim as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debt issuer will ever be able to satisfy the
obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily by
bankruptcy laws. Because trade claims are unsecured, holders may have a lower
priority in terms of payment than most other creditors in a bankruptcy
proceeding.
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 securities and 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 segregate cash or
liquid 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
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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. For a list of these
additional restrictions and more information concerning the policies discussed
above, please see the SAI.
Management
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Trustees and Officers
The Board. The Trust's Board of Trustees oversees the management of the Trust
and elects its officers. The officers are responsible for each Fund's 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. There is no
change in the individuals primarily responsible for the day-to-day operations of
the Fund, and the material terms of the Fund's management agreement with
Franklin New Jersey, including fees, are the same as those of the prior
management agreement with Advisers.
The Manager for the Mutual Discovery and the Mutual Shares Funds is Franklin
Mutual Advisers, Inc. ("Franklin Mutual") 51 John F. Kennedy Parkway, Short
Hills, New Jersey, 07078.
The Manager for the Asset Allocation and Global Growth Funds is Templeton Global
Advisors Limited ("Templeton Nassau") Lyford Cay Nassau, N.P. Bahamas. Templeton
Nassau employs Templeton Florida to act as subadviser to the Asset Allocation
Fund.
The Manager for the Developing Markets Fund is Templeton Asset Management
Ltd.("Templeton Singapore") 7 Temasek Boulevard, # 38-03, Suntec Tower One,
Singapore, 038987.
The Manager for the International Smaller Companies Fund is Templeton Florida.
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 also perform similar
services for other funds. The Managers are wholly owned by Resources, a publicly
owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together the Managers and their affiliates manage
over $179 billion in assets. The Templeton organization has been investing
globally since 1940, with offices in Argentina, Australia, Bahamas, Canada,
France, Germany, Hong Kong, India, Italy, Luxembourg, Poland, Russia, Scotland,
Singapore, South Africa, U.S., and Vietnam. Please see "Investment Management
and Other Services" and "Policies Regarding Brokers Used on Securities
Transactions" in the SAI for information on securities transactions and a
summary of the Trust's Code of Ethics.
Management Services and Fees. The Managers manage each Fund's assets and make
each Fund's investment decisions. Each Fund is obligated to pay a management fee
for these services. Fund Administration fees may be paid directly by the Fund or
indirectly by the Managers through the management fees. See "Fund
Administrator," below.
During the fiscal year ended December 31, 1996, the management and fund
administration fees and total operating expenses, as a percentage of monthly net
assets and before any advance waiver, for each Fund which operated throughout
1996 were as follows:
1996 Manage-
ment and 1996 Total
Fund Adminis-Operating
Fund (Except New Funds) tration Fees Expenses
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Asset Allocation Fund............. .80% .86%
Developing Markets Fund........... 1.25% 1.49%
Global Growth Fund................ .88% .93%
Global Income Fund................ .56% .61%
Government Fund................... .49% .51%
Growth and Income Fund............ .48% .50%
High Income Fund.................. .52% .54%
Income Securities Fund............ .47% .50%
International Equity Fund......... .81% .89%
Natural Resources Fund
(formerly Metals Fund)........... .60% .65%
Money Fund*....................... .51% .53%
Pacific Fund...................... .89% .99%
Real Estate Fund.................. .55% .57%
Rising Dividends Fund............. .75% .76%
Small Cap Fund.................... .75% .77%
Utility Fund...................... .47% .50%
Zero Coupon Fund - 2000**......... .60% .62%
Zero Coupon Fund - 2005**......... .63% .65%
Zero Coupon Fund - 2010**......... .63% .65%
*Under an advance agreement by Advisers to limit its management fees, the Money
Fund paid management and fund administration fees of 0.41% and total operating
expenses of .43%. Advisers may end this arrangement at any time upon notice to
the Board.
**Under an agreement by Advisers to limit its management fees, each Zero Coupon
Fund paid management and fund administration fees of 0.38% and total operating
expenses of 0.40%. In addition, until at least December 31, 1997, Advisers has
voluntarily agreed to keep the total expenses of each Zero Coupon Fund to a
maximum of 0.40%.
