AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1997.
File Nos.
33-23493
811-5583
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 23
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24
FRANKLIN VALUEMARK FUNDS
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:(415) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on [date] pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on [date] pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered: Shares of Beneficial Interest:
Franklin Valuemark Funds
No filing fee is due because and indefinite number of shares is deemed to
have been registered in reliance in Section 24(f) of the Investment Company
Act of 1940.
FRANKLIN VALUEMARK FUNDS
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Summary of Fund Objectives";
"Introduction"; "General Investment
Considerations"; "Fund Investment
Objectives and Policies"; "Highlighted
Risk Considerations"; "Investment
Methods and Risks Common to More than
One Fund"; "Investment Restrictions";
"General Information"
5. Management of the Fund "Management Services and Fees"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "Income Dividends and Capital Gains
Securities Distributions Distributions"; "Tax
Considerations"; "General Information"
7. Purchase of Securities "Purchase, Redemption, and Exchange of
Being Offered Shares"; "Determination of Net Asset
Value"
8. Redemption or Repurchase "Purchase, Redemption, and Exchange of
Shares"; "How the Trust Measures
Performance"; "General Information"
9. Pending Legal Proceedings Not Applicable
FRANKLIN VALUEMARK FUNDS
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information "Introduction, (See also "Introduction";
and History and "General Information" in the
Prospectus)"; "Additional Information"
13. Fund Investment "Fund Investment Objectives and Policies"
Objectives and "Highlighted Risk Considerations";
Policies "Investment Methods and Risks Common to
More Than One Fund"; "Fundamental Investment
Restrictions"; "Non- Fundamental Investment
Restrictions"; (See also "Fund Investment
Objectives and Policies"; "Highlighted Risk
Considerations"; "Investment Methods and
Risks Common to More Than One Fund" in the
Prospectus)
14. Management of the Fund "Officers and Trustees"
15. Control Persons and "Officers and Trustees"
Principal Holders of
Securities
16. Investment Advisory "Investment Management and Other
and Other Services Services", (See also "Management" in the
Prospectus)"; "Additional Information"
17. Brokerage Allocation "Policies Regarding Brokers Used on
Securities Transactions"
18. Capital Stock and "Introduction"; (See also "Introduction"
Other Securities and "General Information" in the
Prospectus)
19. Purchase, Redemption "Additional Information Regarding
and Pricing of Valuation and Redemption of Shares of the
Securities Being Funds"; (See also "Purchase Redemption
Offered and Exchange of Shares" and
"Determination of Net Asset Value" in the
Prospectus)
20. Tax Status "Additional Information" (See also "Tax
Considerations" in the Prospectus)
21. Underwriters Not Applicable
22. Calculation of "How the Trust Measures Performance"
Performance Data
23. Financial Statements Financial Statements
Franklin Valuemark Funds
PROSPECTUS
May 1, 1998
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-five separate
investment portfolios or funds (each a "Portfolio" or "Portfolios"), each of
which has different investment objectives. Shares of the Portfolios 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 Portfolios 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 Portfolios.
This Prospectus contains information that investors should know before
investing in these Portfolios, including the risks associated with investing
in each Portfolio. Please keep it for future reference. The Trust has a
Statement of Additional Information ("SAI") dated May 1, 1998, which may be
amended from time to time. It contains more information about the Portfolio'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.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES OR
INSURANCE COMMISSION HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Shares of the Portfolios 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 Portfolios 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 PORTFOLIO OBJECTIVES
PORTFOLIO SEEKING STABILITY OF PRINCIPAL AND INCOME
Money Market Fund ("Money Fund")1 seeks high current income, consistent with
capital preservation and liquidity. The Portfolio will pursue its objective
by investing exclusively in high quality money market instruments. An
investment in the Money Fund is neither insured nor guaranteed by the U.S.
Government. The Portfolio attempts to maintain a stable net asset value of
$1.00 per share, although no assurances can be given that the Portfolio will
be able to do so.
PORTFOLIOS 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 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 lower rated
debt obligations (commonly referred to as "junk bonds"), and related currency
transactions. Investing in a non-diversified portfolio 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 Portfolios may not be appropriate for
short-term investors or those who intend to withdraw money before the
maturity date.
PORTFOLIOS SEEKING GROWTH AND INCOME
Global Utilities Securities Fund ("Global Utility Fund")1 seeks both capital
appreciation and current income by investing primarily in securities of
issuers engaged in the public utilities industry. The Portfolio may invest in
securities of issuers in any nation, including nations with developing
markets. Foreign investing involves special risks. Prior to May 1, 1998, the
Portfolio was named the Utility Equity Fund and invested primarily in
securities of domestic issuers in the public utility industry.
Growth and Income Fund1 seeks capital appreciation, with current income
return as a secondary objective, by investing primarily in U.S. common
stocks. The Portfolio 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 lower rated obligations (commonly referred to as "junk
bonds") which involve increased risks related to the creditworthiness of
their issuers. The Portfolio may invest in foreign securities.
Mutual Shares Securities Fund ("Mutual Shares Fund")1,2 seeks capital
appreciation, with income as a secondary objective. The Portfolio invests
primarily in domestic equity securities trading at prices below their
intrinsic values. The Portfolio 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 Portfolio 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 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.
Value Securities Fund ("Value Fund")1 seeks long-term total return. The
Portfolio invests primarily in equity securities, including common stocks and
securities convertible into common stocks.
PORTFOLIOS SEEKING CAPITAL GROWTH
Capital Growth Fund ("Growth Fund")1 seeks capital appreciation, with current
income as a secondary consideration. The Portfolio invests primarily in
equity securities, including common stocks and securities convertible into
common stocks.
Global Health Care Securities Fund ("Global Health Care Fund")1 seeks capital
appreciation, by concentrating its investments in equity securities issued by
health care companies located throughout the world. Foreign investing
involves special risks. Mutual Discovery Securities Fund ("Mutual Discovery
Fund")1,2 seeks capital appreciation. The Portfolio invests primarily in
domestic and foreign equity securities, including securities of small
capitalization companies, trading at prices below their intrinsic values. The
Portfolio 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 Portfolio was named the
Precious Metals Fund and had different investment objectives and policies.
Small Cap Fund1 seeks long-term capital growth. The Portfolio seeks to
accomplish its objective by investing primarily in equity securities of small
capitalization growth companies. The Portfolio may also invest in foreign
securities, including those of developing markets issuers. Because of the
Portfolio's investments in small capitalization companies, an investment in
the Portfolio may involve greater risks and higher volatility.
Templeton Developing Markets Equity Fund ("Developing Markets Fund")1 seeks
long-term capital appreciation. The Portfolio seeks to achieve this objective
by investing primarily in equities of issuers in countries having developing
markets. The Portfolio is subject to the heightened foreign securities
investment risks that accompany foreign developing markets and an investment
in the Portfolio may be considered speculative.
Templeton Global Growth Fund ("Global Growth Fund")1 seeks long-term capital
growth. The Portfolio 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 Portfolio'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 Portfolio 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 Portfolio 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 Portfolio may be considered
speculative.
1The Asset Allocation, Capital Growth, Developing Markets, Global Growth,
Global Health Care, Global Income, Global Utility, Growth and Income, Income
Securities, International Equity, International Smaller Companies, Money
Market, Mutual Discovery, Mutual Shares, Pacific, Natural Resources, Small
Cap and Value Funds may invest more than 10% of their total 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 total 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
Portfolios in light of the securities in which they invest. See "Highlighted
Risk Considerations, Lower Rated Debt Obligations."
Table of Contents
Contents Page
FINANCIAL HIGHLIGHTS
INTRODUCTION
GENERAL INVESTMENT
CONSIDERATIONS
PORTFOLIO INVESTMENT OBJECTIVES
AND POLICIES
Stability of Principal and Income
Money Market Fund
Current Income
High Income Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Funds, 2000, 2005, 2010
Growth and Income
Global Utilities Securities Fund
(formerly Utility Equity Fund)
Growth and Income Fund
Income Securities Fund
Mutual Shares Securities Fund
Real Estate Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
Value Securities Fund
Capital Growth
Capital Growth Fund
Global Health Care Securities Fund
Mutual Discovery Securities Fund
Natural Resources Securities Fund (formerly Precious Metals Fund)
Small Cap Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton International
Smaller Companies Fund
Templeton Pacific Growth Fund
HIGHLIGHTED RISK
CONSIDERATIONS
Foreign Transactions
General Considerations
Investments in Developing Markets
Certain Restrictions
Currency Risks and their Management
Interest Rate and Currency Swaps
Investments in Depositary Receipts
Lower Rated Debt Obligations
Defaulted Debt Obligations
The Portfolios' Investments
Asset Composition Table
INVESTMENT METHODS AND
RISKS, COMMON TO MORE
THAN ONE PORTFOLIO
Borrowing
Concentration
Convertible Securities
Debt Obligations
Corporate Debt Obligations
Money Market Instruments
U.S. Government Securities
Zero Coupon Bonds
Deferred Interest and Pay-in-Kind Bonds
Derivatives
Diversification
Loan Participations
Loans of Portfolio Securities
Options and Futures Contracts
Portfolio Turnover
Repurchase and Reverse
Repurchase Agreements
Restricted and Illiquid Securities
"Rolls"
Small Capitalization Issuers
Structured Notes
Temporary Investments
Trade Claims
Warrants
"When-Issued" and "Delayed
Delivery" Transactions
INVESTMENT RESTRICTIONS
MANAGEMENT
Trustees and Officers
Managers
Management Services and Fees
Portfolio Transactions
Operating Expenses
Subadvisor
Portfolio Administrator
Portfolio Operations
Biographical Information
PURCHASE, REDEMPTION, AND
EXCHANGE OF SHARES
INCOME DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS
DETERMINATION OF
NET ASSET VALUE
TAX CONSIDERATIONS
HOW THE TRUST MEASURES PERFORMANCE
GENERAL INFORMATION
Custody of Assets
Distribution Plans
Reports
Transfer Agent
Voting Privileges and Other Rights
APPENDIX
Description of Bond Ratings
Description of Commercial Paper Ratings
Financial Highlights
[financial information for 1997 to be included]
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-five separate investment portfolios or
funds (each a "Portfolio" or "Portfolios"), each of which is, in effect, a
separate mutual fund. The Trust issues a separate series of shares of
beneficial interest for each Portfolio. An investor, by investing in a
Portfolio, 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 Portfolio. Likewise, an investor shares pro rata in any
losses on the investments of that Portfolio.
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 Portfolios, as directed by the owners of the Contracts
(collectively the "Contract Owners"). Some of the current Portfolios 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 Portfolios and any applicable limitations with
respect to their investment options.
General Investment Considerations
Each Portfolio 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 Portfolio will achieve its
investment objective or objectives. The investment objective or objectives of
each Portfolio 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 Portfolio alone to be a complete
investment program and should evaluate each Portfolio in relation to their
personal financial situation, goals, and tolerance for risk. All of the
Portfolios 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 Portfolio 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 Portfolios.
The different types of securities, investments, and investment techniques
used by each Portfolio 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 Portfolios 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 Portfolio
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 Portfolio is invested
or changes in currency valuations may also affect the price of shares of a
Portfolio. 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 Portfolios below, an
investment in certain of the Portfolios 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 Portfolio 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 and refer to total assets, unless otherwise specified. Each of the
Portfolios will not necessarily use the strategies described to the full
extent permitted unless the Managers believe that doing so will help a
Portfolio reach its objectives, and not all instruments or strategies will be
used at all times. In the event of a corporate restructuring or bankruptcy
reorganization of an issuer whose securities are owned by a Portfolio, the
Portfolio 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, convertible securities or even conceivably real estate.
The Portfolio 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. Portfolio Investment Objectives and Policies
PORTFOLIO 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 Portfolio) as is consistent with capital preservation and liquidity.
The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio will limit its investments to high quality securities,
it will experience generally lower yields than if the Portfolio 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 Portfolio"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 the Appendix for an
explanation of ratings by S&P and Moody's.
PORTFOLIO MATURITY. All instruments in which the Portfolio invests will
mature within 397 calendar days or less of the time that they are acquired.
The average maturity of the Portfolio's 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 Portfolio 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 Portfolio may invest up to 25% of its assets in
obligations of foreign branches of U.S. or foreign banks. The Portfolio'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. INVESTMENTS IN FOREIGN SECURITIES, PARTICULARLY IN
DEVELOPING MARKETS, 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 Portfolio 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 Portfolio will not invest more than 5% of its 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 Portfolio may exceed that limit as permitted by SEC rules for a
period of up to three business days; and the Portfolio will not invest (a)
the greater of 1% of the Portfolio's 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 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 Portfolio 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
Portfolio.
PORTFOLIOS 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 Portfolio seeks
capital appreciation to the extent consistent with its principal objective.
SELECTION OF PORTFOLIO SECURITIES. The Portfolio 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. Yield and expected return are the primary criteria
the Portfolio uses in selecting securities.
In the event of a corporate restructuring or bankruptcy reorganization of an
issuer whose securities are owned by the Portfolio, the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 PORTFOLIO'S POLICY OF INVESTING IN
HIGHER YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE PORTFOLIO
IS ACCOMPANIED BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT
IN HIGHER RATED, LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS
CONSIDERING THE PORTFOLIO SHOULD EVALUATE THEIR OVERALL INVESTMENT GOALS AND
TOLERANCE FOR RISK.
It is the Portfolio's current intention not to invest more than 5% in 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 Portfolio 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 Portfolio will not purchase issues
that are in default. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT
OBLIGATIONS," "INVESTMENT METHODS AND RISKS," 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 Portfolio during 1997.
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 Portfolio is changed by the
rating service or the obligation goes into default, such event will be
considered by the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio'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 Portfolio's holdings and thus the value of the
Portfolio's shares.
FOREIGN INVESTMENTS. The Portfolio may invest up to 20% in foreign
securities, including those of developing market issuers. The Portfolio'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 SECURITIES, PARTICULARLY IN
DEVELOPING MARKETS, INVOLVE SPECIAL AND ADDITIONAL RISKS. SEE "HIGHLIGHTED
RISK CONSIDERATIONS, FOREIGN TRANSACTIONS" and the SAI.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Investment
Methods and Risks," "Highlighted Risk Considerations," and the SAI, the
Portfolio 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, invest in restricted
securities, invest in trade claims which carry a high degree of risk, and
engage in other activities specifically identified for this Portfolio.
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 Portfolio 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 Portfolio's objectives. As a global
Portfolio, it may invest in securities issued in any currency and may hold
foreign currencies. The Manager intends to manage the Portfolio'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 Portfolio 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 Portfolio will have at least 25% of its
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 Portfolio
may be less secure than those of U.S. government issuers.
The Portfolio 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 Portfolio 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
Portfolio 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 Portfolio 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 issuerIs 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 30% of
the Portfolio's net assets. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED
DEBT OBLIGATIONS," "INVESTMENT METHODS AND RISKS," 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 Portfolio during 1997.
COUNTRIES OF PRINCIPAL INVESTMENT. Under normal circumstances, at least 65%
of the Portfolio'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 Portfolio 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 Portfolio'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 Portfolio may also invest a substantial portion of its
assets in securities and currency in developing market 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 Portfolio may invest in debt obligations with varying
maturities. Under current market conditions, it is expected that the
dollar-weighted average maturity of the Portfolio's debt obligations
investments will not exceed 15 years. Generally, the average maturity of the
Portfolio'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 Portfolio 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 Portfolio,"
"Highlighted Risk Considerations," and in the SAI, the Portfolio 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 Portfolio.
RISKS AND OTHER CONSIDERATIONS RELATED TO NON-DIVERSIFICATION. The Portfolio
is non-diversified under federal securities laws, but is still subject to the
diversification requirements under the federal tax code and the 25% limit on
concentration of investments in a single industry. The federal tax code
requires that with respect to 50% of total assets, not more than 5% of total
assets will be invested in the securities of a single issuer. Of course, the
more flexible and less restrictive diversification standards for
non-diversified portfolios may at times be important to the Portfolio'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 Portfolio 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 Portfolio's investments and its share price. The
risks of investing in foreign securities could also be magnified. 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio, 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 Portfolio 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 Portfolio. 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 Portfolio will have a direct impact on the net
asset value per share of the Portfolio.
ADJUSTABLE RATE SECURITIES. In addition to ARMS, the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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. The Portfolio may also invest in certain other
types of pass-through debt instruments, issued or guaranteed by U.S.
government agencies or instrumentalities. Under the policies discussed in
"Investment Methods and Risks" and in the SAI, the Portfolio may enter into
covered mortgage "dollar rolls," loan portfolio securities, engage in
repurchase agreements, and engage in other activities specifically identified
for this Portfolio.
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 Portfolio 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 Portfolio 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 Portfolio, 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 Portfolio 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
Portfolio 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 Portfolios' 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 Portfolio must meet annuity tax
diversification rules, the Portfolio 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 portfolio 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
Portfolio's Target Date, the Portfolio will be converted to cash and an
investor may invest in another of the Trust's Portfolios. 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 Portfolio 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 Portfolio. However, the net asset value
of a Portfolio's shares increases or decreases with changes in the market
value of that Portfolio'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 Portfolio will normally decline more
in price than interest-paying securities of similar maturity. Price
fluctuations are expected to be greatest in the longer-maturity Portfolios
and are expected to diminish as a Portfolio 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 Portfolio, an investor
may experience a significantly different investment return than was
anticipated at the time of purchase.
The Portfolios' Manager will attempt to maintain the average duration of each
Portfolio to within twelve months of the Portfolio'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 portfolio seeks to
invest the proceeds from a matured obligation. Since each Portfolio 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
Portfolio's average duration within twelve months of the Portfolio's Target
Date and thereby reduce its unknown reinvestment risk. As a portfolio
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 Portfolio reserves the right to
invest up to 10% of its assets in obligations or securities of foreign
issuers, each Portfolio 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 TRANSACTIONS" and the SAI.
STRUCTURED NOTES. Although each Portfolio reserves the right to invest up to
10%, each Portfolio 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 Portfolio'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 Portfolios 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 Portfolios.
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 Portfolios 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
Portfolios 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 Portfolio may have to
generate the required cash from interest earned on non-zero coupon securities
or possibly from the disposition of zero coupon securities.
PORTFOLIOS SEEKING GROWTH AND INCOME
Global Utilities Securities Fund
EFFECTIVE MAY 1, 1998, THE PORTFOLIO'S NAME CHANGED FORM "UTILITY EQUITY
FUND" TO "GLOBAL UTILITIES SECURITIES FUND," AND THE PORTFOLIO BECAME
AUTHORIZED TO INVEST WITHOUT LIMIT IN FOREIGN SECURITIES. THE PORTFOLIO'S
INVESTMENT OBJECTIVES AND OTHER POLICIES AND RESTRICTIONS DID NOT CHANGE.
WHEN REVIEWING THEIR INVESTMENTS OR CONSIDERING NEW PURCHASES OR TRANSFERS TO
THE PORTFOLIO, CONTRACT OWNERS MAY WISH TO TAKE THESE UPCOMING CHANGES INTO
ACCOUNT AND TO CONSULT WITH THEIR INVESTMENT REPRESENTATIVES.
The investment objectives of the Global Utilities Securities Fund are to seek
both capital appreciation and current income. The Portfolio pursues its
objective by concentrating its investments in the securities of public
utilities companies of any nation.
PORTFOLIO INVESTMENTS. The Portfolio pursues its objectives by investing,
under normal conditions, at least 65% of the Portfolio's assets in securities
of issuers engaged in the public utilities industry. The public utilities
industry includes companies which are, in the Manager's opinion, engaged in
the ownership or operation or manufacture of facilities, equipment or
components used to generate, transmit or distribute electricity, telephone
communications, cable and internet services, wireless telecommunications, gas
or water. The Portfolio will normally invest in common stocks which are
expected to yield dividends.
The Portfolio may invest in stocks and debt obligations of companies of any
nation, developed or developing. The Portfolio will normally invest at least
65% of its assets in issuers domiciled in at least three different countries,
one of which may be the U.S. Under normal circumstances, the Portfolio is
expected to invest a higher percentage of its assets in U.S. securities than
in the securities of issuers located in any other single country. The
Portfolio's Manager believes that a global utilities portfolio may benefit
from a wider selection of investment opportunities and greater
diversification than a portfolio which invests primarily in securities of
domestic utility companies.
The Portfolio will typically invest predominantly in equity securities issued
by large-capitalization or mid-capitalization 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 Portfolio's assets in such securities. SEE "COMMON INVESTMENT
OBJECTIVES AND RISKS, SMALL CAPITALIZATION ISSUERS."
RISKS OF FOREIGN INVESTING. Foreign securities involve greater risks than
similar domestic securities due to currency fluctuations, market volatility,
and economic, social, and political uncertainty. Investments in foreign
developing markets involve heightened risks related to the smaller size and
lesser liquidity of these markets. However, as a non-fundamental policy, the
Portfolio will limit its investments in securities of Russian issuers to 5%
of assets. INVESTMENTS IN FOREIGN SECURITIES, PARTICULARLY IN DEVELOPING
MARKETS, INVOLVE SPECIAL AND ADDITIONAL RISKS WHICH ARE DISCUSSED IN THE
PROSPECTUS UNDER "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" and
the SAI.
RISKS ASSOCIATED WITH UTILITIES INVESTMENTS. Utility companies in the U.S.
and in foreign countries have generally been subject to substantial
government regulations. Major changes in government policies, ranging from
increased regulation or expropriation to deregulation, privatization or
increased competition, may dramatically increase or reduce opportunities for
companies in these industries. For example, while certain companies may
develop more profitable opportunities, others may be forced to defend their
core businesses and may be less profitable. Electric utility companies have
historically been subject to price regulation, risks associated with
increases in fuel and other operating costs, difficulty in obtaining natural
gas for resale, declines in the prices of alternative fuels, high interest
costs on borrowings or reduced ability to borrow particularly during
inflationary periods, costs associated with compliance with environmental,
nuclear facility and other safety regulations and changes in the regulatory
climate, and general effects of energy conservation. Increased scrutiny of
electric utilities might result in higher costs and higher capital
expenditures, with the risk that regulators may disallow inclusion of these
costs in rate authorizations. Alternatively, increased competition in some
areas, while permitting many companies to expand, may reduce or limit the
prices the utility companies can charge. Gas transmission and distribution
companies continue to undergo significant changes as well. Many companies
have diversified into oil and gas exploration and development, making returns
more sensitive to energy prices. The water supply industry is highly
fragmented due to local ownership. Generally, these companies are more mature
and expect little or no per capita volume growth. Increasing competition due
to past regulatory changes in the telephone communications industry continues
and, whereas certain companies have benefited, many companies may be
adversely affected in the future. The cable television industry is regulated
in most countries and, although such companies typically have a local
monopoly, emerging technologies and pro-competitive legislation are combining
to threaten these monopolies and could change the future outlook. The
wireless telecommunications and internet service industries and certain
equipment and component manufacturing businesses, may be in early
developmental stages and predominantly characterized by emerging, rapidly
growing companies, or be subject to risks related to rapidly changing
technology. Securities of new or unseasoned companies, or companies in new,
emerging or rapidly changing industries, may present greatere risks than
securities of larger, more established companies. SEE "INVESTMENT METHODS
AND RISKS, SMALL CAP ISSUERS" and the SAI for more information. Finally, many
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, these 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.
INDUSTRY CONCENTRATION RISK. Because the Portfolio concentrates its
investments in a limited group of related industries, it may be more
susceptible to adverse developments in those industries and thus present
greater risk than a portfolio with greater industry diversification.
OTHER INVESTMENT POLICIES. The Portfolio 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 Portfolio
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 THE APPENDIX. The
Portfolio currently intends to invest no more than 5% of its assets in
preferred stocks or convertible preferred stocks issued by public utility
issuers. Subject to these limits, the Portfolio may invest up to 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 Portfolio may also write covered call options, loan its portfolio
securities, enter into repurchase transactions, and engage in other
activities specifically identified for this Portfolio.
Growth and Income Fund
The principal investment objective of the Growth and Income Fund is capital
appreciation. The Portfolio's secondary objective is to provide current
income return.
PORTFOLIO INVESTMENTS. The Portfolio pursues capital appreciation by
investing in securities the Manager believes have the potential to increase
in value. The Portfolio 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 Portfolio'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 Portfolio 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
Portfolio. In pursuing its secondary objective of current income, the
Portfolio 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 Portfolio
is to generally invest in undervalued issues believed to have attractive
long-term growth prospects. The Portfolio'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 Portfolio's Manager hopes to
identify undervalued stocks, in pursuit of the Portfolio'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 Portfolio's relative yield strategy, the Portfolio generally
restricts its investment to stocks which, in the opinion of the Manager,
yield 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 Portfolio employs other valuation methods
including, but not limited to, quantitative and fundamental analysis. This
strategy generally results in the Portfolio investing predominantly in mid-
and larger capitalization issuers.
FOREIGN INVESTMENTS. Although the Portfolio reserves the right to invest up
to 30% of its assets in foreign securities not publicly traded in the U.S.,
the Portfolio's current investment strategy is to limit such investments to
no more than 20% of the Portfolio's assets, including ADRs. The Portfolio'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, PARTICULARLY IN DEVELOPING
MARKETS, INVOLVE SPECIAL AND ADDITIONAL RISKS. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS" and the SAI.
REITS. The Portfolio currently intends to invest no more than 15% 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. Although the Portfolio may invest in convertible
securities, it currently does not intend to invest more than 10% of its
assets in such securities which may carry special risks as described below.
In addition, the Portfolio 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 Portfolio 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 Portfolio.
Income Securities Fund
The investment objective of the Income Securities Fund is to maximize income
while maintaining prospects for capital appreciation.
PORTFOLIO INVESTMENTS. The Portfolio 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 Portfolio 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 Portfolio might be invested in
debt obligations or, conversely, in common stocks. As a fundamental policy,
however, the Portfolio will not concentrate its investments in a single
industry in excess of 25% of its assets.
Certain of the high yield obligations in which the Portfolio 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). 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 Portfolio 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 PORTFOLIO'S POLICY OF INVESTING IN
HIGHER YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE PORTFOLIO
IS ACCOMPANIED BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT
IN HIGHER RATED, LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS
CONSIDERING THE PORTFOLIO SHOULD EVALUATE THEIR OVERALL INVESTMENT GOALS AND
TOLERANCE FOR RISK.
Currently, however, the Portfolio 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 Portfolio 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," 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 Portfolio during 1997.
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 Portfolio is changed by the
rating service or the obligation goes into default, such event will be
considered by the Portfolio 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 Portfolio's investments at any
particular time may consist of lower rated debt obligations, individual
developments affecting the issuer, among other things, will likely have an
increased effect on the market value of the Portfolio's holdings and thus the
value of the Portfolio's shares.
DEFAULTED DEBT OBLIGATIONS. The Portfolio may invest up to 5% of its assets
in defaulted debt obligations which may be considered speculative.
FOREIGN INVESTMENTS. The Portfolio may invest up to 25% of its assets in
foreign securities not publicly traded in the U.S., including those of
developing markets issuers. The Portfolio may also invest in sponsored or
unsponsored American Depositary Receipts. The Portfolio'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 TRANSACTIONS"
and the SAI.
OTHER INVESTMENT POLICIES. The Portfolio 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 Portfolio 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
Portfolio.
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 Portfolio 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 Portfolio may invest in securities from any
size issuer, including smaller capitalization companies, which may be subject
to different and greater risks. SEE "INVESTMENT METHODS AND RISKS, SMALL
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 Portfolio may hold significant cash positions, consistent with its
policy on temporary investments, until suitable investment opportunities are
available.
The Portfolio 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 Portfolio 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 Portfolio's investment will be
consummated or will be consummated on the terms and within the time period
contemplated. The Portfolio 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 Portfolio'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 Portfolio.
The Portfolio 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
Portfolio may benefit, the Manager may itself seek to influence or control
management or may cause the Portfolio to 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
Portfolio 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 Portfolio 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 PORTFOLIO'S POLICY OF INVESTING IN LOWER-RATED OR UNRATED, HIGHER RISK
DEBT OBLIGATIONS, AN INVESTMENT IN THE PORTFOLIO IS ACCOMPANIED BY A HIGHER
DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED
OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE PORTFOLIO SHOULD EVALUATE
THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS" AND THE APPENDIX.
DEFAULTED DEBT OBLIGATIONS. The Portfolio may invest without limit in
defaulted debt obligations, subject to the Portfolio'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 Portfolio generally invests in defaulted
debt obligations.
FOREIGN INVESTMENTS. Although the Portfolio reserves the right to purchase
securities in any foreign country without percentage limitation, the
Portfolio's current investment strategy is to invest primarily in domestic
securities, with no more than 10-15% of its assets in foreign securities,
including sponsored or unsponsored Depositary Receipts. The Portfolio
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 Portfolio's
investments in foreign securities involve risks related to currency
fluctuations, and political uncertainty. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS" BELOW AND IN THE SAI.
CURRENCY TECHNIQUES. The Portfolio 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 Portfolio 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 Portfolio
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 Portfolio 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 Portfolio can profit if the price decreases. The Portfolio may
also sell securities "short against the box" (i.e., securities which the
Portfolio 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 Portfolio 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 Portfolio.
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 Portfolio 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
Portfolio's assets will be invested in "real estate securities," (defined
below), primarily equity real estate investment trusts ("REITs"). The
Portfolio will generally invest in real estate securities of companies listed
on a securities exchange or traded over-the-counter. As used by the
Portfolio, 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 having at least 50% of their assets related to, or deriving at
least 50% of their revenues from, the ownership, construction, management or
other services, or sale of residential, commercial or industrial real estate.
Such companies would include real estate operating companies, real estate
services and home builders.
The Portfolio 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 REITs can be subject to different and greater
risks than mid or larger cap issuers. Small cap REITs may have greater
regional concentration and less diversification in terms of the regions,
clients and types of properties available for investment.
RISKS RELATED TO CONCENTRATION. The Portfolio may invest more than 25% of its
total assets in any sector of the real estate industry described above. The
Portfolio'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 Portfolio's concentration in the real estate industry, adverse
developments in that industry will have a greater impact on the Portfolio,
and consequently shareholders, than a Portfolio with broader diversification.
Special considerations to an investment in the Portfolio 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 REIT management team's skill, may not
be diversified, and are subject to the risks of financing projects. The
Portfolio could conceivably own real estate directly as a result of a default
on debt obligations it may own. Changes in prevailing interest rates also may
inversely affect the value of the debt obligations in which the Portfolio
will invest.
The Portfolio's Manager believes, however, that diversification of the
Portfolio's assets into different types of real estate investments will help
mitigate, although it cannot eliminate, the inherent risks of such industry
concentration. Moreover, there has historically been a low correlation
between the real estate market and the broader equity market. While there can
be no guarantee that historical trends will continue in the future,
investments in real estate securities may be a useful way of diversifying
one's overall portfolio.
REAL ESTATE RELATED INVESTMENTS. In addition to the Portfolio's investments
in real estate securities, as defined above, the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio
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 Portfolio.
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 Portfolio invests with a long-term
investment horizon. Preservation of capital, while not an objective, is also
an important consideration.
SELECTION OF PORTFOLIO INVESTMENTS. The Portfolio 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. As a fundamental policy, under normal market conditions,
at least 65% of the Portfolio is 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 Portfolio'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 Portfolio'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 Portfolio. 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 Portfolio 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 but significant degree in smaller capitalization companies, which are
subject to different and greater risks. SEE "INVESTMENT METHODS AND RISKS,
SMALL CAPITALIZATION ISSUERS."
OTHER INVESTMENT POLICIES. The Portfolio 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 Portfolio
may also loan its portfolio securities, enter into repurchase transactions,
write covered call options, and engage in other activities specifically
identified for this Portfolio.
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
Portfolio'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
Portfolio may invest.
The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio'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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio will
not invest more than 25% of its 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 Portfolio and its shareholders.
MONEY MARKET INSTRUMENTS. The Portfolio may invest in Money Market
Instruments. In addition, the Portfolio 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 Portfolio 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 Portfolio may invest up to 10% of its assets
in defaulted debt obligations, which may be considered speculative.
FOREIGN SECURITIES. The Portfolio 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 Portfolio will
limit its investments in securities of Russian issuers to 5% of assets. The
Portfolio'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 Portfolio 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
Portfolio 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 Portfolio.
Value Securities Fund
The investment objective of the Value Securities Fund is long-term total
return. Income, though not an objective, is a secondary consideration.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Portfolio will
invest at least 65% of its assets in companies of various sizes including
small capitalization companies ("small cap companies"), which in the opinion
of its Manager, are selling substantially below the underlying value of their
assets or their private market value. Private market value is what a
sophisticated investor would pay for the entire company. In determining
whether to buy or hold securities, the Manager will consider a variety of
factors, including: low price to earnings ratio relative to the market,
industry group or earnings growth; low price relative to book value or cash
flow; valuable franchises, patents, trademarks, trade names, distribution
channels, or market share for particular products or services, tax loss
carryforwards, or other intangibles that may not be reflected in stock
prices; ownership of understated or underutilized tangible assets such as
land, timber or minerals; underutilized cash or investment assets; and
unusually high current income. These criteria and others, alone and in
combination, may identify companies that are attractive to financial or
strategic acquirers (i.e. takeover candidates), or companies that have
suffered sharp price declines but in the Manager's opinion, still have
significant potential ("fallen angels"). Purchases may include companies in
cyclical businesses, turnarounds and companies emerging from bankruptcy.
Purchase decisions may also be influenced by company stock buy-backs and its
insiders' purchases and sales. The securities in which the Portfolio may
invest include common and preferred stocks, securities convertible into
common stocks, warrants, secured and unsecured bonds, and notes. The
Portfolio may, from time to time, hold significant cash positions until
suitable investment opportunities meeting its value standards become
available, consistent with its policy on temporary investments. RISKS
ASSOCIATED WITH VALUE INVESTING. Securities of a company may be undervalued
as a result of overreaction by investors to unfavorable news about a company,
an industry, or the stock market in general, or as a result of a market
decline, poor economic conditions, tax-loss selling or actual or anticipated
unfavorable developments affecting a company. Often these companies are
attempting to recover from business setbacks or adverse events (turnarounds),
cyclical downturns, or in certain cases, bankruptcy. There can be no
assurance that such companies or their stocks will recover from these events
in a timely manner or at all. Cyclical stocks in which the Portfolio may
invest tend to increase in value more quickly during economic upturns than
noncyclical stocks, but also tend to lose value more quickly in economic
downturns. As with all investments, there is always the possibility when
investing in these securities that the Manager may be incorrect in its
assessment of a particular industry or company, or that the Manager may not
buy these securities at their lowest possible prices or sell them at their
highest.
SMALL CAP INVESTMENTS. The Portfolio may invest without minimum or maximum
limitation in small cap companies which have market capitalizations of $1
billion or less at the time of purchase. 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
Portfolio may invest are often not well known, may often trade at a discount
and may not be followed by research organizations. 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 therefore,
speculative. In addition, small cap companies may fluctuate independently of
larger company stocks. SEE "INVESTMENT METHODS AND RISKS."
FOREIGN INVESTMENTS. Although the Portfolio may invest up to 25% of its
assets in foreign securities, including those of developing market issuers
and sponsored or unsponsored Depository Receipts, it currently has no
intention of investing more than 15% of its assets in such securities. The
Portfolio presently does not intend to invest more than 5% of its assets in
developing markets securities. The Portfolio's investment 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 ADDITIONAL RISKS. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" below and in the SAI.
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible securities.
The convertible debt obligations in which the Portfolio may invest are
subject to the same rating criteria and investment policies as the
Portfolio'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
Portfolio 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."
HIGH YIELD SECURITIES. The Portfolio may invest up to 25% of its assets in
debt obligations rated below BBB or lower by S&P or Baa by Moody's, or in
unrated debt obligations of similar quality as determined by the Manager.
Such securities, sometimes called "junk bonds," are regarded 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,
involve special risks. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT
OBLIGATIONS" and the APPENDIX.
RISKS AND OTHER CONSIDERATIONS RELATED TO NON-DIVERSIFICATION. The Portfolio
is non-diversified under federal securities laws, but is still subject to the
diversification requirements under the federal tax code and the 25% limit on
concentration of investments in a single industry. The federal tax code
requires that with respect to 50% of total assets, not more than 5% of total
assets will be invested in the securities of a single issuer. Because the
Portfolio is non-diversified, the value of the Portfolio's shares may
fluctuate more widely than those of a diversified Portfolio, and the
Portfolio may present greater risk than other investments. SEE "INVESTMENT
METHODS AND RISKS."
OTHER INVESTMENT POLICIES. The Portfolio 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 Portfolio
can profit if the price decreases. The Portfolio may also sell securities
"short against the box" (i.e. securities which the Portfolio 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 Portfolio may also loan its portfolio
securities; invest in zero coupon securities, pay-in-kind bonds, structured
notes, mortgage-backed and asset-backed securities; purchase loan
participations and trade claims both of which carry a high degree of risk;
purchase and sell exchange-listed and over-the-counter put and call options
on securities and financial indices; purchase and sell futures contracts or
related options with respect to securities and indices; invest in restricted
or illiquid securities; and engage in other activities specifically
identified for this Portfolio.
PORTFOLIOS 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 Portfolio 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 Portfolio's assets may be invested in shares
of common or capital stock traded on any national securities exchange or
over-the-counter, and in convertible securities. The Portfolio may also keep
a significant portion of its assets in cash from time to time. 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 Portfolio 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 Portfolio's assets in such securities. SEE "INVESTMENT
OBJECTIVES AND RISKS, SMALL CAPITALIZATION ISSUERS."
TECHNOLOGY COMPANIES. Consistent with its investment objective, the Portfolio
expects to have a portion of its assets invested in securities of companies
involved in computing technologies or computing technology-related companies.
The technology sector as a whole has historically been volatile and issues
from this sector tend to be subject to abrupt or erratic price movements. The
Portfolio seeks to reduce such risks through extensive research, and emphasis
on more globally-competitive companies. FOREIGN SECURITIES. As an operating
policy, the Portfolio currently intends to invest no more than 15% of its
assets in foreign securities, including Depositary Receipts and those of
developing market issuers. The Portfolio's investments in foreign securities
involve risks related to currency fluctuations and political uncertainty.
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 TRANSACTIONS"
and the SAI.
OTHER INVESTMENTS. The Portfolio 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 THE APPENDIX. The Portfolio 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 CONSIDERATIONS" and "INVESTMENT
METHODS AND RISKS." Under the policies discussed in "Investment Methods and
Risks" and in the SAI, the Portfolio 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 Portfolio.
Global Health Care Securities Fund
The investment objective of the Global Health Care Securities Fund is capital
appreciation. The Portfolio seeks to achieve its objective by concentrating
its investments in the securities of health care companies located throughout
the world.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Portfolio will
invest at least 70% of its assets in equity securities, including common
stocks, preferred stocks, securities convertible into common stocks, rights
and warrants, of health care companies. A "health care" company is one that
derives at least 50% of its earnings or revenues from, or has devoted at
least 50% of its assets to, health care activities, based upon the company's
most recently reported fiscal year. Health care activities include research,
development, production or distribution of products and services in
industries such as pharmaceutical, biotechnology, health care facilities,
medical supplies, medical technology, managed care companies, health care
related information systems and personal health care products.
The outlook for the Portfolio is to be in a position to benefit from
potential future technological advances and increasing worldwide demand in
the health care sector. Many major developments in health care come from
foreign companies. Thus, in the opinion of the Manager, a portfolio of global
health care company securities may provide greater potential for investment
participation in present and future opportunities that may present themselves
in health care related industries. The Manager also believes that the U.S.
health care industry may be subject to increasing regulation and government
control. By investing in foreign, as well as U.S., health care companies, the
Manager believes that the Portfolio will be able to minimize the impact of
U.S. government regulation on its portfolio. By investing in multiple
countries, the risk of a single government's actions on the portfolio is also
reduced.
RISKS OF INVESTING IN THE HEALTH CARE INDUSTRY. Due to the Portfolio's policy
of concentrating its investments in the health care industry, the Portfolio's
shares may be subject to greater risk of adverse developments in that
industry than an investment in a Portfolio which invests its assets across a
broader spectrum of industries. Specifically, the activities of health care
companies may be funded or subsidized by federal and state governments and a
discontinuance of such subsidization could adversely affect their
profitability. Securities held by the Portfolio may be affected by government
policies on health care reimbursements, regulatory approval for new drugs and
medical instruments, and other similar matters. Health care companies are
also subject to the risk of a legislative reform of the health care system.
Health care companies may face product liability lawsuits and their products
and services are subject to rapid obsolescence. THE PORTFOLIO MAY NOT BE
APPROPRIATE FOR SHORT-TERM INVESTORS, AND IS NOT INTENDED TO BE A COMPLETE
INVESTMENT PROGRAM.
SMALL CAP INVESTMENTS. The Portfolio may invest a substantial portion of its
assets in companies which have market capitalizations of $1 billion or less
at the time of purchase ("small cap companies"). These may include
investments in relatively new or unseasoned companies in their early stages
of development or in new and emerging industries which are believed to have
above average potential for rapid growth. 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, these stocks may fluctuate independently of larger company
stocks. SEE "INVESTMENT METHODS AND RISKS, SMALL CAPITALIZATION ISSUERS."
FOREIGN INVESTMENTS. The Portfolio will mix its investments globally by
investing at least 70% of its assets in securities of issuers in at least
three different countries including the U.S. Such investments may include
issuers located in developed and developing countries. The Portfolio will not
invest more than 40% of its net assets in any one country (other than the
U.S.). From time to time, the Portfolio may invest a significant portion of
its assets in securities of U.S. issuers, which may fluctuate independently
from comparable foreign securities. As a global Portfolio, it may invest in
securities issued in any currency and may hold currency, as well as buy
sponsored or unsponsored Depository Receipts. The Portfolio currently does
not intend to invest more than 5% of its assets in securities of developing
markets including Eastern European countries and Russia. The Portfolio'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 THE SUBSTANTIAL RISKS INVOLVED IN
INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN
DEVELOPING MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN
TRANSACTIONS" below and in the SAI.