The Mutual Discovery and Mutual Shares Funds are each obligated to pay Franklin
Mutual a monthly fee computed at the annual rate of 0.80% and 0.60%
respectively, of the value of the average daily net assets of each Fund. The
Capital Growth Fund is obligated to pay Advisers a monthly fee computed at the
annual rate of 0.75% of the Fund's 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.
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.
Please refer to the SAI for further details regarding management fees.
Portfolio Transactions. Each Manager tries to obtain the best execution on all
transactions. If a Manager believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "Brokerage Allocation" in the SAI for more information.
Operating Expenses. Each Fund pays its own operating expenses. These expenses
include, but may not be limited to: the Managers' management fees; fund
administration fees where they are separate from the management fee; taxes, if
any; custodian, legal, and auditing fees; the 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. Expenses incurred jointly by more than one
Fund will be apportioned on a pro rata basis.
Subadvisor
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 Administrator
Franklin Templeton Services, Inc. ("FT Services"), 777 Mariners Island
Boulevard, San Mateo, California 94404, provides certain administrative
facilities and services for the Funds, including preparation and maintenance of
books and records, preparation of tax reports, preparation of financial reports,
and monitoring compliance with regulatory requirements.
FT Services is employed directly by the Asset Allocation, International Smaller
Companies, Mutual Discovery and Mutual Shares Funds, and through subcontracts by
the Managers of all the other Funds.
Where FT Services is employed directly by a Fund, it 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. Where it is employed through a subcontract with the Manager, the
same fees schedule applies; however, its fees are not separate expenses of the
Fund but are paid by the Manager from the management fees received from the
Fund.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
each Fund's portfolio, other than the Money Fund.
Capital Growth Fund
Conrad B. Herrmann
Vivian J. Palmieri
Kei Yamamoto
Kevin Carrington
Growth and Income Fund
Frank Felicelli
Douglas Barton
Ernst Schleimer
High Income Fund
Betsy Hofman-Schwab
Chris Molumphy
R. Martin Wiskemann
Income Securities Fund
Charles B. Johnson
Matt Avery
Mutual Discovery Securities and
Mutual Shares Securities Funds
Michael F. Price
Peter Langerman
Jeffrey Altman
Robert Friedman
Raymond Garea
Lawrence Sondike
Natural Resources Securities Fund
(formerly Precious Metals Fund)
Suzanne Willoughby Killea
Ed Perks
Real Estate Securities Fund
Matt Avery
Tom Branch
Rising Dividends Fund
Donald G. Taylor
William Lippman
Margaret McGee
Bruce C. Baughman
Small Cap Fund
Edward B. Jamieson
Michael McCarthy
Templeton Developing Markets Equity Fund
J. Mark Mobius, Ph.D.
H. Allan Lam
Tom Wu
Dennis Lim
Eddie Chow
Tek-Khoan Ong
Templeton Global Asset Allocation Fund
Jeffrey A. Everett
Dale A. Winner
Sean Farrington
Templeton Global Growth Fund
Sean Farrington
Jeffrey A. Everett
Mark G. Holowesko
Templeton Global Income Securities Fund
Neil S. Devlin
Thomas J. Dickson
Ronald A. Johnson, Ph.D.
Templeton International Equity Fund
Howard J. Leonard
Mark Beveridge
William Howard
Templeton International Smaller Companies Fund
Simon Rudolph
Peter A. Nori
Templeton Pacific Growth Fund
William T. Howard
Mark Beveridge
Gary Clemons
U.S. Government Securities Fund
Jack Lemein
David Capurro
Roger Bayston
Tony Coffey
Utility Equity Fund
Gregory E. Johnson
Sally Edwards-Haff
Ian Link
Zero Coupon Funds
David Capurro
Jack Lemein
Tony Coffey
Biographical Information
Jeffrey Altman
Senior Vice President
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, an investment adviser acquired by Resources, for at
least 5 years. He joined the Franklin Templeton Group in November 1996 and has
managed the Mutual Discovery Securities Fund and Mutual Shares Securities Fund
from inception.
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 the Franklin Templeton Group 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
the Franklin Templeton Group in July 1988 and has managed the Growth and Income
Fund since May 1995.
Bruce C. Baughman
Vice President and 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 the Franklin Templeton Group 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
the Franklin Templeton Group 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 the
Franklin Templeton Group in 1985 and has managed the International Equity and
Pacific Funds since January 1994.