RISKS AND OTHER CONSIDERATIONS RELATED TO NON-DIVERSIFICATION. The Portfolio
is non-diversified under federal securities laws, but is still subject to the
diversification requirements under the federal tax code and the 25% limit on
concentration of investments in a single industry. The federal tax code
requires that with respect to 50% of total assets, not more than 5% of total
assets will be invested in the securities of a single issuer. Because the
Portfolio is non-diversified, the value of the Portfolio's shares may
fluctuate more widely than those of a diversified Portfolio, and the
Portfolio may present greater risk than other investments. SEE "INVESTMENT
METHODS AND RISKS."
DEBT OBLIGATIONS AND CREDIT QUALITY. The Portfolio may invest up to 30% of
its assets in debt obligations issued by domestic or foreign corporations or
governments. To the extent the Portfolio invests in debt securities, changes
in interest rates in any country where the Portfolio is invested will affect
the value of the Portfolio and its share price. The Fund will invest in debt
securities rated B or above by Moody's or S&P, or in unrated securities that
are of similar quality. Securities rated below BBB are considered to be below
investment grade and the Manager does not currently expect investments in
such 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 the APPENDIX.
OTHER INVESTMENT POLICIES. The Fund may engage in short sale transactions, in
which the Fund sells a security it does not own to a purchaser at a specified
price. 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. See
the SAI for further details concerning short sales. Under the policies
discussed in "Investments Methods and Risks," "Highlighted Risk
Considerations," and in the SAI, the Fund may also make temporary defensive
investments; 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; enter into repurchase or reverse
repurchase agreements; enter into foreign currency exchange contracts; borrow
money; 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 Portfolio 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 Portfolio can invest in securities from any
size issuer, and may from time to time invest a substantial portion of its
assets in securities of smaller 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 Portfolio 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 Portfolio may hold significant cash
positions until suitable investment opportunities are available, consistent
with its policy on temporary investments.
The Portfolio 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 Portfolio 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 Portfolio's investment will be
consummated or will be consummated on the terms and within the time period
contemplated. The Portfolio 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 Portfolio'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 Portfolio.
The Portfolio 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
Portfolio may benefit, the Manager may itself seek to influence or control
management or may cause the Portfolio to 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 Portfolio may purchase securities in any foreign
country, developed or undeveloped, and currently expects to invest up to 50%
or more of its assets in foreign securities, including sponsored or
unsponsored Depositary Receipts. The Portfolio 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 Portfolio'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 TRANSACTIONS" BELOW AND IN THE SAI.
CURRENCY TECHNIQUES. The Portfolio 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
Portfolio 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
Portfolio 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 Portfolio 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 PORTFOLIO'S POLICY OF INVESTING IN LOWER-RATEDORUNRATED, HIGHER RISK
DEBT OBLIGATIONS, AN INVESTMENT IN THE PORTFOLIO IS ACCOMPANIED BY A HIGHER
DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED
OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE PORTFOLIO SHOULD EVALUATE
THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS" and the APPENDIX.
DEFAULTED DEBT OBLIGATIONS. The Portfolio may invest without limit in
defaulted debt obligations, subject to the Portfolio'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 Portfolio generally invests in defaulted
debt obligations.
OTHER INVESTMENT POLICIES. While the Portfolio 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 Portfolio
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 Portfolio 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 Portfolio can profit if the price decreases. The Portfolio may
also sell securities "short against the box" (i.e., securities which the
Portfolio 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 Portfolio 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 Portfolio.
Natural Resources Securities Fund
Effective May 1, 1997, the Portfolio's name changed from "Precious Metals
Fund" to "Natural Resources Securities Fund," to reflect the changes approved
by shareholders in the Portfolio'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 Portfolio
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 Portfolio 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 related to
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 Portfolio may invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
obligations. While the Portfolio 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
Portfolio's investment objective.
SELECTION OF PORTFOLIO INVESTMENTS. The Portfolio's Manager searches for
companies that will prosper throughout economic cycles. In searching for such
companies, the manager tends to focus on what it believes are highly
profitable companies with skilled management, strong growth profiles and
solid financials, as well as companies with sustainable advantages either
through strategic asset bases or technological expertise. As with all
investments, there is always the possibility that the Manager may be
incorrect in its assessment of securities selected or that the issuing
companies may not perform as expected. RISKS OF INVESTING IN NATURAL
RESOURCES SECTOR. Due to the Portfolio's policy of concentrating its
investments in the natural resources sector, the Portfolio's shares may be
subject to greater risk of adverse developments in those industries than an
investment in a Portfolio with greater industry diversification. In addition,
at the Manager's discretion, the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio'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 Portfolio 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 Portfolio 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 Portfolio may invest in debt
obligations issued by domestic or foreign corporations or governments.
The Portfolio 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 Portfolio may also
invest up to 15% of its 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 Portfolio's assets. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS," "INVESTMENT
METHODS AND RISKS, DEBT OBLIGATIONS," AND THE APPENDIX.
OTHER INVESTMENT POLICIES. The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio.
Small Cap Fund
The investment objective of the Small Cap Fund is long-term capital growth.
The Portfolio 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 Portfolio will
invest at least 65% of its 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 Portfolio's investment and, in the opinion of the Portfolio'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 Portfolio will not invest more than 10% of its assets in securities
issued by companies with less than three years of continuous operation.
The Portfolio 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 Portfolio 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
Portfolio and recommend appropriate action to the Board of Trustees of the
Trust if it appears that this goal will not be attainable under the
Portfolio'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 Portfolio 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 Portfolio 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
Portfolio 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 Portfolio 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
PORTFOLIO MAY NOT BE APPROPRIATE FOR SHORT-TERM INVESTORS, AND AN INVESTMENT
IN THE PORTFOLIO SHOULD NOT BE CONSIDERED A COMPLETE INVESTMENT PROGRAM.
FOREIGN INVESTMENTS. Although the Portfolio may invest up to 25% of its
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 Portfolio presently does not intend
to invest more than 5% of its assets in developing markets securities. The
Portfolio'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 TRANSACTIONS" below and in the SAI.
OTHER INVESTMENTS. Although the Portfolio's assets will be invested primarily
in equity securities of small cap companies, the Portfolio may invest up to
35% of its assets in other instruments, which may cause its performance to
vary from that of the small capitalization equity markets. The Portfolio may
invest in equity securities of larger capitalization companies which the
Portfolio'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 Portfolio 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
Portfolio's objective of capital growth. The Portfolio 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
Portfolio 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 the
APPENDIX.
The Portfolio 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
Portfolio 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 Portfolio.
Templeton Developing Markets Equity Fund
The investment objective of the Templeton Developing Markets Equity Fund is
long-term capital appreciation.
The Portfolio 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
Portfolio's assets will be invested in such securities. The Portfolio will at
all times, except during defensive periods, maintain investments in at least
three countries having developing markets. The Portfolio has the right to
purchase securities in any foreign country, developed or developing. However,
as a non-fundamental policy, the Portfolio will limit its investments in
securities of Russian issuers to 5% of 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 PORTFOLIO MAY BE CONSIDERED SPECULATIVE, AND MAY NOT BE
APPROPRIATE FOR SHORT-TERM INVESTORS. 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 Portfolio 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 Portfolio 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 Portfolio seeks to benefit from economic and other developments in
developing markets. The investment objective of the Portfolio 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 Portfolio may invest up to
35% of its 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 Portfolio will not invest more
than 5% of its 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
Portfolio 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 Portfolio may invest
up to 10% of its assets in defaulted debt obligations which may be considered
speculative.
CURRENCY TECHNIQUES. The Portfolio 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 Portfolio will not enter into forward
contracts if, as a result, the Portfolio will have more than 20% of its
assets committed to the consummation of such contracts. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENT POLICIES. The Portfolio may invest up to 10% of its 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 Portfolio
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; purchase convertible securities and warrants;
invest in restricted or illiquid securities; and engage in other activities
specifically identified for this Portfolio. The Portfolio may not commit more
than 5% of its 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 assets
of the Portfolio. Presently, some of the above strategies cannot be used to a
significant extent by the Portfolio in the markets in which the Portfolio
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 Portfolio seeks to achieve its objective
through a flexible policy of investing in stocks and debt obligations of
companies and governments of any nation. The Portfolio has the right to
purchase securities in any foreign country, developed or emerging. However,
as a non-fundamental policy, the Portfolio will limit its investments in
securities of Russian issuers to 5% of assets. Although the Portfolio
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 Portfolio 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 Portfolio will typically invest predominantly
in equity securities issued by large-cap or mid-cap 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, SMALL
CAPITALIZATION ISSUERS."
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 Portfolio 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 the APPENDIX. As a policy established by
the Board, however, the Portfolio will not invest more than 5% of its 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 Portfolio.
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 Portfolio may invest
up to 10% of its assets in defaulted debt obligations which may be considered
speculative.
CURRENCY TECHNIQUES. The Portfolio 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 Portfolio may also purchase and sell stock
index futures contracts up to an aggregate amount not exceeding 20% of its
assets and may not at any time commit more than 5% of its 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
Portfolio 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 Portfolio may invest up to 5% of its assets in securities issued by any
one company or foreign government, exclusive of U.S. Government Securities.
The Portfolio may invest up to 5% of its assets in warrants (exclusive of
warrants acquired in units or attached to securities) and up to 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 Portfolio may also
enter into repurchase agreements, lend its portfolio securities, invest in
restricted securities, and engage in other activities specifically identified
for this Portfolio.
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 Portfolio will
invest at least 65% of its 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 Portfolio 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
Portfolio's assets could be invested in U.S. companies.
In selecting portfolio securities, the Portfolio attempts to take advantage
of the difference between economic trends and the anticipated performance of
securities and securities markets in various countries. The Portfolio 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 Portfolio 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 "INVESTMENT METHODS AND RISKS,
SMALL CAPITALIZATION ISSUERS."
The Portfolio has the right to purchase securities in any foreign country,
developed or emerging. Normally, the Portfolio will invest at least 65% of
its assets in securities traded in at least three foreign countries. As a
non-fundamental policy, the Portfolio will limit its investments in
securities of Russian issuers to 5% of assets. The Portfolio'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 Portfolio's assets may be invested in
debt obligations of which up to 10% 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. 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
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 Portfolio 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 Portfolio may invest up to 10% of its net
assets in illiquid securities. The Portfolio 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 Portfolio 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, invest in enhanced convertible securities, and
engage in other activities specifically identified for this Portfolio.
Templeton International Smaller Companies Fund
The investment objective of the Templeton International Smaller Companies
Fund is to seek long-term capital appreciation. The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 PORTFOLIO
MAY NOT BE APPROPRIATE FOR SHORT-TERM INVESTORS, AND AN INVESTMENT IN THE
PORTFOLIO SHOULD NOT BE CONSIDERED A COMPLETE INVESTMENT PROGRAM.
The Portfolio has the right to purchase securities in any foreign country,
developed or emerging. However, as a non-fundamental policy, the Portfolio
will limit its investments in securities of Russian issuers to 5% of assets.
The Portfolio'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 TRANSACTIONS."
OTHER INVESTMENTS. The Portfolio may invest up to 35% of its 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 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
Portfolio will not invest more than 5% of its 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 Portfolio's performance to vary from those of international smaller
capitalization equity markets.
DEFAULTED DEBT OBLIGATIONS. The Portfolio may invest up to 10% of its assets
in defaulted debt obligations, which may be considered speculative.
CURRENCY TECHNIQUES. The Portfolio 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 Portfolio will not enter into forward
contracts if, as a result, the Portfolio would have more that 20% of its
assets committed to the consummation of such contracts. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS" and the SAI.
OTHER INVESTMENT POLICIES. The Portfolio may invest no more than 5% of its
assets in securities of any one issuer, exclusive of U.S. Government
Securities. The Portfolio may invest up to 5% of its assets in warrants,
including such warrants that are not listed on an exchange. For hedging
purposes only, the Portfolio 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 assets of the Portfolio. 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 Portfolio may also enter into repurchase
agreements, invest in illiquid securities, lend its portfolio securities, and
engage in other activities specifically identified for this Portfolio.
Templeton Pacific Growth Fund
The Templeton Pacific Growth Fund seeks to provide long-term growth of
capital.
Under normal conditions, the Portfolio will invest at least 65% of its 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
Portfolio'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
Portfolio will invest at least 65% of its assets in securities traded in at
least three foreign countries, including the countries listed herein. The
Portfolio may, from time to time, hold significant cash positions until
suitable investment opportunities are available, consistent with its policy
on temporary investments.
Although the Portfolio will not invest more than 25% of its assets in any one
industry or the government of any one country, the Portfolio 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 Portfolio, the Portfolio has less
geographical diversification than a broad-based international Portfolio and
thus its volatility is higher. AN INVESTMENT IN THE PORTFOLIO MAY BE
CONSIDERED SPECULATIVE, AND MAY NOT BE APPROPRIATE FOR SHORT-TERM INVESTORS.
INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL AND HEIGHTENED RISKS
INVOLVED IN INVESTING IN DEVELOPING MARKETS SECURITIES. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS" and the SAI.
OTHER INVESTMENTS. The Portfolio 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 Portfolio 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 Portfolio's 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. However, the
Portfolio's Manager currently does not intend to hold any significant
positions in debt obligations.
The Portfolio 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 Portfolio may invest up to 10% of its net
assets in illiquid securities. Currently the Portfolio 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
Portfolio 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, purchase
convertible securities, lend its portfolio securities, engage in repurchase
agreements, and engage in other activities specifically identified for this
Portfolio.
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
Portfolio. 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 Portfolio may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts. The Portfolio
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 Portfolio to obtain or to enforce a judgment
against the issuers of such securities.
Securities which are acquired by a Portfolio 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 Portfolio acquires and holds the security with the intention of
reselling the security in the foreign trading market, the Portfolio
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 Portfolios 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 Portfolio's investment objectives and policies),
such investments, nevertheless, may tend to reduce the liquidity of the
Portfolios' 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 Portfolio with a significant non-U.S. portfolio can be expected to
be higher than those of Portfolios 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 Portfolio are
uninvested and no return is earned thereon. The inability of a Portfolio to
make intended security purchases due to settlement problems could cause a
Portfolio to miss attractive investment opportunities. Inability to dispose
of a portfolio security due to settlement problems could result either in
losses to the Portfolio due to subsequent declines in value of the portfolio
security or, if the Portfolio 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, developed countries include, but
are not limited to, 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 Portfolios 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
Portfolio's investments in those countries and the availability to a
Portfolio 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 Portfolios' investments in such countries less liquid and
more volatile than investments in Japan or most Western European countries,
and these Portfolios 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 Portfolios 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 Portfolios 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 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 Portfolio investments.
CERTAIN RESTRICTIONS. THE U.S. GOVERNMENT SECURITIES FUND DOES NOT INVEST IN
FOREIGN SECURITIES. THE 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 PORTFOLIOS MAY
INVEST IN FOREIGN SECURITIES ABOVE 10% OF THEIR ASSETS, AS NOTED IN THE
INDIVIDUAL PORTFOLIO DESCRIPTIONS.
Some of the countries in which the Portfolios 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
Portfolio 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 Health Care,
Global Income, Global Utility, International Equity, International Smaller
Companies, Mutual Discovery, 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
Portfolios with other investment vehicles before making an investment
decision.
There may be other applicable policies or restrictions on a Portfolio'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 Portfolio are denominated is an
important factor in each Portfolio's overall performance. The Managers intend
to manage a Portfolio'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 PORTFOLIO 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
Portfolio, each of the Portfolios 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 Portfolio 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 Portfolio 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 Portfolio's securities denominated in that currency. Such
changes will also affect a Portfolio's income and distributions to
shareholders. In addition, although the Portfolio will receive income on
foreign securities in such currencies, the Portfolio 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 Portfolio's income has
been accrued and translated into U.S. dollars, the Portfolio could be
required to liquidate portfolio securities to make required distributions.
Similarly, if an exchange rate declines between the time a Portfolio 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 Portfolio 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 Portfolio may enter into currency futures contracts traded
on regulated commodity exchanges, including non-U.S. exchanges.
A Portfolio 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 Portfolio 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 Portfolio converts assets from one currency to another. A
Portfolio 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 Portfolio 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 Portfolio to deliver an amount of currency other than U.S.
dollars in excess of the value of the 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 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 Portfolio
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 Portfolio 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 Portfolio'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 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 Portfolio 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 Portfolio 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 Portfolios expect to
achieve an acceptable degree of correlation between their portfolio
investments and their interest rate or currency swap positions.
A Portfolio will only enter into interest rate swaps on a net basis, which
means that the two payment streams are netted out, with the Portfolio
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 Portfolio is contractually obligated to make. If the other
party to an interest rate swap defaults, the Portfolio's risk of loss
consists of the net amount of interest payments that the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio's investment policies, a Portfolio'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 Portfolio.
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
Portfolio. 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 Portfolio. 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 Portfolio to manage the timing of its
receipt of income, which may have tax implications. A Portfolio 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 Portfolio's shareholders even though the Portfolio 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
Portfolio 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 Portfolio shares.
A Portfolio 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 Portfolio's ability to dispose of particular
issues, when necessary, to meet the Portfolio'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 Portfolio to obtain market quotations based on actual
trades for purposes of valuing the 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
PORTFOLIOS," 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 Portfolio 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 Portfolio may incur special costs in disposing of such
securities; however, the Portfolio 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 Portfolios 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 Portfolio 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
Portfolio 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 Portfolio is changed by the rating service, such
change will be considered by the Portfolio 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 Portfolios, 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 Portfolio 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 Portfolio 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 Portfolio may have unrealized losses on such
defaulted obligations which are reflected in the price of the Portfolio'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 Portfolios net
assets are impacted prior to the default. A Portfolio may retain an issue
which has defaulted because such issue may present an opportunity for
subsequent price recovery.
A Portfolio 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 Portfolio 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 Portfolio shares.
THE PORTFOLIOS' INVESTMENTS. BECAUSE OF CERTAIN OF THE PORTFOLIOS' POLICIES
OF INVESTING IN HIGHER YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT
IN SUCH A PORTFOLIO IS ACCOMPANIED BY A HIGHER DEGREE OF RISK THAN IS PRESENT
WITH AN INVESTMENT IN A PORTFOLIO THAT INVESTS IN HIGHER RATED, LOWER
YIELDING DEBT OBLIGATIONS. ACCORDINGLY, AN INVESTMENT IN ANY SUCH PORTFOLIO
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, 1997, the High Income and Income Securities Funds each held
[...] position, and the Mutual Shares and Mutual Discovery Funds each held [...]
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, Global
Asset Allocation, 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, 1997. No other Portfolio 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 High Income
Moody's Securities Fund Fund
Aaa [to be included in B Amendment for these two Portfolios]
Aa
A
Baa
Ba
B
Caa
Ca
C
Global Asset Global
S&P Allocation Income Fund
Fund
AAA 66.61% 80.76%
AA+ 0.00% 0.00%
AA 0.02% 0.11%
AA- 0.00% 0.00%
BBB+ 0.00% 0.00%
BBB 0.00% 0.00%
BBB- 0.05% 0.00%
BB+ 1.85%** 0.34%
BB 13.15%** 12.32%***
BB- 9.64% 5.02%
B+ 4.11% 0.00%
B 3.63%** 0.00%
B- 0.94%** 0.00%
**Securities, which are unrated by S&P, have been included as follows: 0.73%
BB+, 0.35% BB, 2.86% B, 0.94% B-.
***0.11% of these securities, which are unrated by S&P, have been included in
the BB rating category.
It should be noted that the above ratings are not necessarily indicative of
ratings of bonds at the time of purchase.
Investment Methods and Risks
Common to More than One Portfolio
Certain types of investments and investment techniques authorized for more
than one Portfolio, as stated in the descriptions of the individual
Portfolios, 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 Portfolios will not necessarily use the
strategies described to the full extent permitted unless the Managers believe
that doing so will help a Portfolio 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 Portfolios except the Asset
Allocation, Developing Markets, Global Health Care, International Smaller
Companies, Mutual Discovery, Mutual Shares, Small Cap and Value 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 Portfolios may
also borrow from banks for temporary or short-term purposes. The Portfolios
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,
Global Health Care, International Smaller Companies, Mutual Discovery, Mutual
Shares, Small Cap and Value 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 Portfolio 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 Portfolio'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 Portfolio'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
Portfolio will not purchase additional securities while its borrowings exceed
the above percentage of its total assets.
Concentration
The Global Health Care Fund, Real Estate Fund, Global Utility 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 Portfolio. The other Portfolios 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 Portfolios 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 Portfolio may invest are subject
to the same rating criteria and investment policies as that Portfolio'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 Portfolio's financial reporting, credit rating, and investment
limitation purposes.
Certain Portfolios, 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 Portfolios 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 Portfolio. Debt obligations in which the Portfolios 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 Portfolio's investments in debt obligations
are interest rate sensitive, a Portfolio'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 portfolios which define them as
"Eligible Securities" for purposes of the Portfolio, will be referred to
generally as "Money Market Instruments" in this prospectus.
U.S. GOVERNMENT SECURITIES. All of the Portfolios 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 Portfolio 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 Portfolio 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 Portfolio) consists of the difference between its
face value at maturity and its cost.
One particular zero coupon security a Portfolio 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
Portfolio will realize no cash until the cash payment date and, if the issuer
defaults, the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio sections or the SAI, certain of the
Portfolios 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; mortgage pass-throughs, including 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 Portfolio sections, and/or in the
SAI.
Diversification
Each Portfolio, except the Global Income Fund, will operate as a diversified
Portfolio under federal securities law. Each diversified Portfolio 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 Portfolio's assets would be invested in such issuer.
In addition, each Portfolio 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 Portfolio 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 Portfolio will
not own more than 10% of the outstanding voting securities of a single
issuer. A Portfolio'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 Portfolio'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 Portfolio will diversify its
investments such that (i) no more than 55% of the Portfolio's assets is
represented by any one investment; (ii) no more than 70% of the Portfolio's
assets is represented by any two investments; (iii) no more than 80% of the
Portfolio's assets is represented by any three investments; and (iv) no more
than 90% of the Portfolio's assets is represented by any four investments. In
the case of Portfolios 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 Portfolios may acquire loan participations and other direct or
indirect bank obligations ("Loan Participations"), in which a Portfolio 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
Portfolio 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 Portfolios 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 Portfolios 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 Portfolio's total assets at
the time of the most recent loan (one-third of the Portfolio's assets in the
case of the Asset Allocation, Developing Markets, Global Health Care,
International Equity, Mutual Discovery, Mutual Shares, Pacific, and Value
Funds), and further provided that the borrower deposits and maintains, with
the Portfolio'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 Portfolio may
engage in security loan arrangements with the primary objective of increasing
the Portfolio'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 Portfolio 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 Portfolios may invest in options and futures contracts and any
limitations noted in this section are qualified by the Portfolios' individual
policies as stated in the individual descriptions of each of the Portfolios.
UNLESS OTHERWISE NOTED IN A PORTFOLIO'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 PORTFOLIO. NOR WILL A PORTFOLIO 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 PORTFOLIO'S POLICIES, NONE OF THE PORTFOLIOS
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 PORTFOLIO AND PREMIUMS PAID ON OPTIONS ON FUTURES CONTRACTS WOULD EXCEED
5% OF THE MARKET VALUE OF THE TOTAL ASSETS OF THE PORTFOLIO. See the
"Investment Objectives and Policies" of the specific Portfolio and the SAI
for a discussion of whether, and to what extent, the Portfolio may purchase
these investments.
In general, a Portfolio 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 Portfolio 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 Portfolios currently expect to make significant use of these
transactions, except to manage currency risk. See "Highlighted Risk
Considerations, Foreign Transactions."
Portfolio Turnover
Each Portfolio may purchase and sell securities without regard to the length
of time the security has been held, and the frequency of Portfolio
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 Portfolio'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 [%] in 1997 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 experienced a higher portfolio turnover
of [ ]% in 1997, as it sold precious metals securities and purchased
securities in the broader natural resources sector as a result of its new
concentration policy which became effective on May 1, 1997. It is not
expected that the Natural Resources Securities Fund will have portfolio
turnover exceeding 100% in the future.
Higher portfolio turnover rates generally increase transaction costs, which
are Portfolio 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 Portfolio may engage in repurchase transactions, in which the Portfolio
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 Portfolio, with an initial market value,
including accrued interest, equal to at least 102% of the dollar amount
invested by the Portfolio, 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 Portfolio to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The
Portfolio might also incur disposition costs in liquidating the collateral.
Each Portfolio intends to enter into repurchase agreements only with
qualified securities dealers or other institutional investors deemed
creditworthy by the Portfolio's investment manager. Under federal securities
laws, a repurchase agreement is deemed to be the loan of money by the
Portfolio to the seller, collateralized by the underlying security.
Certain Portfolios 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 Portfolios to not invest more than 10% of
their respective net assets in illiquid investments, except that the Global
Health Care, International Smaller Companies, Mutual Discovery, Mutual Shares
and Value 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 Portfolio
invests in restricted securities that are deemed liquid, the general level of
illiquidity in a Portfolio 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"
Portfolios that may purchase Treasury securities may also enter into "U.S.
Treasury rolls" in which the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio, 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.
Portfolios that may purchase mortgage-backed securities may enter into
mortgage "dollar rolls" in which the Portfolio 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 Portfolio forgoes
principal and interest paid on the mortgage-backed securities. The Portfolio
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 Portfolio will not enter into any
dollar rolls that are not covered rolls.
Small Capitalization Issuers
Certain Portfolios 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 Portfolio which invests a substantial
portion of its net assets in small company stocks may be more volatile than
the shares of a Portfolio 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 Portfolio's percentage
limits on illiquid securities. IF PERMITTED BY A PORTFOLIO'S INVESTMENT
POLICIES, THE TEMPLETON MANAGERS MAY OCCASIONALLY INVEST UNDER 5% OF THEIR
RESPECTIVE PORTFOLIO'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 Portfolio
(other than the Money Fund) may establish a temporary defensive position.
Such Portfolios may therefore invest up to 100% of their respective net
assets in high quality Money Market Instruments or in, for example, U.S.
Government Securities, bank obligations, and the highest quality commercial
paper, as described above. The Rising Dividends Fund may also invest in
short-term fixed-income securities. Any decision to make a substantial
withdrawal for a sustained period of time, from a Portfolio's "defined"
market(s) based on its investment objectives will be reviewed by the Board of
Trustees.
The Asset Allocation, Developing Markets, Global Health Care, Global Income,
Global Growth, Global Utilities, 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
Portfolio will employ defensive strategies.
Trade Claims
Trade claims are purchased from creditors of companies in financial
difficulty. For purchasers such as a Portfolio, 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 Portfolio does not exercise or dispose of a warrant prior
to its expiration, it will expire worthless.
"When-Issued" and "Delayed Delivery" Transactions
A Portfolio 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 Portfolio and generally do not earn interest until
their scheduled delivery date. When the Portfolio 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 Portfolio engages in when-issued and
delayed delivery transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with the Portfolio'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 Portfolio may miss a price or
yield considered advantageous. See the SAI for additional information.
Investment Restrictions
Each Portfolio is subject to a number of additional investment restrictions,
some of which are fundamental policies and, like the investment objective of
each Portfolio, 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
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 Portfolio'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, Rising Dividends and Value 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, and is the Manager for
the Value Securities Fund. 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
Portfolio, and the material terms of the Portfolio'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 Portfolios. 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," "Policies
Regarding Brokers Used on Securities Transactions" and "Miscellaneous
Information" 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 Portfolio's assets and
make each Portfolio's investment decisions. Each Portfolio is obligated to
pay a management fee for these services. Portfolio Administration fees may be
paid directly by the Portfolio or indirectly by the Managers through the
management fees. See "Portfolio Administrator," below.
During the fiscal year ended December 31, 1997, the management and portfolio
administration fees and total operating expenses, as a percentage of monthly
net assets and before any advance waiver, for each Portfolio which operated
throughout 1997 were as follows:
1997 Manage-
ment and 1997 Total
Fund Adminis- Operating
tration Fees Expenses
Fund (Except New Funds)
Asset Allocation Fund % %
Capital Growth Fund % %
Developing Markets Fund % %
Global Growth Fund % %
Global Income Fund % %
Global Utility Fund % %
(formerly Utility Fund)
Government Fund % %
Growth and Income Fund % %
High Income Fund % %
Income Securities Fund % %
International Smaller
Companies Fund % %
International Equity Fund % %
Natural Resources Fund % %
(formerly Metals Fund)
Money Fund* % %
Mutual Shares Fund % %
Mutual Discovery Fund % %
Pacific Fund % %
Real Estate Fund % %
Rising Dividends Fund % %
Small Cap Fund % %
Zero Coupon Fund - 2000** % %
Zero Coupon Fund - 2005** % %
Zero Coupon Fund - 2010** % %
*Under an advance agreement by Advisers to limit its management fees, the
Money Fund paid management and portfolio 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 portfolio 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 Global Health Care Fund is obligated to pay Advisers a monthly fee
computed at the annual rate of 0.60% of the Portfolio's average daily net
assets up to and including $200 million, plus 0.50% of the value of average
daily net assets over $200 million up to and including $1.3 billion, plus
0.40% of the value of average daily net assets over $1.3 billion. Under a
management agreement with Franklin New Jersey, the Value Securities Fund is
obligated to pay the Manager a monthly fee equal to an annual rate of 0.60%
of the value of the Portfolio's average daily net assets up to and including
$200 million, 0.50% of the value of the Portfolio's average daily net assets
over $200 million up to and including $1.3 billion, and 0.40% of the value of
the Portfolio's average daily net assets over $1.3 billion.
In general, the fees which the Portfolios 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 Portfolio shares, as well as
shares of other Portfolios 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 Portfolio pays its own operating expenses. These
expenses include, but may not be limited to: the Managers' management fees;
portfolio 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 Portfolio's net assets; printing
and other expenses which are not expressly assumed by the Managers. Expenses
incurred jointly by more than one Portfolio 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 FundIs average
daily net assets. In all cases, Templeton Florida's fees are not a separate
expense of the respective Portfolios but are paid by the Managers from the
management fees they receive from their respective management agreements with
the Portfolios. 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 Portfolios 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 Portfolios, 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, Global Health Care,
International Smaller Companies, Mutual Discovery, Mutual Shares and Value
Funds, and through subcontracts by the Managers of all the other Portfolios.
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 Portfolio, other than the Money Fund.
CAPITAL GROWTH FUND
Conrad B. Herrmann
Kevin Carrington
Vivian J. Palmieri
GLOBAL HEALTH CARE SECURITIES FUND
Kurt von Emster
Rupert H. Johnson
Evan McCulloch
GLOBAL UTILITIES SECURITIES FUND
(FORMERLY UTILITY EQUITY FUND)
Sally Edwards-Haff
Ian Link
GROWTH AND INCOME FUND
Frank Felicelli
Douglas Barton
Ernst Schleimer
HIGH INCOME FUND
Jeff Holbrook
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
Dale Winner
Thomas J. Dickson
Jeffrey A. Everett
Sean Farrington
TEMPLETON GLOBAL GROWTH FUND
Sean Farrington
Jeffrey A. Everett
Mark G. Holowesko
TEMPLETON GLOBAL INCOME SECURITIES FUND
Thomas J. Dickson
Neil S. Devlin
Ronald A. Johnson, Ph.D.
TEMPLETON INTERNATIONAL EQUITY FUND
Howard J. Leonard
Mark Beveridge
William Howard
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
Simon Rudolph Gary Clemons
Mark Beveridge Peter Nori
Juan Benito-Martin
TEMPLETON PACIFIC GROWTH FUND
William T. Howard
Mark Beveridge
Gary Clemons
U.S. GOVERNMENT SECURITIES FUND
Jack Lemein
David Capurro
Roger Bayston
Tony Coffey
VALUE SECURITIES FUND
Donald G. Taylor
William Lippman
Margaret McGee
Bruce C. Baughman
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
Vice President and 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
Vice President and 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 and will manage the
Value Fund from 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.
Juan Benito-Martin
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Benito holds a Master of Business Administration degree from the Harvard
Business School. He earned his MS/BS in engineering from the Polytechnical
University of Valencia, Spain. Prior to joining the Franklin Templeton Group
in 1996, Mr. Benito-Martin was a management consultant and case team leader
with Monitor Company, a leading global strategy consulting firm in Cambridge,
Massachusetts. Mr. Benito has managed the Templeton International Smaller
Companies Fund since July 1997.
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
and Pacific Growth Funds since January 1994 and has managed the Templeton
International Smaller Companies Fund from inception.
Tom Branch
Portfolio Manager
Franklin Advisers, Inc.
Mr. Branch received a Bachelor of Science degree in Business Administration
with a concentration in finance from California Polytechnic State University,
San Luis Obispo. Mr. Branch joined 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 and has
managed the Templeton International Smaller Companies Fund from inception.
T. Anthony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration 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
Vice President
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 Global Utility Fund (formerly 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
Vice President and 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.
Jeff Holbrook
Portfolio Manager
Franklin Advisers, Inc.
Mr. Holbrook is a Chartered Financial Analyst and holds a Master of Business
Administration degree in Finance from University of Chicago and a Bachelor of
Science degree from Brigham Young University. Mr. Holbrook joined the
Franklin Templeton Group in July 1992. Mr. Holbrook is a member of several
securities industry-related associations. He has managed the High Income Fund
since September 1997.
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.
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
MasterIs 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 since 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 Global Utility Fund
(formerly 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.
Rupert H. Johnson, Jr.
President
Franklin Advisers, Inc.
Senior Vice President
Franklin Advisory Services and Franklin Investment Advisory Services, Inc.
Mr. Johnson is a graduate of Washington and Lee University. He has been with
the Franklin Templeton Group since 1965 and prior thereto was an office with
the U.S. Marine Corps. Mr. Johnson will manage the Global Health Care
Securities Fund from inception.
Suzanne Willoughby Killea
Portfolio Manager
Franklin Advisers, Inc.
Ms. Killea holds a Master of Business Administration degree from Stanford
University, and earned her Bachelor of Arts degree from Princeton University.
Ms. Killea joined the Franklin Templeton Group, in 1991. Ms. 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 Templeton 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 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 Global
Utility Fund (formerly 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 and will manage the Value Fund from its
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.
Evan McCulloch
Portfolio Manager Franklin Advisers, Inc.
Mr. McCulloch holds a Bachelor of Science degree in Economics from the
University of California at Berkeley. He has been with the Franklin Templeton
Group since 1992. Mr. McCulloch will manage the Global Health Care 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 and will manage the Value Fund from its
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
BachelorIs and MasterIs 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 MasterIs 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 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 Franklin portfolio research in 1990 as an
equity analyst. In 1994, Mr. Nori joined the Templeton organization. He 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.
Edward D. Perks
Portfolio Manager
Franklin Advisers, Inc.
Mr. Perks holds a Bachelor of Arts in Economics and Political Science from
Yale University. Mr. Perks joined the Franklin Templeton Group in October
1992 and has managed the Natural Resources Fund (formerly the Precious Metals
Fund) since May 1997.
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 Templeton 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 joined the Franklin
Templeton Group in June 1996. Mr. Taylor has managed the Rising Dividends
Fund since 1996 and will manage the Value Fund from its inception.
Kurt von Emster
Portfolio Manager
Franklin Advisers, Inc.
Mr. von Emster is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Business and Economics from the University of California at Santa
Barbara. He has been with the Franklin Templeton Group since 1989. Mr. von
Emster will manage the Global Health Care Fund from its inception.
Dale A. Winner
Portfolio Manager
Templeton Global Advisors Limited
Mr. Winner received his LLB from Reading University, England and has
successfully completed a Level III Chartered Financial Analyst examination.
Prior to joining the Franklin Templeton Group in 1995, Mr. Winner was a Trust
Officer at J.P. Morgan, Bahamas for two 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 since 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.
Purchase, Redemption, and Exchange of Shares
Purchases of Shares
As noted in the Introduction, shares of each Portfolio 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 Portfolio 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 Portfolio. This might force the
Portfolio to sell portfolio securities at disadvantageous prices.
The applicable Insurance Company Variable Account purchases shares of each
Portfolio 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 Portfolio next determined after the Portfolio 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 Portfolios do not issue share certificates. Initial and subsequent
payments allocated to a specific Portfolio 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 Portfolio to make
benefit or surrender payments under the terms of its Contracts. Redemptions
are processed on any day on which the Portfolios are open for business (each
day the New York Stock Exchange is open) and are effected at the Portfolio's
net asset value next determined after the Portfolio 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
Portfolios 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
investments of that Portfolio.
If a substantial portion of any Portfolio's shares should be redeemed within
a short period, the Portfolio 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 Portfolio may be exchanged for shares of any other
Portfolios 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 Portfolio and a purchase of shares of one or more
of the other Portfolios and are effected at the respective net asset value
per share of each Portfolio 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 Portfolio 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 Portfolio and therefore may be refused. Accounts under common ownership
or control may be aggregated for purposes of the transfer limits. Investors
should consult the Variable Account prospectus of the specific insurance
product that accompanies this Trust prospectus for information on other
specific limitations on the transfer privilege.
The Trust reserves the right to modify or discontinue its exchange program at
any time upon 60 days' notice to the Insurance Companies.
Income Dividends and Capital Gains Distributions
Each Portfolio, 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 Portfolio's investments less expenses
incurred in the Portfolio'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 Portfolio'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 Portfolio's net income.
Any distributions made by the Portfolios will be automatically reinvested in
additional Shares of that Portfolio. Dividends or distributions by the
Portfolios will reduce the per share net asset value by the per share amount
so paid.
Determination of Net Asset Value
The net asset value per share of each Portfolio is determined as of the close
of the New York Stock Exchange normally 4:00 p.m., Eastern time. To calculate
the Net Asset Value per share of each Portfolio, the assets of each Portfolio
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 Portfolio are valued as described under "Additional Information
Regarding Valuation and Redemption of Shares of the Portfolios" in the SAI.
Tax Considerations
Each Portfolio of the Trust is treated as a separate entity for federal
income tax purposes. Each Portfolio 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 Portfolio will not be subject to federal income taxes.
In order to ensure that individuals holding the Policies whose assets are
invested in a Portfolio will not be subject to federal income tax on
distributions made by the Portfolio prior to the receipt of payments under
the Policies, each Portfolio intends to comply with the additional
requirements of Section 817(h) of the Code relating to diversification of its
assets.
The Portfolios 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 Portfolio to an income tax and
interest charge with respect to such investments. To the extent possible, the
Portfolio 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 Portfolios 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
Portfolios' 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 FundIs 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
Advertisements, sales literature, hypothetical personalized illustrations,
and communications with Contract Owners and others may cite a Portfolio'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
Portfolio (except the Money Fund) shows the an annualization of income per
share earned by that Portfolio over a recent 30 day period, and is shown as a
percentage of the investment. The current distribution rate for a Portfolio
(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 Portfolio.
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 Portfolio'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 Portfolios, 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 Portfolio's management agreement includes a distribution or "Rule 12b-1"
plan (the "Plan"). However, no payments are to be made by any Portfolio as a
result of the Plan. The Portfolios do not make any payments other than
payments for which the Portfolios 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
Portfolio 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
Portfolio and the Contract Owners whose purchase payments have indirectly
been invested in each Portfolio. 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 Portfolio's shares, and serves as
each Portfolio'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
Portfolio will be fully paid and nonassessable and will have no preemptive,
conversion, or sinking rights.
Shares of each Portfolio have equal voting rights and vote separately (from
other Portfolios in the Trust) as to issues affecting that Portfolio, 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 Portfolio. 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
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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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.
Franklin
Valuemark Funds
STATEMENT OF
ADDITIONAL INFORMATION 777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777
MAY 1, 1998
1-800/342-3863
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Franklin Valuemark Funds (the "Trust") is an investment company, organized as a
Massachusetts business trust, and consisting of twenty-five separate investment
portfolios or funds (each a "Portfolio" or "Portfolios") each of which has
different investment objectives. Shares of the Portfolios 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 Portfolios may not be available in
connection with a particular policy or contract or in a particular state.
Investors should consult the separate account prospectus for the specific
insurance product that accompanies the Trust prospectus for information on any
applicable restrictions or limitations with respect to a separate account's
investments in the Portfolios.
A Prospectus for the Trust, dated May 1, 1998, as may be amended from time to
time, provides the basic information an investor should know before investing in
any Portfolio and may be obtained without charge from the Trust at the address
listed above.
This Statement of Additional Information is not a prospectus. It contains
information in addition to, and in more detail than set forth in, the
Prospectus. This Statement is intended to provide the prospective investor with
additional information regarding the activities and operations of the Trust and
the Portfolios and should be read in conjunction with the Prospectus.
- ------------------------------------------------------------------------------
Mutual funds, annuities, and other investment products:
`are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other agency of the U.S. government;
`are not deposits or obligations of, or guaranteed or endorsed by any bank;
`are subject to investment risks, including the possible loss of principal.
ContentsPage
Introduction (See also "Introduction" and
"General Information" in the Prospectus)
Portfolio Investment Objectives and Policies
(See also "Portfolio Investment Objectives
and Policies" in the Prospectus).
Highlighted Risk Considerations
(See also "Highlighted Risk
Considerations" in the Prospectus)
Foreign Securities ..............
Currency Management Techniques ..
Zero Coupon Funds -
Special Considerations .........
Investment Methods and Risks
Common to More than One Portfolio (See
also "Investment Methods and
Risks Common to More than One
Portfolio" in the Prospectus)....
Convertible Securities ..........
Illiquid Securities .............
Interest Rate Swaps..............
Inverse Floaters ................
Mortgage and Asset-Backed Securities
Municipal Securities ............
Options and Futures .............
Portfolio Turnover...............
Real Estate Fund.................
Repurchase Agreements ...........
Reverse Repurchase Agreements ...
Short Sales......................
When-Issued Securities ..........
Fundamental Investment Restrictions
Non-Fundamental Investment
Restrictions.....................
Officers and Trustees ............
Investment Management and
Other Services (See also
"Management" in the Prospectus)
Fund Administrator..............
Transfer Agent .................
Custodians .....................
Independent Auditors ...........
Research Services ..............