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 the Franklin Templeton Group in July 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 the Franklin Templeton Group in 1983 and has managed the
Government Fund and the Zero Coupon Funds since inception.
Kevin Carrington
Portfolio Manager
Franklin Advisers, Inc.
Mr. Carrington is a Charter Financial Analyst and holds a Bachelor of Science
degree in business administration from California State University at Chico. He
has been with the Franklin Templeton Group since 1992 and has managed the
Capital Growth Fund from inception.
Eddie Chow
Investment Analyst
Templeton Asset Management Ltd.
Mr. Chow holds a Master of Business Administration degree from the University of
Wisconsin-Milwaukee. Prior to joining the Franklin Templeton Group in, 1994, he
worked for many years in the finance and banking industry. He has managed the
Developing Markets Fund since February 1996.
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 the Franklin Templeton Group
in 1990 and has managed the Pacific Fund since 1994.
T. Anthony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey 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 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 the Franklin
Templeton Group in 1989. He has managed the Zero Coupon Funds since August 1989
and the U.S. Government Securities Fund since 1996.
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
the Franklin Templeton Group 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 the Franklin Templeton
Group in 1992. 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 the Franklin
Templeton Group in 1990, has managed the Global Growth the Asset Allocation
Funds 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 the Franklin Templeton Group 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 degree 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 degree 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 the Franklin Templeton Group since 1986. He has
managed the Growth and Income Fund since May 1995.
Robert Friedman
Senior Vice President
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 November 1996, Mr. Friedman was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and has managed the Mutual Discovery Securities Fund and Mutual
Shares Securities Fund from inception.
Raymond Garea
Senior Vice President
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 from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996 and has managed the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
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 the Franklin Templeton Group since
1989 and prior thereto was Vice President and General Manager of Aquila
Management. He has managed the Capital Growth Fund from inception.
Betsy Hofman-Schwab
Portfolio Manager
Franklin Advisers, Inc.
Ms. Hofman-Schwab is a 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 the Franklin Templeton Group 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 the
Franklin Templeton Group 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 the Franklin Templeton Group, Mr.
Howard was the international portfolio manager and analyst with the State of
Tennessee Consolidated Retirement System. He has managed the Pacific Fund since
1993 and the International Equity Fund since June 1997.
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 the Franklin Templeton Group 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 the Franklin Templeton Group 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 the Franklin
Templeton Group 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 the Franklin Templeton Group, 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.
Suzanne Willoughby Killea
Portfolio Manager
Franklin Advisers, Inc.
Ms. Willoughby 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 the Franklin Templeton Group, in 1991,
Ms. Willoughby 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. Willoughby Killea has managed
the Natural Resources Fund (formerly 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 the Franklin Templeton Group in 1987 and has
managed the Developing Markets Fund from inception.
Peter Langerman
Senior Vice President
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 Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He joined the Franklin Templeton Group in
November 1996 and has managed the Mutual Discovery Securities Fund and Mutual
Shares Securities Fund from inception.
Jack Lemein
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. Mr. Lemein has been in the securities industry since 1967. He is a
member of several securities industry-related committees and associations. Mr.
Lemein joined the Franklin Templeton Group in 1984 and has managed the
Government Fund, and the Zero Coupon Funds since their inception.
Howard J. Leonard
Senior Vice President and Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Leonard is a Chartered Financial Analyst and holds a bachelor of business
administration degree in finance and economics from Temple University. Prior to
joining the Franklin Templeton organization in 1989, Mr. Leonard was director of
investment research at First Pennsylvania Bank. Mr. Leonard has managed the
International Equity Fund since June 1997.
Dennis Lim
Vice President and Portfolio Manager
Templeton Asset Management Ltd.
Mr. Lim holds a Master of Science degree in Management (Finance Analysis), from
the University of Wisconsin-Milwaukee, (Beta Gamma Sigma, Delta Chapter of
Wisconsin). He earned a Bachelor of Science degree in building engineering from
the National University of Singapore. Prior to joining the Franklin Templeton
Group, in 1990, he worked for the Government of Singapore's Ministry of National
Development. He has managed the Developing Markets Fund since February 1996.
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 the
Franklin Templeton Group in 1989, and has managed the Utility Fund since March
1995.