Policies Regarding Brokers
Used on Securities Transactions..
Additional Information Regarding
Valuation and Redemption of Shares
of the Portfolios (See also "Purchase,
Redemption and Exchange of Shares"
and "Determination of Net Asset Value"
in the Prospectus) ..............
Calculation of Net Asset Value..
Portfolios Other than Money Fund
Money Market Fund ..............
Additional Information ...........
Additional Information
Regarding Taxation .............
How the Trust Measures Performance
Miscellaneous Information .......
Portfolio Similarity.............
Financial Statements .............
Introduction
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Franklin Valuemark Funds (the "Trust") is an open-end management investment
company, or mutual fund, organized as a Massachusetts business trust on April
26, 1988 and registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 (the "1940 Act"). Shares of the Trust
are currently sold only to the separate accounts (the "Variable Accounts") of
Allianz Life Insurance Company of North America, or its wholly owned subsidiary
Preferred Life Insurance Company of New York, or their affiliates ("Insurance
Companies") to fund the benefits under variable life insurance policies and
variable annuity contracts (collectively the "Contracts") issued by the
Insurance Companies. The Variable Accounts are divided into sub-accounts (the
"Sub-Accounts"), each of which will invest in one of the Portfolios, as directed
within the limitations described in the appropriate Contracts, by the owners of
the respective Contracts issued by the Insurance Companies (collectively the
"Contract Owners"). The Trust issues a separate series of shares of beneficial
interest for each Portfolio. Each Portfolio maintains a totally separate and
distinct investment portfolio. Some of the current Portfolios in the Trust may
not be available in connection with a particular Contract or in a particular
state. Contract owners should consult the insurance product prospectus
accompanying the Trust prospectus which describes the specific Contract or the
appropriate Insurance Company for information on available Portfolios and any
applicable limitations with respect to a separate account's investments in the
Portfolios.
Portfolio Investment Objectives and Policies
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Each Portfolio has one or more investment objectives and related investment
policies and uses various investment techniques to pursue these objectives and
policies, all of which are described more completely in the Trust's Prospectus.
There can be no assurance that any of the Portfolios will achieve their
investment objective or objectives. Investors should not consider any one
Portfolio alone to be a complete investment program and should evaluate each
Portfolio in relation to their personal financial situation, goals, and
tolerance for risk. All of the Portfolios 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 Portfolio 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 Portfolios.
SUMMARY OF PORTFOLIO OBJECTIVES
Portfolio Seeking Stability of Principal and Income
Money Market Fund ("Money Fund")1 seeks high current income, consistent with
capital preservation and liquidity. The Portfolio 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 Portfolio attempts to maintain a stable net asset value of $1.00 per share,
although no assurances can be given that the Portfolio will be able to do so.
Portfolios 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 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 lower rated debt obligations
(commonly referred to as "junk bonds"), and related currency transactions.
Investing in a non-diversified portfolio of global securities including those of
developing markets issuers, involves increased susceptibility to the special
risks associated with foreign investing. Prior to May 1, 1996 the Portfolio was
known as the Global Income Fund.
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 Portfolios may not be appropriate for short-term
investors or those who intend to withdraw money before the maturity date.
Portfolios Seeking Growth and Income
Global Utilities Securities Fund ("Global Utility Fund") 1 seeks both capital
appreciation and current income by investing primarily in securities of issuers
engaged in the public utilities industry. The Portfolio may invest in securities
of issuers of any nation, including nations with developing markets. Foreign
investing involves special risks. Prior to May 1, 1998, the Portfolio was named
the Utility Equity Fund and invested primarily in securities of domestic issuers
in the public utility industry.
Growth and Income Fund1 seeks capital appreciation, with current income return
as a secondary objective, by investing primarily in U.S. common stocks. The
Portfolio may invest in foreign securities. Prior to May 1, 1995, the Growth and
Income Fund was known as the Equity Growth Fund.
Income Securities Fund1,2 seeks to maximize income while maintaining prospects
for capital appreciation by investing primarily in a diversified portfolio of
domestic debt obligations and/or equity securities. Debt obligations include
lower rated obligations (commonly referred to as "junk bonds") which involve
increased risks related to the creditworthiness of their issuers. The Portfolio
may invest in foreign securities.
Mutual Shares Securities Fund ("Mutual Shares Fund")1,2 seeks capital
appreciation, with income as a secondary objective. The Portfolio invests
primarily in domestic equity securities trading at prices below their intrinsic
values. The Portfolio 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.
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 Portfolio 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 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.
Value Securities Fund ("Value Fund") 1 seeks long-term total return. The
Portfolio invests primarily in equity securities, including common stocks and
securities convertible into common stocks.
Portfolios Seeking Capital Growth
Capital Growth Fund ("Growth Fund")1 seeks capital appreciation, with current
income as a secondary consideration. The Portfolio invests primarily in
equity securities, including common stocks and securities convertible into
common stocks.
Global Health Care Securities Fund ("Global Health Care Fund") 1 seeks
capital appreciation, by concentrating its investments in equity securities
issued by health care companies located throughout the world. Foreign
investing involves special risks.
Mutual Discovery Securities Fund ("Mutual Discovery Fund")1,2 seeks capital
appreciation. The Portfolio invests primarily in domestic and foreign equity
securities, including securities of small capitalization companies, trading
at prices below their intrinsic values. The Portfolio 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 return as a secondary objective. The
Portfolio seeks to achieve its objective by concentrating its investments in
securities issued by companies in or related to the natural resources sector.
Foreign investing involves special risks. Prior to May 1, 1997, the Natural
Resources Fund was known as the Precious Metals Fund and had different
investment objectives and policies.
Small Cap Fund1 seeks long-term capital growth. The Portfolio seeks to
accomplish its objective by investing primarily in equity securities of small
capitalization growth companies. The Portfolio may also invest in foreign
securities, including those of developing markets issuers. Because of the
Portfolio's investments in small capitalization companies, an investment in
the Portfolio may involve greater risks and higher volatility and should not
be considered a complete investment program.
Templeton Developing Markets Equity Fund ("Developing Markets Fund")1 seeks
long-term capital appreciation. The Portfolio seeks to achieve this objective
by investing primarily in equities of issuers in countries having developing
markets. The Portfolio is subject to the heightened foreign securities
investment risks that accompany foreign developing markets and an investment
in the Portfolio may be considered speculative.
Templeton Global Growth Fund ("Global Growth Fund")1 seeks long-term capital
growth. The Portfolio 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 Portfolio's
objective of long-term capital growth. Foreign investing involves special
risks.
Templeton International Equity Fund ("International Equity Fund")1 seeks
long-term growth of capital. Under normal conditions, the International Equity
Fund will invest at least 65% of its total assets in an internationally mixed
portfolio of foreign equity securities which trade on markets in countries other
than the U.S., including developing markets, and are (i) issued by companies
domiciled in countries other than the U.S., or (ii) issued by companies that
derive at least 50% of either their revenues or pre-tax income from activities
outside of the U.S. Foreign investing involves special risks. Prior to October
15, 1993, the Templeton International Equity Fund was known as the International
Equity Fund. Foreign investing involves special risks.
Templeton International Smaller Companies Fund ("International Smaller Companies
Fund")1 seeks long-term capital appreciation. The Portfolio 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 Portfolio 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 Portfolio may be considered speculative. Prior to October
15, 1993, the Templeton Pacific Growth Fund was known as the Pacific Growth
Fund.
1The Asset Allocation, Capital Growth, Developing Markets, Global Growth, Global
Health Care, Global Income, Global Utility, Growth and Income, Income
Securities, International Equity, International Smaller Companies, Money Market,
Mutual Discovery, Mutual Shares, Pacific, Natural Resources, Small Cap and Value
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
Portfolios 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 Portfolios
in light of the securities in which they invest. See "Highlighted Risk
Considerations, Lower Rated Debt Obligations."
Highlighted Risk Considerations
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As described more fully in the individual Portfolio sections in the Trust
prospectus and as supplemented below, an investment in certain of the Portfolios
involves special additional risks as a result of their ability to invest a
substantial portion of their assets in high yield, high risk, lower rated debt
obligations, foreign investments including those of "developing market" issuers
located in emerging nations as defined by the World Bank, specialized industry
sectors, derivative instruments or complex securities. These and other types of
investments and investment techniques common to more than one Portfolio, as
stated in the individual Portfolio descriptions in the Trust Prospectus, are
described in greater detail, including the risks of each and any limitations, in
the Trust Prospectus, this section of the SAI and in "Investment Methods and
Risks."
All policies and percentage limitations are considered at the time of purchase.
Each of the Portfolios will not necessarily use the strategies described to the
full extent permitted unless the Managers believe that doing so will help a
Portfolio reach its objectives, and not all instruments or strategies will be
used at all times.
Foreign Securities
Investors should consider carefully the substantial risks involved in securities
of companies and governments of foreign nations, which are in addition to the
usual risks associated with investing in U.S. issuers. There is generally less
government supervision and regulation of securities exchanges, brokers, dealers
and listed companies than in the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
With respect to American Depositary Receipts ("ADRs") a Portfolio may purchase
the securities of foreign issuers directly in foreign markets if no ADRs are
available or the Managers believe these securities offer better opportunities
than the ADRs, with reasonable liquidity. Even though the Portfolios authorized
to invest in foreign securities intend to acquire the securities of foreign
issuers generally where there are public trading markets, investments by a
Portfolio in the securities of foreign issuers may tend to increase the risks
with respect to the liquidity of that Portfolio's investments and that
Portfolio's ability to meet large redemption requests should there be economic
or political turmoil in a country in which the Portfolio has a substantial
portion of its assets invested or should relations between the U.S. and foreign
countries deteriorate markedly. Changes of governmental administrations or of
economic or monetary policies, in the U.S. or abroad, or changed circumstances
in dealings between nations could result in investment losses for a Portfolio
and could affect adversely that Portfolio's operations. A Portfolio's purchase
of securities in foreign countries will involve currencies of the U.S. and of
foreign countries; consequently, changes in exchange rates, currency,
convertibility and repatriation may favorably or adversely affect each
Portfolio.
Securities which are acquired by a Portfolio outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Portfolio to be illiquid assets so
long as the Portfolio acquires and holds the securities with the intention of
reselling the securities in the foreign trading market, the Portfolio reasonably
believes it can readily dispose of the securities for cash in the U.S. or
foreign market and current market quotations are readily available. Investments
may be in securities of foreign issuers, whether located in developed or
emerging countries.
Investments in foreign securities where delivery takes place outside the U.S.
will have to be made in compliance with any applicable U.S. and foreign currency
restrictions and tax laws (including laws imposing withholding taxes on any
dividend or interest income) and laws limiting the amount and types of foreign
investments. Changes of governmental administrations or of economic or monetary
policies, in the U.S. or abroad, or changed circumstances in dealings between
nations or currency convertibility or exchange rates could result in investment
losses for a Portfolio. Investments in foreign securities may also subject a
Portfolio to losses due to nationalization, expropriation, holding and
transferring assets through foreign subcustodians, depositories and broker
dealers, or differing accounting practices and treatment.
Foreign companies are not generally subject to uniform accounting, auditing
and financial reporting standards, and auditing practices and requirements
may not be comparable to those applicable to U.S. companies. The Portfolio,
therefore, may encounter difficulty in obtaining market quotations for
purposes of valuing its investments and calculating its net asset value.
Moreover, investors should recognize that foreign securities are often traded
with less frequency and volume and, therefore, may have greater price
volatility, than is the case with many U.S. securities. Notwithstanding the
fact that the Portfolios permitted to invest in foreign securities generally
intend to acquire the securities of foreign issuers where there are public
trading markets, investments by each Portfolio in the securities of foreign
issuers may tend to increase the risks with respect to the liquidity of a
Portfolio's investments and a Portfolio's ability to meet a large number of
shareholder redemption requests should there be economic or political turmoil
in a country in which a Portfolio has a substantial portion of its assets
invested or should relations between the U.S. and foreign countries
deteriorate markedly. Furthermore, the reporting and disclosure requirements
applicable to foreign issuers may differ from those applicable to domestic
issuers, and there may be difficulties in obtaining or enforcing judgments
against foreign issuers.
A Portfolio may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which a Portfolio may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. dollar.
Any devaluations in the currencies in which a Portfolio's investment securities
are denominated may have a detrimental impact on the Portfolio. The Managers
endeavor to avoid unfavorable consequences and to take advantage of favorable
developments in particular nations where from time to time they place a
Portfolio's investments. The exercise of this policy may include decisions to
purchase securities with substantial risk characteristics and other decisions
such as changing the emphasis on investments from one nation to another and from
one type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if any,
will exceed losses.
Developing Markets. Certain Portfolios may invest in the obligations of
governments, government agencies and corporations of developing countries. As
many developing countries restructure their existing bank debt and economic
conditions improve, these obligations have become available and may offer the
Portfolios the potential for current U.S. dollar income. Such instruments are
not traded on any exchange. However, the Managers believe there may be a market
for such securities either in multinational companies wishing to purchase such
assets at a discount for further investment or from the issuing governments
which may decide to redeem their obligations at a discount.
The Portfolios endeavor to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when a Portfolio changes investment from
one country to another or when proceeds of the sale of shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent a Portfolio from transferring
cash out of the country or withhold portions of interest and dividends at the
source, or impose other taxes with respect to a Portfolio's investments in
securities of issuers of that country. Although the Managers place a Portfolio's
investments only in foreign nations which they consider as having relatively
stable and friendly governments, there is the possibility of cessation of
trading on national exchanges, expropriation, nationalization, confiscatory or
other taxation, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability or diplomatic
developments which could affect investments in securities of issuers in those
nations.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Portfolio's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the Portfolio may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event of
such expropriation, the Portfolio could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in Eastern European countries. Finally, even though certain
Eastern European Currencies may be convertible into U.S. dollars, the conversion
rates may be artificial to the actual market values and may be adverse to
Portfolio investors.
Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals.
Authoritarian governments in certain Eastern European countries may require that
a governmental or quasi-governmental authority act as custodian of the
Portfolio's assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the Portfolio's cash and securities, the
Portfolio's investment in such countries may be limited or may be required to be
effected through intermediaries. The risk of loss through governmental
confiscation may be increased in such countries.
Investing in securities of Russian issuers, for the Portfolios that are
permitted to invest in Russia, involves a high degree of risk and special
considerations not typically associated with investing in the United States
securities markets, and should be considered highly speculative. Such risks
include: (a) delays in settling portfolio transactions and risk of loss arising
out of Russia's unique system of share registration and custody; (b) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (c) pervasiveness of corruption and crime in the
Russian economic system; (d) currency exchange rate volatility and the lack of
available currency hedging instruments; (e) higher rates of inflation (including
the risk of social unrest associated with periods of hyperinflation); (f)
controls on foreign investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits and dividends, and
on a Portfolio's ability to exchange local currencies for U.S. dollars; (g) the
risk that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (h) the
financial condition of Russian companies, including large amounts of
intercompany debt which may create a payments crisis on a national scale; (i)
dependency on exports and the corresponding importance of international trade;
(j) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (k) possible
difficulty in identifying a purchaser of securities held by a Portfolio due to
the underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for a Portfolio to lose its
registration through fraud, negligence or even mere oversight. While a Portfolio
investing in Russian securities will endeavor to ensure that its interest
continues to be appropriately recorded either itself or through a custodian or
other agent inspecting the share register and by obtaining extracts of share
registers through regular confirmations, these extracts have no legal
enforceability and it is possible that subsequent illegal amendment or other
fraudulent act may deprive the Portfolio of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian regulations impose
liability on registrars for losses resulting from their errors, it may be
difficult for a Portfolio to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
1,000 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. This practice may prevent a Portfolio from investing in the securities
of certain Russian companies deemed suitable by the Manager. Further, this also
could cause a delay in the sale of Russian company securities by a Portfolio if
a potential purchaser is deemed unsuitable, which may expose the Portfolio to
potential loss on the investment.
Currency Management Techniques
Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A forward contract may be for a single price or for a range of
prices. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers or
between broker-dealers and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
Some forward contracts, however, have a cancellation fee which a Portfolio must
pay upon cancellation if such Portfolio determines that canceling the contract
is more favorable to the Portfolio than completing the contract.
To complete or close a forward contract, a Portfolio may either accept or make
delivery of the currency specified in the contract at maturity, or enter into a
closing purchase transaction on or before the maturity date, which involves the
purchase or sale of an offsetting contract. Closing purchase transactions with
respect to forward contracts are usually effected with the currency trader who
is a party to the original forward contract.
A Portfolio may enter into forward contracts in several circumstances. For
example, when a Portfolio enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when the Portfolio
anticipates the receipt in a foreign currency of dividends or interest
payments on such a security which it holds, the Portfolio may desire to "lock
in" the dollar price of the security or the dollar equivalent of such
dividend or interest payment, as the case may be. In addition, when a Manager
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar, it may enter into a forward
contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of the Portfolio's securities
denominated in such foreign currency.
A Portfolio may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange
of that currency for another currency. The investment position is not itself
a security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
For example, an Italian lira-denominated position could be constructed by
purchasing a German mark-denominated debt security and simultaneously
entering into a forward contract to exchange an equal amount of marks for
lira at a future date and at a specified exchange rate. With such a
transaction, the Portfolio may be able to receive a return that is
substantially similar, from a yield and currency perspective, to a direct
investment in lira debt securities (which are relatively limited in size and
number), while also obtaining the benefits of liquidity available from German
mark-denominated debt securities, which may have a lower yield. The Portfolio
may experience slightly different results from its use of such combined
investment positions as compared to its purchase of a debt security
denominated in the particular currency subject to the forward contract. Such
difference may be enhanced or offset by premiums which may be available in
connection with the forward contract.
While a Portfolio may enter into forward contracts to reduce currency
exchange rate risks, changes in currency prices may result in a poorer
overall performance for the Portfolio than if it had not engaged in any such
transaction. Moreover, there may be an imperfect correlation between the
Portfolio's holding of securities denominated in a particular currency and
forward contracts entered into by the Portfolio. Such imperfect correlation
may prevent a Portfolio from achieving the intended hedge or expose the
Portfolio to the risk of foreign exchange loss.
Certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which a Portfolio may enter into forward
contracts. Such transactions may also affect the character and timing of
income, gain or loss recognized by the Portfolio for U.S. federal income tax
purposes.
Certain Portfolios may engage in cross-hedging by using forward contracts in
one currency to hedge against fluctuations in the value of securities
denominated in a different currency, if the Managers determine that there is
a pattern of correlation between the two currencies. A Portfolio may also
purchase and sell forward contracts for non-hedging purposes when the
Managers anticipate that the foreign currency will appreciate or depreciate
in value, but securities denominated in that currency do not present
attractive investment opportunities and are not held in the Portfolio.
The Portfolio's custodian will segregate cash or liquid securities, as
permitted by applicable regulations, in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward contracts
requiring the Portfolio to purchase foreign currencies. If the value of the
segregated securities declines, additional cash or securities will be
segregated on a daily basis so that the value of the segregated securities
will equal the amount of the Portfolio's commitments with respect to such
contracts. The segregated securities will be marked-to-market on a daily
basis. Although forward contracts are not presently regulated by the
Commodity Futures Trading Commission (the "CFTC"), the CFTC may in the future
assert authority to regulate these contracts. In such event, a Portfolio's
ability to utilize forward contracts may be restricted.
A Portfolio generally will not enter into a forward contract with a term
greater than one year.
Although a Portfolio may enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other
risks. Thus, while a Portfolio may benefit from such transactions,
unanticipated changes in currency prices may result in a poorer overall
performance for the Portfolio than if it had not engaged in any such
transactions. Moreover, there may be imperfect correlation between a
Portfolio's holdings of securities denominated in a particular currency and
forward contracts entered into by the Portfolio. Such imperfect correlation
may cause a Portfolio to sustain losses which will prevent the Portfolio from
achieving a complete hedge or expose the Portfolio to risk of foreign
exchange loss. The Portfolios may, but are not required, to hedge currency
risks.
Zero Coupon Funds - Special Considerations
As stated in the Prospectus, each of the Zero Coupon Funds will be primarily
invested in Stripped Government Securities. These include zero coupon securities
issued by the U.S. government and its agencies and instrumentalities, by a
variety of tax-exempt issuers such as state and local governments and their
agencies and instrumentalities and by "mixed-ownership government corporations."
Zero coupon securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from changing
interest rates than debt obligation of comparable maturities which make current
distributions of interest (cash). As a result, the net asset value of shares of
a Portfolio prior to its Target Date may fluctuate over a greater range than
shares of other mutual funds investing in U.S. Treasury securities making
current distributions of interest and having similar maturities. The current net
asset value of a Portfolio generally will vary inversely with changes in current
interest rates.
The Zero Coupon Funds' zero coupon securities investments will include:
Stripped Treasury Securities, Stripped Government Securities, Stripped
Corporate Securities and Stripped Eurodollar Obligations, as defined in the
Prospectus. A holder will separate the interest coupons from the underlying
principal (the "corpus") of the security. A number of securities firms and
banks have stripped the interest coupons and resold them in custodial receipt
programs with a number of different names, including, in the case of stripped
Treasury securities, "Treasury Income Growth Receipts" ("TIGRS") and
Certificate of Accrual on Treasuries ("CATS"). The underlying U.S. Treasury
bonds and notes themselves are held in book-entry form at the Federal Reserve
Bank or, in the case of bearer securities (i.e., unregistered securities
which are owned ostensibly by the bearer or holder thereof), in trust on
behalf of the owners thereof. Counsel to the underwriters of these
certificates or other evidences of ownership of the U.S. Treasury securities
have stated that for federal tax and securities purposes, in their opinion,
purchasers of such certificates, such as the Portfolios, most likely will be
deemed the beneficial holders of the underlying U.S. government securities.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of
particular interest coupon and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under
the STRIPS program, a Portfolio will be able to have its beneficial ownership
of zero coupon securities recorded directly in the book-entry record-keeping
system in lieu of having to hold certificates or other evidences of ownership
of the underlying U.S. Treasury securities. When U.S. Treasury obligations
have been stripped of their unmatured interest coupons by the holder, the
stripped coupons are sold separately or grouped with other coupons with like
maturity dates and sold in such bundled form. The principal or corpus is sold
at a deep discount because the buyer receives only the right to receive a
future fixed payment on the security and does not receive any rights to
periodic interest (cash) payments. Purchasers of stripped obligations
acquire, in effect, discount obligations that are economically identical to
the zero coupon securities that the Treasury sells itself. Other facilities
are available to facilitate the transfer of ownership of non-Treasury zero
coupon securities by accounting separately for the beneficial ownership of
particular interest coupon and corpus payments on such securities through a
book-entry record-keeping system.
Under normal circumstances, each Zero Coupon Fund will invest at least 65% of
its net assets in stripped securities. For short-term or emergency purchases,
the Zero Coupon Funds may purchase interest-paying U.S. government securities
and other money market instruments. The Zero Coupon Funds may enter into
repurchase agreements with respect to securities in which the Zero Coupon
Funds invest. These interest-paying securities produce income which may be an
efficient way to provide for expenses and redemptions to make benefit or
surrender payments, among other things.
Management of Reinvestment Risk and Anticipated Growth - The Zero Coupon
Funds seek to minimize unknown reinvestment risk. Reinvestment risk arises
from the uncertainty as to the total return which will be realized from
conventional interest-paying bonds due to the fact that periodic interest
(cash) will be reinvested in the future at interest rates unknown at the time
of the original purchase. With zero coupon securities, however, there are no
cash distributions to reinvest, so owners thereof bear no unknown
reinvestment risk if they hold a zero coupon security to maturity.
For a person who makes a direct investment in a zero coupon security (rather
than through a portfolio which invests in such instruments) and holds it to
maturity, the return or yield to maturity is certain regardless of whether
interim reinvestment rates rise or fall. (See table below).
Total Ending Value on a $1,000 Investment
Coupon Initial Yield (Realized Yield) if Reinvestment Rates are:
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Interest Maturity to Maturity 3% 5% 7% 9% 11%
- ---------------------------------------------------------------------------
7% 10 Years 7% $1,809 $1,894 $1,990 $2,098 $2,220
(6.11%) (6.60%) (7.12%) (7.69%) (8.30%)
0% 10 Years 7% $1,990 $1,990 $1,990 $1,990 $1,990
(7.12%) (7.12%) (7.12%) (7.12%) (7.12%)
These results assume semi-annual compounding. For illustration purposes only,
the table above assumes these reinvestment rates would remain constant over
the life of the bond. The actual reinvestment rates and total returns of
coupon-paying bonds will vary with changing market conditions.
Due to the nature of Stripped Government Securities, which may comprise 80% or
more of the investments of each Zero Coupon Fund, the reinvestment risk
accompanying these Portfolios is expected to be less than would be the case if
these Portfolios were entirely invested in interest (cash)-paying securities.
Furthermore, the Portfolio's Manager will attempt to manage reinvestment risk by
maintaining each Portfolio's average duration within twelve months of a
Portfolio's Target Date.
Duration is a measure of the length of an investment which takes into account,
through present value analysis, the timing and amount of any interest payments
as well as the amount of the principal repayment. Duration is commonly used by
professional managers to help control reinvestment risk by balancing investments
with slightly longer and shorter maturities than the investment horizon of the
overall portfolio.
The investment return of a Zero Coupon Fund, if the investment is held to
maturity, will consist primarily of the amortization of discount on the
underlying securities owned by such Portfolio (i.e., the difference between
their purchase price and their maturity value) and will be realized on the
specified Target Date. Changes in the market value of the Portfolio's
securities will affect investment return should investors redeem prior to
maturity, as can the skill of the Manager in managing the Portfolio.
Liquidation and Distribution of Assets in Target Year - As securities in a
Zero Coupon Fund's portfolio mature or are sold throughout the Target Year,
the proceeds will be invested in Money Market Instruments. By December of
that year, substantially all of the assets of the Portfolio will consist of
such Money Market Instruments and other then-maturing securities. These
instruments will be sold or allowed to mature, the liabilities of the
Portfolio will be discharged or provision made therefor, and the net assets
will be reinvested at the direction of Contract owners in one of the other
Portfolios of the Trust or automatically reinvested as stated in the
Prospectus. The estimated expenses of terminating and liquidating a Portfolio
will be accrued ratably over its Target Year. These expenses, which are
charged to income as are all expenses, are not expected to exceed
significantly the ordinary annual expenses incurred by the Portfolio and,
therefore, should have no significant additional effect on the maturity value
of the Portfolio.
Investment Methods and Risks
Common to More than One Portfolio
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Certain types of investments and investment techniques authorized for more
than one portfolio, as stated in the descriptions of the individual
Portfolios in the Prospectus, are described below and in the Prospectus. All
policies and percentage limitations are considered at the time of purchase
unless otherwise noted. Each of the Portfolios will not necessarily use the
strategies described to the full extent permitted unless the Managers believe
that doing so will help a Portfolio reach its objectives, and not all
instruments or strategies will be used at all times.
Convertible Securities
Enhanced Convertible Securities. Consistent with their respective investment
policies, certain Portfolios may invest in convertible preferred stocks that
offer enhanced yield features, such as Preferred Equity Redemption Cumulative
Stock ("PERCS"), which provide an investor, such as a Portfolio, with the
opportunity to earn higher dividend income than is available on a company's
common stock. A PERCS is a preferred stock which generally features a
mandatory conversion date, as well as a capital appreciation limit which is
usually expressed in terms of a stated price. Most PERCS expire three years
from the date of issue, at which time they are convertible into common stock
of the issuer (PERCS are generally not convertible into cash at maturity).
Under a typical arrangement, if after three years the issuer's common stock
is trading at a price below that set by the capital appreciation limit, each
PERCS would convert to one share of common stock. If, however, the issuer's
common stock is trading at a price above that set by the capital appreciation
limit, the holder of the PERCS would receive less than one full share of
common stock. The amount of that fractional share of common stock received by
the PERCS holder is determined by dividing the price set by the capital
appreciation limit of the PERCS by the market price of the issuer's common
stock. PERCS can be called at any time prior to maturity, and hence do not
provide call protection. However if called early the issuer must pay a call
premium over the market price to the investor. This call premium declines at
a preset rate daily, up to the maturity date of the PERCS.
Certain Portfolios may also invest in other classes of enhanced convertible
securities. These include but are not limited to ACES (Automatically
Convertible Equity Securities), PEPS (Participating Equity Preferred Stock),
PRIDES (Preferred Redeemable Increased Dividend Equity Securities), SAILS
(Stock Appreciation Income Linked Securities), TECONS (Term Convertible
Notes), QICS (Quarterly Income Cumulative Securities), and DECS (Dividend
Enhanced Convertible Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS,
and DECS all have the following features: they are issued by a company, the
common stock of which will be received in the event the convertible preferred
stock is converted; unlike PERCS, they do not have a capital appreciation
limit; they seek to provide the investor with high current income with some
prospect of future capital appreciation; they are typically issued with three
to four-year maturities; they typically have some built-in call protection
for the first two to three years; investors have the right to convert them
into shares of common stock at a preset conversion ratio or hold them until
maturity, and upon maturity they will automatically convert to either cash or
a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by an
operating company whose common stock is to be acquired in the event the
security is converted or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically, they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not identified here which are also similar to those
described above in which a Portfolio may invest, consistent with its
objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risk to a Portfolio. A Portfolio may have difficulty
disposing of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and a Portfolio's ability to dispose of particular
securities, when necessary, to meet the Portfolio's liquidity needs or in
response to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for a Portfolio to obtain
market quotations based on actual trades for purposes of valuing the
Portfolio's investments. Each Portfolio, however, intends to acquire liquid
securities, though there can be no assurances that this will be achieved.
Synthetic Convertibles. Certain Portfolios may invest a portion of their
assets in "synthetic convertible" securities. A synthetic convertible is
created by combining distinct securities which together possess the two
principal characteristics of a true convertible security, i.e., fixed income
and the right to acquire the underlying equity security. This combination is
achieved by investing in nonconvertible fixed-income securities and in
warrants or stock or stock index call options which grant the holder the
right to purchase a specified quantity of securities within a specified
period of time at a specified price or to receive cash in the case of stock
index options. Synthetic convertible securities are generally not considered
to be "Equity Securities" for purposes of each Portfolio's investment policy
regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the Managers
expect normally to create synthetic convertibles whose two components
represent one issuer, the character of a synthetic convertible allows a
Portfolio to combine components representing distinct issuers, or to combine
a fixed income security with a call option on a stock index, when the
Managers determine that such a combination would better promote a Portfolio's
investment objectives. In addition, the component parts of a synthetic
convertible security may be purchased simultaneously or separately; and the
holder of a synthetic convertible faces the risk that the price of the stock,
or the level of the market index underlying the convertibility component will
decline.
Illiquid Securities
The Portfolios reserve the right to invest up to 10% of their net assets in
illiquid securities, except that the Global Health Care, International
Smaller Companies, Mutual Discovery, Mutual Shares and Value Funds reserve
the right to invest up to 15% in such investments. Generally an "illiquid
security" is any security that cannot be disposed of promptly and in the
ordinary course of business at approximately the amount at which the
Portfolio has valued the instrument. Subject to this limitation, the Board of
Trustees has authorized each Portfolio to invest in restricted securities
where such investment is consistent with the Portfolio's investment objective
and has authorized such securities to be considered to be liquid to the
extent the Portfolio's Manager determines that there is a liquid
institutional or other market for such securities for example, restricted
securities which may be freely transferred among qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended,
and for which a liquid institutional market has developed. The Board of
Trustees will review any determination by the Portfolio's Managers to treat a
restricted security as liquid on a regular basis, including the Managers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly
considered a liquid security, the Portfolios' advisers and the Board of
Trustees will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers;
(iii) dealer undertakings to make a market in the security; and (iv) the
nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer). To the extent a Portfolio invests in restricted
securities that are deemed liquid, the general level of illiquidity in the
applicable Portfolio may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
Interest Rate Swaps
Certain of the Portfolios may also participate in interest rate swaps. An
interest rate swap is the transfer between two counterparties of interest
rate obligations, one of which has an interest rate fixed to maturity while
the other has an interest rate that changes in accordance with changes in a
designated benchmark (e.g., LIBOR, prime, commercial paper, or other
benchmarks). The obligations to make repayment of principal on the underlying
securities are not exchanged. Such transactions generally require the
participation of an intermediary, frequently a bank. The entity holding the
fixed-rate obligation will transfer the obligation to the intermediary, and
such entity will then be obligated to pay to the intermediary a floating rate
of interest, generally including a fractional percentage as a commission for
the intermediary. The intermediary also makes arrangements with a second
entity which has a floating-rate obligation which substantially mirrors the
obligation desired by the first party. In return for assuming a fixed
obligation, the second entity will pay the intermediary all sums that the
intermediary pays on behalf of the first entity, plus an arrangement fee and
other agreed upon fees. Interest rate swaps are generally entered into to
permit the party seeking a floating rate obligation the opportunity to
acquire such obligation at a lower rate than is directly available in the
credit market, while permitting the party desiring a fixed-rate obligation
the opportunity to acquire such a fixed-rate obligation, also frequently at a
price lower than is available in the capital markets. The success of such a
transaction depends in large part on the availability of fixed-rate
obligations at a low enough coupon rate to cover the cost involved.
Inverse Floaters
These are instruments with floating or variable interest rates that move in
the opposite direction, usually at an accelerated speed, to short-term
interest rates or interest rate indices. As with other mortgage-backed
securities, interest rate declines may result in accelerated prepayment of
mortgages and the proceeds from such prepayment must be reinvested at lower
prevailing interest rates. During periods of extreme fluctuations in interest
rates, the resulting fluctuation could affect the net asset value of a
Portfolio in proportion to the Portfolio's investment in inverse floaters. An
accelerated decline in interest rates creates a higher degree of volatility
and risk.
Mortgage and Asset-Backed Securities
This section contains additional information about adjustable rate mortgage
securities ("ARMS"), collateralized mortgage obligations ("CMOs"), which may
have "caps and floors" and "resets," asset-backed securities, and stripped
mortgage-backed securities.
Adjustable Rate Mortgage Securities ("ARMS"). ARMS are pass-through mortgage
securities which are collateralized by mortgages with adjustable rather than
fixed interest rates. The ARMS in which the Portfolios invest are issued
primarily by the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA"), and the Federal Home Loan
Mortgage Corporation ("FHLMC"), and are actively traded in the secondary
market. The underlying mortgages which collateralize ARMS issued by GNMA are
fully guaranteed by the Federal Housing Administration ("FHA") or the
Veterans Administration ("VA"), while those collateralizing ARMS issued by
FHLMC or FNMA are typically conventional residential mortgages conforming to
standard underwriting size and maturity constraints.
Unlike fixed-rate mortgages, which generally decline in value during periods
of rising interest rates, adjustable rate mortgage securities may allow a
Portfolio to participate in increases in interest rates through periodic
adjustments in the coupon rates of the underlying mortgages, resulting in
both higher current yields and lower price fluctuations. Furthermore, if
prepayments of principal are made on the underlying mortgages during periods
of rising interest rates, a Portfolio generally will be able to reinvest such
amounts in securities with a higher current rate of return. A Portfolio will
not, however, benefit from increases in interest rates to the extent that
interest rates rise to the point where they cause the current coupon of
adjustable rate mortgages held as investments to exceed the maximum allowable
annual or lifetime reset limits (or "cap rates") for a particular mortgage.
The adjustable interest rate feature of the underlying mortgages generally
will act as a buffer to reduce sharp changes in the ARMS value in response to
normal interest rate fluctuations. As the coupon rates on the mortgages
underlying the ARMS are reset periodically, yields of portfolio securities
will gradually align themselves to reflect changes in market rates and should
cause the ARMS' values to fluctuate less dramatically than those of more
traditional long-term, fixed-rate debt obligations. During periods of rising
interest rates, however, changes in the coupon rate lag behind changes in the
market rate, resulting in lower ARMS values until the coupon resets to market
rates. Since most mortgage securities in the Portfolios will generally have
annual reset caps of 100 to 200 basis points, fluctuation in interest rates
above these levels could cause such mortgage securities to "cap out" and to
behave more like long-term, fixed-rate debt obligations.
ARMS differ from conventional bonds in that principal is paid back over the
life of the ARMS rather than at maturity. As a result, the holder of the ARMS
receives monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing prepayments on the
underlying mortgages. When the holder reinvests the payments and any
unscheduled prepayments of principal it receives, it may receive a rate of
interest which is lower than the rate on the existing ARMS. For this reason,
ARMS may be less effective than other types of U.S. Government Securities as
a means of "locking in" long-term interest rates.
Collateralized Mortgage Obligations ("CMOs"). CMOs, considered derivative or
complex securities, are securities collateralized by pools of mortgage loans
created by commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other issuers in the U.S. Timely
payment of interest and principal (but not the market value) of these pools
is supported by various forms of insurance or guarantees issued by U.S.
Government agencies, private issuers, and mortgage poolers; however, the
obligation itself is not guaranteed. If the collateral securing the
obligations is insufficient to make payment on the obligation, a holder could
sustain a loss. In addition, a Portfolio may buy CMOs without insurance or
guarantees if, in the opinion of the Managers, the sponsor is creditworthy.
The ratings of the CMOs will be consistent with the ratings criteria of the
Portfolio. Prepayments of the mortgages included in the mortgage pool may
influence the yield of the CMO. Prepayments usually increase when interest
rates are decreasing, thereby decreasing the life of the pool. Reinvestment
of prepayments may be at a lower rate than that on the original CMO. As a
result, the value of CMOs decrease like other debt obligations when interest
rates rise, but when interest rates decline, they may not increase as much as
other debt obligations, due to the prepayment feature.
Resets. The interest rates paid on ARMS and CMOs generally are readjusted at
intervals of one year or less to an increment over some predetermined
interest rate index. There are several main categories of indices: those
based on U.S. Treasury securities, those based on the London Interbank Offer
Rate ("LIBOR"), and those derived from a calculated measure such as a cost of
funds index or a moving average of mortgage rates.
Caps and Floors. The underlying mortgages which collateralize ARMS and CMOs
will frequently have caps and floors which limit the maximum amount by which
the loan rate to the residential borrower may change up or down (1) per reset
or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization
(that is, an increase in the principal due). In periods of rising interest
rates, certain coupons may be temporarily "capped out" resulting in declines
in the prices of those securities and, therefore, a negative effect on share
price. Conversely, in periods of declining interest rates, certain coupons
may be temporarily "floored out" resulting in an increase in the prices of
those securities and therefore, a positive effect on a Portfolio's share
price.
Asset-Backed Securities. Asset-backed securities represent participation in,
or are secured by and payable from, assets such as motor vehicle installment
sale contracts, installment loan contracts, leases of various types of real
and personal property, receivables from revolving credit (credit card)
agreements and other categories of receivables. Such securities are generally
issued by trusts and special purpose corporations.
Like mortgage-backed securities, asset-backed securities are often subject to
more rapid repayment than their stated maturity dates would indicate as a
result of the pass-through of prepayments of principal on the underlying
loans. During periods of declining interest rates, prepayment of loans
underlying asset-backed securities can be expected to accelerate, and thus
impair a Portfolio's ability to reinvest the returns of principal at
comparable yields. Accordingly, the market values of such securities will
vary with changes in market interest rates generally and in yield
differentials among various kinds of U.S. Government Securities and
mortgage-backed and asset-backed securities. Asset-backed securities present
certain additional risks that are not presented by mortgage-backed securities
because asset-backed securities generally do not have the benefit of a
security interest in collateral that is comparable to mortgage assets. There
is the possibility that, in some cases, recoveries on repossessed collateral
may not be available to support payments on these securities.
Stripped Mortgage-Backed Securities. Stripped mortgage securities are
derivative multi-class mortgage securities. Stripped mortgage securities may
be issued by agencies or instrumentalities of the U.S. government, or by
private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Stripped mortgage securities
have greater market volatility than other types of mortgage securities in
which a Portfolio may invest.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on
a pool of mortgage assets. A common type of stripped mortgage security will
have one class receiving some of the interest and most of the principal from
the mortgage assets, while the other class will receive most of the interest
and the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the
other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive not only
to changes in prevailing interest rates but also to the rate of principal
payments (including prepayments) on the related underlying mortgage assets,
and a rapid rate of principal payments may have a material adverse effect on
a Portfolio's yield to maturity. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Portfolio may fail to
fully recoup its initial investment in these securities even if the
securities are rated in the highest rating categories, AAA or Aaa, by S&P or
Moody's, respectively.
Stripped mortgage securities are purchased and sold by institutional
investors, such as the Portfolios, through several investment banking firms
acting as brokers or dealers. As these securities were only recently
developed, traditional trading markets have not yet been established for all
such securities. Accordingly, some of these securities may generally be
illiquid. The staff of the SEC (the "Staff") has indicated that only
government-issued IO or PO securities which are backed by fixed-rate
mortgages may be deemed to be liquid, if procedures with respect to
determining liquidity are established by a portfolio's board. The Board of
Trustees may, in the future, adopt procedures which would permit a Portfolio
to acquire, hold, and treat as liquid government-issued IO and PO securities.
At the present time, however, all such securities will continue to be treated
as illiquid and will, together with any other illiquid investments, not
exceed 10% of a Portfolio's net assets. Such position may be changed in the
future, without notice to shareholders, in response to the Staff's continued
reassessment of this matter as well as to changing market conditions.
Municipal Securities
Municipal securities are debt obligations issued by local and state
governments that provide interest income which can be either taxable or tax
exempt. Municipal securities include both municipal bonds (those securities
with maturities of five years or more) and municipal notes (those with
maturities of less than five years). Generally, municipal securities are used
to raise money for various public purposes such as constructing public
facilities and making loans to public institutions. Taxable municipal bonds
are generally issued to provide funding for privately operated facilities.
Municipal notes are issued to meet the short-term funding requirements of
local, regional, and state governments. General obligation municipal
securities are secured by the issuer's pledge of full faith, credit and
taxing power. Revenue or special tax bonds are payable from the revenues
derived from a particular facility or, in some cases, from a special excise
or other tax, but not from general tax revenue.