William Lippman
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 the
Franklin Templeton Group 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 the Franklin Templeton Group since
1992. He has managed the Small Cap Fund from inception.
Margaret McGee
Vice President and 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 the Franklin Templeton Group
since 1988. Ms. McGee is a member of several securities industry-related
committees and associations. She has managed the Rising Dividends Fund since
inception.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Asset Management Ltd.
Dr. 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. Dr. Mobius joined the Franklin Templeton Group 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 the Franklin
Templeton Group in 1988 and has managed the High Income Fund since its
inception.
Peter A. Nori
Vice President and Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Nori is a Chartered Financial Analyst and holds both a Master of Business
Administration degree and a Bachelor of Science degree in finance from the
University of San Francisco. After completing the Franklin management training
program, Mr. Nori joined portfolio research in 1990 as an equity analyst and
portfolio manager of the Franklin Convertible Securities Fund. In 1994, Mr. Nori
moved to the Templeton organization and has managed the Templeton International
Smaller Companies Fund since June 1997.
Tek-Khoan Ong
Portfolio Manager
Templeton Asset Management Ltd.
Mr. Ong holds a Masters of Business Administration degree from the Wharton
School, graduating with honors and on the director's list. He earned a Bachelor
of Science degree in computing science and a Bachelor of Science degree, with
honors, both from Imperial College, University of London, UK. Prior to joining
the Franklin Templeton Group, in 1993, he worked for the Monetary Authority of
Singapore (Singapore's central bank)for five years. He has managed the
Developing Markets Fund since February 1996.
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 the Franklin Templeton Group since 1965. Mr. Palmieri has
managed the Capital Growth Fund from inception.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of Franklin
Mutual in November 1996 and has managed the Mutual Discovery Securities Fund and
Mutual Shares Securities Fund from inception.
Simon Rudolph
Vice President and Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Rudolph is a Chartered Accountant and holds a Bachelor of Arts degree in
economic history from Durham University in England. Mr. Rudolph has been a
securities analyst since 1986. Before joining the Franklin Templeton
organization in 1997, he was an executive director with Morgan Stanley. Mr.
Rudolph has managed the International Smaller Companies Fund since June 1997.
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 the Franklin Templeton Group 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
Senior Vice President
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 November 1996, he was a Research Analyst for Heine Securities
Corporation, an investment adviser acquired by Resources, for at least 5 years.
He joined the Franklin Templeton Group in November 1996, and has managed the
Mutual Discovery Securities Fund and Mutual Shares Securities Fund from
inception.
Donald G. Taylor
Portfolio Manager
Franklin Advisory Services, Inc.
Mr. Taylor holds a Bachelor of Science degree in Economics from the Wharton
School of the University of Pennsylvania. Mr. Taylor has been in the securities
industry for over ten years. He joined the Franklin Templeton Group in June 1996
and has managed the Rising Dividends Fund since 1996.
Dale A. Winner
Portfolio Manager
Templeton Global Advisors Limited
Mr. Winner received his LLB from Reading University, England and is currently a
Level II Chartered Financial Analyst candidate. Prior to joining the Franklin
Templeton Group in 1995, Mr. Winner was a Trust Officer at J.P. Morgan, Bahamas
for two years and prior to that he was a credit analyst at Mitsui Trust, London
for five years. He has managed the Asset Allocation Fund since August 1997.
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 the Franklin Templeton Group 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 the Franklin Templeton Group, in 1987,
he was a stockbroker at Vickers da Costa Hong Kong Ltd. He has managed the
Developing Markets Fund from inception.
Kei Yamamoto
Portfolio Manager
Franklin Advisers, Inc.
Ms. Yamamoto is a Chartered Financial Analyst and has a Master of Science degree
and a Bachelor of Science degree in material science and engineering from the
Massachusetts Institute of Technology. Prior to joining the Franklin Templeton
Group in 1994, Ms. Yamamoto worked at Goldman Sachs & Co. as a financial analyst
and at Wasserstein Perella & Co. as an associate and vice president. Ms.
Yamamoto has managed the Capital Growth Fund from inception.