Options and Futures
Certain Portfolios, as described in the Trust's Prospectus, may write covered
put or call options, purchase put and call options, or engage in futures
transactions.
Writing Options. All options written by a Portfolio will be "covered." Call
options written by a Portfolio give the holder the right to buy the
underlying securities from the Portfolio at a stated exercise price. Put
options written by a Portfolio give the holder the right to sell the
underlying security to the Portfolio at a stated exercise price.
A call option written by a Portfolio is "covered" if that Portfolio owns the
underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if a Portfolio holds a call on the same security and
in the same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the call
written or (b) is greater than the exercise price of the call written if the
difference is maintained by a Portfolio in cash and high grade debt
obligations in a segregated account with its custodian.
A put option written by a Portfolio is "covered" if the Portfolio segregates
cash and liquid securities, as permitted by applicable regulations, with a
value equal to the exercise price with its custodian, or else holds a put on
the same security and in the same principal amount as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written. The premium paid by the purchaser of an option will
reflect, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand, and interest rates.
The writing of covered put options involves certain risks. For example, if
the market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and the Portfolio's gain
will be limited to the premium received. If the market price of the
underlying security declines or otherwise is below the exercise price, a
Portfolio may attempt to close the position or take delivery of the security
at the exercise price, and the Portfolio's return will be the premium
received from the put options minus the amount by which the market price of
the security is below the exercise price.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. If a secondary market does not exist, it
might not be possible to effect closing sale transactions in particular
options held by a Portfolio, with the result that the Portfolio would have to
exercise the options in order to realize any profit. The premium which a
Portfolio will pay in executing a closing purchase transaction may be higher
or lower than the premium it received when writing the option, depending in
large part upon the relative price of the underlying security at the time of
each transaction. If a Portfolio is unable to effect a closing purchase
transaction with respect to options it has written in a secondary market, it
will not be able to sell the underlying security or other asset covering the
option until the option expires or it delivers the underlying security or
asset upon exercise.
Purchasing Options. Put options on particular securities may be purchased to
protect against a decline in the market value of the underlying security
below the exercise price less the premium paid for the option. A put option
gives the holder the right to sell the underlying security at the option
exercise price at any time during the option period. The ability to purchase
put options will allow a Portfolio to protect the unrealized gain in an
appreciated security in its portfolio without actually selling the security.
In addition, a Portfolio will continue to receive interest or dividend income
on the security. A Portfolio may sell a put option which it has previously
purchased prior to the sale of the securities underlying such option. Such
sales will result in a net gain or loss, depending on whether the amount
received on the sale is more or less than the premium and other transaction
costs paid for the put option that is sold. Such gain or loss may be wholly
or partially offset by a change in the value of the underlying security which
the Portfolio owns or has the right to acquire.
Call options on securities may be purchased to limit the risk of a
substantial increase in the market price of such security. A Portfolio may
also purchase call options on securities held in its portfolio and on which
it has written a call option. A call option gives the holder the right to buy
the underlying securities from the option writer at a stated exercise price.
Prior to its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on whether the
amount received is more or less than the premium paid for the call option
plus the related transaction costs. When a Portfolio writes a call option on
one of its portfolio securities and the underlying securities do not reach a
price level which would make the exercise of the option profitable to the
holder of the option, the option will generally expire without being
exercised. However, if the underlying securities rise in price and the option
is exercised, the Portfolio will not participate in any increase in the price
of the underlying securities beyond the exercise price of the option.
Options on Stock Indices. Call and put options on stock indices may be
purchased and written to hedge against the risk of market or industry-wide
stock price fluctuations or to increase income to the Portfolio. Call and put
options on stock indices are similar to options on securities except that,
rather than the right to purchase or sell particular securities at a
specified price, options on a stock index give the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level
of the underlying stock index is greater than (or less than, in the case of
puts) the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of
the option, expressed in dollars multiplied by a specified number. Thus,
unlike options on individual securities, all settlements are in cash, and
gain or loss depends on price movements in the stock market generally (or in
a particular industry or segment of the market) rather than price movements
in individual securities. When a Portfolio writes an option on a stock index,
it will segregate cash or liquid securities, as permitted by applicable
regulations, with its custodian in an amount at least equal to the market
value of the option and will continue this segregation while the option is
open or will otherwise cover the transaction.
Combining Option Transactions. Certain Portfolios may also (i) buy puts and
write calls on the same portfolio security in "forward conversion"
transactions; (ii) engage in "spread" transactions in which a Portfolio
purchases and writes a put or call option on the same security with the
options having different exercise prices and/or expiration dates; (iii)
engage in "straddles" in which the Portfolio may purchase or write
combinations of put and call options on the same security; and (iv) purchase
a security and then write a call option against that security in a
"buy-and-write" transaction. Spread and straddle transactions may involve a
limited degree of investment leverage, and a Portfolio will not engage in
spreads or straddles if, as a result, more than 5% of its net assets will be
invested in such option transactions.
Special Risks Associated With Options. Options on securities traded on
national securities exchanges are within the jurisdiction of the SEC, as are
other securities traded on such exchanges. As a result, many of the
protections provided to traders on organized exchanges will be available with
respect to such transactions. In particular, all option positions entered
into on a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation, thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a Portfolio to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements. Over-the-counter options and the
assets used to cover such options will be considered illiquid securities and
will not, together with any other illiquid securities, exceed 10% of a
Portfolio's net assets.
An exchange traded options position may be closed out only on an options
exchange which provides a secondary market for an option of the same series.
Although a Portfolio will generally purchase or write only those options for
which there appears to be an active secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
option, or at any particular time. For some options, no secondary market on
an exchange may exist. In such event, it might not be possible to effect
closing transactions in particular options, with the result that a Portfolio
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the sale of underlying securities pursuant to
the exercise of put options. If a Portfolio as a covered call option writer
is unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying currency (or security denominated in
that currency) until the option expires or it delivers the underlying
currency upon exercise. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times, render
certain of the facilities of the Options Clearing Corporation inadequate, and
thereby result in the institution by an exchange of special procedures which
may interfere with the timely execution of customers' orders.
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily price
fluctuation limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. The Portfolio, when it is the
purchaser of an option, is at risk only to the full extent of the premium it
has paid for the option. The Portfolio, when it is the writer of an option,
is at risk for the difference between the price at which the option is
exercisable and the market price of the underlying security, minus the amount
of the premium received.
The amount of the premiums which a Portfolio may pay or receive may be
adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option purchasing and
writing activities.
The risks of transactions in options on foreign exchanges are similar to the
risks of investing in foreign securities. In addition, a foreign exchange may
impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
Futures Contracts. Certain of the Portfolios may enter into contracts for the
purchase or sale for future delivery of debt securities or currency ("futures
contracts"), or may purchase and sell financial futures contracts. As long as
required by regulatory authorities, each Portfolio will limit its use of
futures contracts to hedging transactions in order to avoid being a commodity
pool. A "sale" of a futures contract means the acquisition and assumption of
a contractual right and obligation to deliver the securities or currency
called for by the contract at a specified price on a specified settlement
date. A "purchase" of a futures contract means the acquisition and assumption
of a contractual right and obligation to acquire the securities or currency
called for by the contract at a specified price on a specified date. U.S.
futures contracts have been designed by exchanges which have been designated
"contract markets" by the CFTC and must be executed through a futures
commission merchant or brokerage firm, which is a member of the relevant
contract market. Existing contract markets for futures contracts on debt
securities include the Chicago Board of Trade, the New York Cotton Exchange,
the Mid-America Commodity Exchange (the "MCE"), and International Money
Market of the Chicago Mercantile Exchange (the "IMM"). Existing contract
markets for futures contracts on currency include the MCE, the IMM and the
London International Financial Futures Exchange. Futures contracts trade on
these markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange. A Portfolio may enter into futures contracts which are based on
foreign currencies, interest rates, or on debt securities that are backed by
the full faith and credit of the U.S. government, such as long-term U.S.
Treasury bonds, Treasury notes, Government National Mortgage Association
modified pass-through mortgage-backed securities, and three-month U.S.
Treasury bills. A Portfolio may also enter into futures contracts which are
based on corporate securities and non-U.S. government debt securities, but
such futures contracts are not currently available.
At the time a futures contract is purchased or sold, the Portfolio must
deposit cash or securities in a segregated account ("initial deposit") with
the Portfolio's custodian. It is expected that the initial deposit would be
approximately 1% to 5% of a contract's face value. Thereafter, the futures
contract is valued daily and the payment of "variation margin" may be
required since each day the Portfolio would pay or receive cash that reflects
any decline or increase in the contract's value.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of currency or securities, in most cases the contractual
obligation is terminated before the settlement date of the contract without
having to make or take delivery of the securities. The termination of a
contractual obligation is accomplished by buying (or selling, as the case may
be) on a commodities exchange an identical offsetting futures contract
calling for delivery in the same month. Such a transaction, which is effected
through a member of an exchange, cancels the obligation to make or take
delivery of the underlying currency or security. Since all transactions in
the futures market are made, offset or fulfilled through a clearing house
associated with the exchange on which the contracts are traded, the
Portfolios will incur brokerage fees when they purchase or sell futures
contracts.
The purpose of the purchase or sale of a futures contract by the Portfolios
is to attempt to protect the Portfolios from fluctuations in interest or
currency exchange rates without actually buying or selling long-term,
fixed-income securities or currency. For example, if a Portfolio owns
long-term bonds and interest rates were expected to increase, such Portfolio
might enter into futures contracts for the sale of debt securities. Such a
sale would have much the same effect as selling an equivalent value of the
long-term bonds owned by a Portfolio. If interest rates did increase, the
value of the debt securities owned by a Portfolio would decline, but the
value of the futures contracts to such Portfolio would increase at
approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. A Portfolio
could accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are expected to
increase. However, since the futures market is often more liquid than the
cash (securities) market, the use of futures contracts as an investment
technique allows a Portfolio to maintain a defensive position without having
to sell its portfolio securities. Similarly, if a Portfolio expects that a
foreign currency in which its securities are denominated will decline in
value against the U.S. dollar, the Portfolio may sell futures contracts on
that currency. If the foreign currency does decline in value, the decrease in
value of the security denominated in that currency will be offset by an
increase in the value of the Portfolio's futures position.
Alternatively, when it is expected that interest rates may decline, futures
contracts may be purchased in an attempt to hedge against the anticipated
purchase of long-term bonds at higher prices. Since the fluctuations in the
value of futures contracts should be similar to that of long-term bonds, the
Portfolio could take advantage of the anticipated rise in the value of
long-term bonds without actually buying them until the market had stabilized.
At that time, the futures contracts could be liquidated and such Portfolio
could then buy long-term bonds on the cash (securities) market. Similarly, if
a Portfolio intends to acquire a security or other asset denominated in a
currency that is expected to appreciate against the U.S. dollar, the
Portfolio may purchase futures contracts on that currency. If the value of
the foreign currency does appreciate, the increase in the value of the
futures position will offset the increased U.S. dollar cost of acquiring the
asset denominated in that currency. To the extent a Portfolio enters into
futures contracts for this purpose, the assets in the segregated asset
account maintained to cover the Portfolio's purchase obligations with respect
to such futures contracts will consist of cash, cash equivalents or high
quality debt securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash (securities or foreign
currency) and futures markets, due to differences in the natures of those
markets, are subject to distortions. First, all participants in the futures
markets are subject to initial deposit and variation margin requirements.
Rather than meeting additional variation margin requirements, investors may
close futures contracts through offsetting transactions which could distort
the normal relationship between the cash (securities or foreign currency) and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus causing distortions.
Due to the possibility of such distortion, a correct forecast of general
interest rate trends by the Manager may still not result in a successful
hedging transaction.
In addition, futures contracts entail certain risks. Although the Managers
believe that the use of such contracts will benefit a Portfolio, if the
Manager's investment judgment about the general direction of interest or
currency exchange rates is incorrect, a Portfolio's overall performance would
be poorer than if it had not entered into any such contract. For example, if
the Portfolio has hedged against the possibility of an increase in interest
rates which would adversely affect the price of bonds held in its portfolio
and interest rates decrease instead, the Portfolio will lose part or all of
the benefit of the increased value of its bonds which it has hedged because
it will have offsetting losses in its futures positions. Similarly, if a
Portfolio sells a foreign currency futures contract and the U.S. dollar value
of the currency unexpectedly increases, the Portfolio will lose the
beneficial effect of such increase on the value of the security denominated
in that currency. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. Such
Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
Options on Futures Contracts. Certain of the Portfolios are permitted to
purchase and write options on futures contracts for hedging purposes only.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security or
currency. Depending on the pricing of the option compared to either the price
of the futures contract upon which it is based or the price of the underlying
debt securities or currency, it may or may not be less risky than direct
ownership of the futures contract of the underlying debt securities or
currency. As with the purchase of futures contracts, when the Portfolio is
not fully invested, it may purchase a call option on a futures contract to
hedge against a market advance due to declining interest rates or
appreciation in the value of a foreign currency against the U.S. dollar.
If a Portfolio writes a call option on a futures contract and the futures
price at expiration of the option is below the exercise price, the Portfolio
will retain the full amount of the option premium, which may provide a
partial hedge against any decline that may have occurred in the value of the
Portfolio's holdings. If the futures price at expiration of the option is
higher than the exercise price, such Portfolio will retain the full amount of
the option premium, which may provide a partial hedge against any increase in
the price of securities which the Portfolio intends to purchase. If a put or
call option a Portfolio has written is exercised, the Portfolio will incur a
loss which will be reduced by the amount of the premium it received.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures positions, a
Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of its portfolio securities.
The amount of risk a Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of
an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. A Portfolio will purchase a put option on a futures contract only
to hedge the Portfolio's investments against the risk of rising interest
rates or the decline in the value of securities denominated in a foreign
currency.
A Portfolio's ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options and futures are relatively new and still
developing, and it is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no
assurance can be given that the Portfolio will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, a
Portfolio's ability to engage in options and futures transactions may be
limited by tax considerations.
A Portfolio will engage in transactions in future contracts and related
options only to the extent such transactions are consistent with the
requirements of the Code for maintaining its qualification as a regulated
investment company for federal income tax purposes (see "Tax Considerations"
in the Prospectus).
A Portfolio investing in such investments may not purchase or sell futures
contracts or purchase or sell related options, except for closing purchase or
sale transactions, if immediately thereafter the sum of the amount of margin
deposits on a Portfolio's outstanding futures and related options positions
and the amount of premiums paid for outstanding options on futures would
exceed 5% of the market value of the Portfolio's total assets. These
transactions involve brokerage costs, require margin deposits and, in the
case of contracts and options obligating a Portfolio to purchase securities
or currencies, require the Portfolio to segregate assets to cover such
contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Portfolio may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Portfolio
than if it had not entered into any futures contracts or options
transactions. In the event of an imperfect correlation between a futures
position and portfolio position which is intended to be protected, the
desired protection may not be obtained and the Portfolio may be exposed to
risk of loss.
Perfect correlation between a Portfolio's futures positions and portfolio
positions may be difficult to achieve because no futures contracts based on
corporate fixed-income securities are currently available. In addition, it is
not possible to hedge fully or perfectly against currency fluctuations
affecting the value of securities denominated in foreign currencies because
the value of such securities is likely to fluctuate as a result of
independent factors not related to currency fluctuations.
Financial Futures Contracts. A Portfolio permitted to do so under its
investment policies may, for bona fide hedging purposes or for other
appropriate risk management purposes permitted under regulations promulgated
by the Commodity Futures Trading Commission ("CFTC"), purchase or sell
futures contracts on interest rates, financial indices, currencies and stock
indices, and U.S. government securities, and may purchase and write on a
covered basis put and call options on futures contracts. Investment decisions
relating to futures contracts and options thereon will be based upon, among
other considerations, the composition of a Portfolio's investments and the
Managers' expectations concerning interest rates and the currency and
securities markets. In addition, for hedging purposes or to increase income
to a Portfolio, the Portfolio may purchase put and call options and write
covered put and call options on securities, currencies and securities indices
traded on U.S. exchanges and, to the extent permitted by law, foreign
exchanges, as well as over-the-counter.
For bona fide hedging purposes or for other appropriate risk management
purposes pursuant to the Commodity Exchange Act, as amended, and the rules
promulgated thereunder by the CFTC, a Portfolio may enter into contracts for
the purchase or sale for future delivery of U.S. Treasury or foreign
securities. Each Portfolio may similarly enter into futures contracts based
upon financial indices. A Portfolio may enter into financial futures
contracts, stock index futures contracts, foreign currency futures contracts
and options on any of the foregoing. These futures contracts are referred to
collectively as "financial futures." Financial futures are commodity
contracts that obligate the long or short holder to take or make delivery of
a specified quantity of a financial instrument, such as U.S. Treasury or
other securities or foreign currencies, or the cash value of a securities
index during a specified future period at a specified price. A "sale" of
these types of futures contracts means the acquisition of a contractual
obligation to deliver the securities or the cash value of the index called
for by the contract at a specified price on a specified date. A "purchase" of
these types of futures contracts means the acquisition of a contractual
obligation to acquire the securities or the cash value of the index called
for by the contract at a specified price on a specified date.
At the same time a futures contract is purchased or sold, a Portfolio must
allocate cash or securities as a deposit payment ("initial deposit"). The
futures contract is valued daily thereafter and the payment of some amount of
"variation margin" may be required, reflecting any decline or increase in the
contract's value.
To the extent a Portfolio enters into contracts for the purchase or sale for
future delivery of financial futures and to the extent required by SEC rules,
it will maintain, with its custodian bank, assets in a segregated account to
cover its obligations with respect to such contracts. These assets will
consist of cash, cash equivalents or high quality debt obligations from the
Portfolio's investments, in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect
to such futures contracts.
Interest Rate Futures Contracts. Certain Portfolios may purchase and sell
interest rate futures contracts and options thereon traded on domestic
exchanges and, to the extent such contracts have been approved by the CFTC
for sale to customers in the U.S., on foreign exchanges.
A Portfolio may enter into interest rate futures contracts in order to
protect its portfolio securities from fluctuations in interest rates without
necessarily buying or selling the underlying fixed-income securities. For
example, if a Portfolio owns bonds, and interest rates are expected to
increase, it might sell futures contracts on debt obligations having
characteristics similar to those held in the portfolio. Such a sale would
have much the same effect as selling an equivalent value of the bonds owned
by the Portfolio. If interest rates did increase, the value of the debt
obligations in the portfolio would decline, but the value of the futures
contracts to the Portfolios would increase at approximately the same rate,
thereby keeping the net asset value of the Portfolio from declining as much
as it otherwise would have. A Portfolio could accomplish similar results by
selling bonds with longer maturities and investing in bonds with shorter
maturities when interest rates are expected to increase. However, since the
futures market may be more liquid than the cash market, the use of futures
contracts as a risk management technique allows a Portfolio to maintain a
defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, a Portfolio
may purchase interest rate futures contracts in an attempt to hedge against
having to make future anticipated purchases of bonds at the higher prices
expected to prevail in the future. Since the fluctuations in the value of
appropriately selected futures contracts should be similar to that of the
bonds that will be purchased, the Portfolio could take advantage of the
anticipated rise in the cost of the bonds without actually buying them until
the market had stabilized. At that time, the Portfolio could make the
intended purchase of the bonds in the cash market and the futures contracts
could be liquidated.
Options on Interest Rate Futures Contracts. A Portfolio may also purchase
call and put options and write covered call and put options on interest rate
futures contracts traded on domestic exchanges and, to the extent such
contracts have been approved by the CFTC for sale to customers in the U.S.,
on foreign exchanges to hedge against risks associated with shifts in
interest rates and may enter into closing transactions with respect to such
options.
Stock Index Futures Contracts. Certain Portfolios may purchase and sell stock
index futures contracts and options on stock index futures contracts traded
on domestic exchanges and, to the extent such contracts have been approved by
the CFTC for sale to customers in the U.S., on foreign exchanges. A stock
index futures contract obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is
made. Open futures contracts are valued on a daily basis and a Portfolio may
be obligated to provide or receive cash reflecting any decline or increase in
the contract's value. No physical delivery of the underlying stocks in the
index is made in the future.
A Portfolio may sell stock index futures contracts in anticipation of or
during a market decline in an attempt to offset the decrease in market value
of its securities that might otherwise result. When a Portfolio is not fully
invested in stocks and anticipates a significant market advance, it may
purchase stock index futures in order to gain rapid market exposure that may
offset increases in the cost of common stocks that it intends to purchase.
Options on Stock Index Futures Contracts. Call and put options on stock index
futures may be purchased or sold to hedge against risks of market-side price
movements. Such options may be traded on domestic exchanges and, to the
extent such contracts have been approved by the CFTC for sale to customers in
the U.S., on foreign exchanges. The need to hedge against such risks will
depend on the extent of diversification of a Portfolio's common stock
investments and the sensitivity of such investments to factors influencing
the stock market as a whole.