Purchase, Redemption, and Exchange of Shares
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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 serves as an investment vehicle for both variable annuity and variable
life insurance contracts. Therefore, the Trust's Board of Trustees monitors
events in order to identify any material conflicts between variable annuity
contract owners and variable life contract owners and will determine what
action, if any, should be taken in the event of such a conflict. Although the
Trust does not currently foresee any disadvantages to contract owners, an
irreconcilable material conflict may conceivably arise between contract owners
of different separate accounts investing in the Fund due to differences in tax
treatment, the management of investments, or other considerations. If such a
conflict were to occur, one of the Variable Accounts might withdraw its
investment in a Fund. This might force the Fund 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. Shares are purchased by
the Variable Accounts at the net asset value of each respective Fund next
determined after the Fund receives the purchase payment in good order and are
credited to each Sub-Account in the form of full and fractional shares (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.
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 Fund receives the appropriate order from the Variable Accounts.
Payment for redeemed shares will be made within seven days after receipt of the
redemption order in proper form. However, under unusual circumstances, the Trust
may suspend redemptions or postpone payment for more than seven days as
permitted by federal securities law. 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.
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.
Exchanges of Shares
Shares of any one Fund may be exchanged for shares of any other Funds in the
Trust, all of which are described in this Prospectus, subject to the terms of
the Contract 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.
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
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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.
Any distributions made by the Funds will be automatically reinvested in
additional Shares of that Fund. Dividends or distributions by the Funds will
reduce the per share net asset value by the per share amount so paid.
Determination of Net Asset Value
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The net asset value per share of each Fund is determined as of the scheduled
close of the New York Stock Exchange generally 4:00 p.m., Eastern time. To
calculate the Net Asset Value per share of each Fund, the assets of each Fund
are valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding. The assets in each
Fund's portfolio are valued as described under "Additional Information Regarding
Valuation and Redemption of Shares of the Funds" in the SAI.
Tax Considerations
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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 known 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 Natural Resources 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.
How the Trust Measures Performance
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Advertisements, sales literature, hypothetical personalized illustrations, and
communications with Contract Owners and others may cite a Fund's performance
calculated on a total return, current yield or current distribution rate basis.
Total return figures show the change in value of a hypothetical past investment
as a percentage of the investment, assuming any dividends and capital gains are
reinvested. Total return figures will indicate the time periods used, whether
figures are cumulative or annualized and whether the effects of sales charges
are included. Current yield for each Fund (except the Money Fund) shows the an
annualization of income per share earned by that Fund over a recent 30 day
period, and is shown as a percentage of the investment. The current distribution
rate for a Fund (other than the Money Fund) is usually computed by annualizing
the dividends paid per share during the most recent preceding fiscal quarter and
dividing that amount by the net asset value at the end of the period. Unlike
current yield, the current distribution rate may include income distributions
from sources other than dividends and interest received by each Fund.
Performance data will include uniformly computed performance figures for
comparative purposes.
From time to time, the Money Fund may advertise its current and effective yield.
The Money Fund's current yield refers to an annualization of the income
generated by an investment over a stated seven-day period, and is shown as a
percentage of the investment. The Money Fund's effective yield is calculated
similarly but, when annualized, the income earned is assumed to be reinvested.
The effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
Each Fund's investment results will vary. Performance figures are always based
on past performance and do not indicate future results. Hypothetical performance
information may also be prepared for sales literature or advertisements. For
additional information, see the SAI "How the Trust Measures Performance" and the
appropriate insurance company separate account prospectus and 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 and State Street Bank serve as custodian. The Chase Manhattan Bank
currently serves as custodian for the Asset Allocation, Developing Markets,
Global Growth and International Smaller Companies Funds. State Street Bank and
Trust Company serves as the custodian of the Mutual Discovery and Mutual Shares
Funds.
Distribution Plans
Each Fund's management agreement includes a distribution or "Rule 12b-1" plan
(the "Plan"). 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, a wholly-owned subsidiary of Franklin
Resources, Inc. and a transfer agent 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 voting rights and vote separately (from other
Funds in the Trust) as to issues affecting that Fund, or the Trust, unless
otherwise permitted. The Trust has noncumulative voting rights. This gives
holders of more than 50% of the shares voting the ability to elect all of the
Trustees. If this happens, holders of the remaining shares voting will not be
able to elect any Trustees. The Trust does not intend to hold annual shareholder
meetings. It may hold a special meeting, however, for matters requiring
shareholder approval. A meeting may also be called by the trustees, at their
discretion, or by shareholders holding at least 10% of the outstanding shares of
any Fund. The Trust is required to help a shareholder communicate with other
shareholders in connection with removing trustees. 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
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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.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings 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.