Risks in Investing in Options and Futures Contracts and Related Options. The
purchase and sale of futures contracts and options thereon, as well as the
purchase and writing of options on securities and securities indices and
currencies, involve risks different from those involved with direct
investments in securities. A liquid secondary market for any futures or
options contract may not be available when a futures or options position is
sought to be closed and the inability to close such positions could leave an
adverse impact on a Portfolio's ability to effectively hedge its securities
on foreign currency exposure. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which
the futures or options contract is based and movements in the securities or
currency in the Portfolio's investments. 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 Portfolio gives up the
opportunity, while the option is in effect, to profit from any price increase
in the underlying security above the option exercise price.
While utilization of options, futures contracts and similar instruments may
be advantageous to the Portfolios, if the Managers are not successful in
employing such instruments in managing each Portfolio's investments, each
Portfolio's performance will be worse than if they did not employ such
strategies. In addition, each Portfolio will pay commissions and other costs
in connection with such investments, which may increase each Portfolio's
expenses and reduce its return. In writing options on futures, each
Portfolio's loss is potentially unlimited and may exceed the amount of the
premium received.
The risk of loss in trading foreign futures contracts and foreign options can
be substantial. Investors should be aware of the following: (i) participation
in foreign futures contracts and foreign options transactions involves the
execution and clearing of trades on, or subject to, the rules of a foreign
board of trade; and (ii) applicable foreign law which will vary, depending on
where the foreign futures or options transaction occurs. For these reasons, a
Portfolio might not be afforded certain of the protective measures provided
by the Commodity Exchange Act, the CFTC's regulations and the rules of the
National Futures Association and any domestic exchange. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon, may be affected by any variance in the
foreign exchange rate between the time a particular order is placed and the
time it is liquidated, offset or exercised.
In certain cases the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed more effectively
and at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities. However, there are risks involved
in these transactions as discussed above.
Any Portfolio's investment in options, futures contracts, forward contracts,
options on futures contracts or stock indices, and foreign currencies and
securities may be limited by the requirements of the Code for qualification
as a regulated investment company. These securities require the application
of complex and special rules and elections, more information about which is
included below under "Additional Information Regarding Taxation."
Portfolio Turnover
Because the investment outlook of the type of securities which each Portfolio
may purchase may change as a result of unexpected developments in national or
international securities markets, or in economic, monetary or political
relationships, a Portfolio's Manager will consider the economic effect of
portfolio turnover but generally not treat portfolio turnover as a limiting
factor in making investment decisions. Investment decisions affecting
turnover may include changes in investment strategies or nonfundamental
investment policies, including changes in management personnel, as well as
individual portfolio transactions.
Moreover, turnover may be increased by certain factors wholly outside the
control of the Managers. For example, during periods of rapidly declining
interest rates, such as the U.S. experienced in 1991 through 1993, the rate
of mortgage prepayments may increase rapidly, resulting in the return of
principal to portfolios which invest in mortgage securities, thus increasing
"sales" of portfolio securities. Similarly, the rate of bond calls by issuers
of fixed-income securities may increase as interest rates decline, thereby
forcing the "sale" of called bonds by portfolios which invest in fixed-income
securities and subsequent purchase of replacement investments. In other
periods, increased merger and acquisition activity, or increased rates of
bankruptcy or default, may create involuntary transactions for portfolios
which hold affected stocks and bonds, especially high-yield bonds. Global or
international fixed income securities portfolios may have higher turnover
rates because of maturing debt securities, rebalancing of the portfolio to
keep interest rate risk at desired levels and the rebalancing of the
portfolio to keep country allocations at desired levels; if the Manager's
allocation target changes, additional turnover may result.
In addition, redemptions or exchanges by investors may require the
liquidation of portfolio securities. Changes in particular portfolio holdings
may be made whenever it is considered that a security is no longer the most
appropriate investment for a Portfolio, or that another security appears to
have a relatively greater opportunity, and will be made without regard to the
length of time a security has been held.
The portfolio turnover rates for each Portfolio are disclosed in the
prospectus for the Portfolios, in the section entitled "Financial
Highlights." Portfolio turnover is a measure of how frequently a portfolio's
securities are bought and sold. As required by the SEC, annual portfolio
turnover is calculated generally as the dollar value of the lesser of a
portfolio's purchases or sales of portfolio securities during a given year,
divided by the monthly average value of the portfolio's securities during
that year (excluding securities whose maturity or expiration at the time of
acquisition were less than one year). For example, a portfolio reporting a
100% portfolio turnover rate would have purchased and sold securities worth
as much as the monthly average value of its portfolio securities during the
year. Except for certain Portfolios noted in the Prospectus, the Portfolios
generally do not expect their annual turnover rates to exceed 100%. Because
so many variable factors are beyond the control of the Managers, it is not
possible to estimate future turnover rates with complete accuracy. Higher
portfolio turnover rates generally increase transaction costs, which are
portfolio expenses, but would not create taxable capital gains for investors
because of the tax-
deferred status of variable annuity and life insurance investments.
Real Estate Fund
Real Estate Related Investments. In addition to the Portfolio's investments
in real estate securities, as defined in the Trust Prospectus, the Portfolio
may also invest a portion of its assets in debt obligations or equity
securities of issuers engaged in businesses whose products and services are
closely related to the real estate industry, and publicly traded on an
exchange or in the over-the-counter market, including principal mortgage
pools, CMOs, and related instruments which are publicly traded (including,
without limitation, pools containing GNMA and FNMA mortgages). The Portfolio
will invest no more than 55% of its assets in either GNMA or FNMA securities
and no more than 70% of its assets in GNMA and FNMA securities, in the
aggregate. In addition, the Portfolio does not invest in the "residual
interests" of real estate mortgage investment conduits ("REMICs").
Repurchase Agreements
Each Portfolio may enter into repurchase agreements. A repurchase agreement
is an agreement in which the seller of a security agrees to repurchase the
security sold at a mutually agreed upon time and price. Under the 1940 Act, a
repurchase agreement is deemed to be the loan of money by the Portfolio to
the seller, collateralized by the underlying security. The resale price is
normally in excess of the purchase price, reflecting an agreed upon interest
rate. The interest rate is effective for the period of time in which the
Portfolio is invested in the agreement and is not related to the coupon rate
on the underlying security. The period of these repurchase agreements will
usually be short, from overnight to one week, and at no time will a Portfolio
invest in repurchase agreements for more than one year. However, the
securities which are subject to repurchase agreements may have maturity dates
in excess of one year from the effective date of the repurchase agreements.
The transaction requires the initial collateralization of the seller's
obligation by securities with a market value, including accrued interest,
equal to at least 102% of the dollar amount invested by the Portfolio, with
the value marked-to-market daily to maintain 100% coverage. A default by the
seller might cause the Portfolio to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The
Portfolios might also incur disposition costs in liquidating the collateral.
The Portfolios may not enter into a repurchase agreement with more than seven
days duration if, as a result, the market value of the Portfolios' net
assets, together with investments in other securities deemed to be not
readily marketable, would be invested in such repurchase agreements in excess
of the Portfolios' policy on investments in illiquid securities. The
Portfolios intend to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy
by their respective Managers. The securities held subject to resale (the
collateral) will be held on behalf of a Portfolio by a custodian approved by
the Board and will be held pursuant to a written agreement.
Reverse Repurchase Agreements
Certain Portfolios may enter into reverse repurchase agreements with banks
and broker-dealers. Reverse repurchase agreements involve sales by a
Portfolio of portfolio assets concurrently with an agreement by the Portfolio
to repurchase the same assets at a later date at a fixed price. During the
reverse repurchase agreement period, the Portfolio continues to receive
dividend payments on these securities.
When effecting reverse repurchase transactions, each Portfolio will establish
a segregated account with its custodian bank in which it will maintain cash,
U.S. Government securities or other liquid high grade debt obligations equal
in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by a Portfolio may decline below the price of the
securities the Portfolio has sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, a Portfolio's use of the
proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Portfolio's
obligation to repurchase the securities. Reverse repurchase agreements are
considered borrowings by the Portfolios and as such are subject to the
investment limitations discussed below under "Fundamental Investment
Restrictions" or in the prospectus under "Investment Methods and Risks,
Common to More Than One Portfolio."
These transactions may increase the volatility of a Portfolio's income or net
asset value. The Portfolio carries the risk that any securities purchased
with the proceeds of the transaction will depreciate or not generate enough
income to cover the Portfolio's obligations under the reverse repurchase
transaction. These transactions also increase the interest and operating
expenses of a portfolio.
Short Sales
Certain Portfolios may make short sales of securities. A short sale is a
transaction in which the Portfolio sells a security it does not own in
anticipation that the market price of that security will decline. Each
Portfolio expects to make short sales (i) as a form of hedging to offset
potential declines in long positions in similar securities, (ii) in order to
maintain portfolio flexibility and (iii) for profit.
When a Portfolio makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Portfolio may have to pay a fee to borrow particular securities and
is often obligated to pay over any payments received on such borrowed
securities.
The Portfolio's obligation to replace the borrowed security will be secured
by collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed.
The Portfolio will also be required to deposit similar collateral with its
custodian to the extent, if any, necessary so that the value of both
collateral deposits in the aggregate is at all times equal to at least 100%
of the current value of the security sold short.
If the price of the security sold short increases between the time of the
short sale and the time the Portfolio replaces the borrowed security, the
Portfolio will incur a loss; conversely, if the price declines, the Portfolio
will realize a gain. Any gain will be decreased, and any loss increased, by
the transaction costs described above. Although the Portfolio's gain is
limited to the price at which it sold the security short, its potential loss
is theoretically unlimited.
The Mutual Discovery and Mutual Series Funds may make short sales, but will
not make a short sale if, after giving effect to such sale, the market value
of all securities sold short exceeds 5% of the value of the Portfolio's total
assets or the Portfolio's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. These
Portfolios may also make short sales "against the box" without respect to
such limitations. In this type of short sale, at the time of the sale, the
Portfolios own or have the immediate and unconditional right to acquire at no
additional cost the identical security.
When-Issued Securities
Securities when originally issued are sometimes offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield
terms, is fixed at the time the commitment to purchase is made, but delivery
and payment for the when-issued securities take place at a later date.
Normally, the settlement date occurs within one month of the purchase of such
securities; during the period between purchase and settlement, no payment is
made by the purchaser to the issuer and no interest accrues to the purchaser.
To the extent that assets of a Portfolio are not vested prior to the
settlement of a purchase of securities, the Portfolio will earn no income;
however, it is intended that each Portfolio will be fully invested to the
extent practicable and subject to the policies stated above. While
when-issued securities may be sold prior to the settlement date, it is
intended that each Portfolio will purchase such securities with the purpose
of actually acquiring them, unless a sale appears desirable for investment
reasons. At the time the Portfolio makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect
the value of the security in determining its net asset value. The market
value of when-issued securities may be more or less than the purchase price.
The Trust does not believe that the net asset value or income of any of the
Portfolios will be adversely affected by their purchase of securities on a
when-issued basis. The Trust will establish for each Portfolio a segregated
account with its custodian bank in which it will maintain cash and/or high
grade marketable securities equal in value to commitments for when-issued
securities. Such segregated securities will either mature or, if necessary,
be sold on or before the settlement date. There are no restrictions on the
percentage of net assets of any Portfolio which may be invested in
when-issued securities at any given time.
Fundamental Investment Restrictions
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Each Portfolio has adopted the following restrictions as fundamental policies
(except as otherwise indicated), which means that they may not be changed
without the approval of a majority of that Portfolio's shares. In order to
change any of these restrictions, the lesser of (i) holders of 67% or more of
a Portfolio's voting securities present at a meeting of shareholders if the
holders of more than 50% of its voting securities are represented at the
meeting or (ii) holders of more than 50% of that Portfolio's outstanding
voting securities must vote to make the change.
Each of the Portfolios may not:
1. with respect to 75% of its total assets, except for the Global Income,
Global Health Care and Value Funds, purchase the securities of any one issuer
(other than cash, cash items and obligations of the U.S. government) if
immediately thereafter, and as a result of the purchase, the Portfolio would
(a) have more than 5% of the value of its total assets invested in the
securities of such issuer or (b) hold more than 10% of any or all classes of
the securities of any one issuer;
2. borrow money in an amount in excess of 5% of the value of its total
assets, except from banks for temporary or emergency purposes, and not for
direct investment in securities (excepting the Asset Allocation, Developing
Markets, Global Health Care, International Smaller Companies, Mutual
Discovery, Mutual Shares, Small Cap and Value Funds). The Asset Allocation,
Developing Markets, Global Health Care, International Smaller Companies,
Mutual Discovery, Mutual Shares, Small Cap and Value Funds may borrow money
from banks in an amount not exceeding 331/3% of the value of the Portfolio's
total assets including the amount borrowed. Each of these Portfolios may also
pledge, mortgage or hypothecate its assets to secure borrowings to an extent
not greater than 15% of the Portfolio's total assets. Arrangements with
respect to margin for futures contracts, forward contracts and related
options are not deemed to be a pledge of assets.
3. lend its assets, except through the purchase or acquisition of bonds,
debentures or other debt securities of any type customarily purchased by
institutional investors, or through loans of portfolio securities, or to the
extent the entry into a repurchase agreement may be deemed a loan;
4. underwrite securities of other issuers, except as noted in number 6 below
and except insofar as a Portfolio may be technically deemed an underwriter
under the federal securities laws in connection with the disposition of
portfolio securities;
5. purchase illiquid securities, including illiquid securities which, at the
time of acquisition, could be disposed of publicly by the Portfolios only
after registration under the Securities Act of 1933, if as a result more than
10% of their net assets would be invested in such illiquid securities (not
applicable to the Global Health Care, International Smaller Companies, Mutual
Discovery, Mutual Shares or Value Funds);
6. invest in securities for the purpose of exercising management or control
of the issuer (not applicable to the Mutual Discovery or Mutual Shares Funds);
7. invest more than 25% of its assets (measured at the time of the most
recent investment) in any single industry (not applicable to the Global
Health Care Fund, Global Utilities Fund, Natural Resources Fund, Real Estate
Securities Fund or the Value Fund);
8. invest in companies which have a record of less than three years of
continuous operation, including the operations of any predecessor companies,
except that the Real Estate Fund, the Capital Growth Fund, the Growth and
Income Fund, the Global Income Fund, the International Equity Fund, the
Pacific Fund, the Global Growth Fund, and the Developing Markets Fund may
invest up to 5% of their respective assets in such companies, the Natural
Resources Fund may invest up to 10% of its assets in such companies, and such
limitation shall not apply to the Asset Allocation Fund, Global Health Care
Fund, International Smaller Companies Fund, Mutual Discovery Fund, Mutual
Shares Fund, Small Cap Fund or the Value Fund;
9. maintain a margin account with a securities dealer or effect short sales,
with the exceptions that (i) the Growth and Income Fund and the Income
Securities Fund may effect short sales if the Portfolio owns securities
equivalent in kind and amount to those sold, (ii) Mutual Discovery, Mutual
Shares, Global Health Care and Value Funds may engage in short sales to the
extent described in the Prospectus and SAI, and (iii) the Natural Resources
Fund, the Global Health Care Fund, the Global Income Fund, the Global Growth
Fund, the Developing Markets Fund, the Asset Allocation Fund, the
International Equity Fund, the International Smaller Companies Fund, the
Pacific Fund, the Mutual Discovery Fund, the Mutual Shares Fund, the Value
Fund and the Small Cap Fund may make initial deposits and pay variation
margin in connection with futures contracts;
10. invest in commodities or commodity pools, except that (i) certain
Portfolios may purchase and sell Forward Contracts in amounts necessary to
effect transactions in foreign securities, (ii) the Global Health Care Fund,
the Global Income Fund, the International Equity Fund, the International
Smaller Companies Fund, the Pacific Growth Fund, the Global Growth Fund, the
Developing Markets Fund, the Asset Allocation Fund, the Mutual Discovery
Fund, the Mutual Shares Fund, the Value Fund and the Small Cap Fund may enter
into Futures Contracts and may invest in foreign currency and (iii) the
Natural Resources Fund may invest in commodities and commodity futures
contracts with respect to commodities related to the natural resources sector
as defined in the prospectus. Securities or other instruments backed by
commodities are not considered commodities or commodity contracts for the
purpose of this restriction;
11. invest directly in real estate, although certain Portfolios may invest in
real estate investment trusts or other publicly traded securities engaged in
the real estate industry. First mortgage loans or other direct obligations
secured by real estate are not considered real estate for purposes of this
restriction;
12. invest in the securities of other open-end investment companies (except
that securities of another open-end investment company may be acquired
pursuant to a plan of reorganization, merger, consolidation or acquisition).
This restriction is not applicable to the Capital Growth Fund, the Global
Health Care Fund, the International Equity Fund, the International Smaller
Companies Fund, the Mutual Discovery Fund, the Mutual Shares Fund, the
Pacific Fund, the Asset Allocation Fund, the Value Fund or the Developing
Markets Fund;
13. invest in assessable securities or securities involving unlimited
liability on the part of the Portfolio;
14. invest an aggregate of more than 10% of its assets in securities with
legal or contractual restrictions on resale, securities which are not readily
marketable (including over-the-counter options and assets used to cover such
options), and repurchase agreements with more than seven days to maturity
(this restriction does not apply to the Asset Allocation, Mutual Discovery or
Mutual Shares Funds);
15. purchase or retain any security if any officer, director or security
holder of the issuer is at the same time an officer, trustee or employee of
the Trust or of the Portfolio's Manager and such person owns beneficially
more than one-half of 1% of the securities and all such persons owning more
than one-half of 1% own more than 5% of the outstanding securities of the
issuer; or
16. invest its assets in a manner which does not comply with the investment
diversification requirements of Section 817(h) of the Code.
17. invest more than 10% of its assets in illiquid securities (including
illiquid equity securities, repurchase agreements of more than seven days
duration, over-the-counter options and assets used to cover such options, and
other securities which are not readily marketable), as more fully described
in the prospectus and SAI. This policy shall not apply to the Global Health
Care, International Smaller Companies, Mutual Discovery, Mutual Shares or
Value Funds.
18. The Global Growth and Developing Markets Funds may not invest more than
5% of their respective assets in warrants, whether or not listed on the New
York or American Exchange, including no more than 2% of their respective
total assets which may be invested in warrants that are not listed on those
exchanges. Warrants acquired by the Portfolios in units or attached to
securities are not included in this restriction.
19. The Global Growth Fund and Developing Markets Fund will not invest more
than 15% of their respective assets in securities of foreign issuers that are
not listed on a recognized U.S. or foreign securities exchange, including no
more than 10% in illiquid investments.
Non-Fundamental Investment Restrictions
- ------------------------------------------------------------------------------
In addition to these fundamental policies, it is the present policy of each
Portfolio, except the Mutual Discovery and Mutual Shares Funds, (which may be
changed without the approval of a majority of its outstanding shares) not to
pledge, mortgage or hypothecate its assets as security for loans (except to
the extent of allowable temporary loans), nor to engage in joint or joint and
several trading accounts in securities, except that the Portfolios (including
the Mutual Discovery and Mutual Shares Funds) may participate with other
investment companies in the Franklin Group of Funds(R) in a joint account to
engage in certain large repurchase transactions and may combine orders to
purchase or sell securities with orders from other persons to obtain lower
brokerage commissions. It is not any Portfolio's policy to invest in
interests (other than publicly traded equity securities) in oil, gas or other
mineral exploration or development programs.
As non-fundamental investment policies, which may be changed by the Board of
Trustees of the Trust without shareholder approval, the Asset Allocation Fund
will not invest more than 15% of its total assets in securities of foreign
issuers which are not listed on a recognized United States or foreign
securities exchange, or more than 10% of their total assets in (a) securities
with a limited trading market, (b) securities subject to legal or contractual
restrictions as to resale, (c) repurchase agreements not terminable within
seven days, and (d) debt obligations rated Baa or lower by Moody's Investors
Service, Inc. or BBB or lower by Standard & Poor's Corporation or, if
unrated, are of comparable investment quality as determined by the Managers.
The International Smaller Companies Fund may not invest more than 5% of its
respective assets in warrants, whether or not listed on the New York or
American Exchange, including no more than 2% of its total assets which may be
invested in warrants that are not listed on those exchanges. Warrants
acquired by the Portfolio in units or attached to securities are not included
in this restriction.
Whenever any investment policy or investment restriction states a maximum
percentage of a Portfolio's assets which may be invested in any security or
other property, it is intended that such maximum percentage limitation be
determined immediately after and as a result of the Portfolio's acquisition
of such security or property.
Officers and Trustees
- ------------------------------------------------------------------------------
The Trust is managed by a Board of Trustees who have been elected for an
indefinite term. The Board of Trustees is responsible for the overall
management of the Trust and each Portfolio, including overseeing the
investment of each Portfolio's assets. The Board elects the officers who are
responsible for administering the day-to-day operations of the Trust and each
Portfolio. Listed below are the trustees and officers of the Trust and a
brief description of the business experience and affiliations of each during
at least the past five years. Trustees who are "interested persons" of the
Trust, as defined in the 1940 Act, are designated by an asterisk(*).
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 28 of the investment companies in
the Franklin Templeton Group of Funds.
Lowell C. Anderson (60)
Allianz Life Insurance Company of North America
1750 Hennepin Avenue South
Minneapolis, MN 55403-2195
Trustee
Chairman, President and Chief Executive Officer, Allianz Life Insurance
Company of North America (privately owned company formerly North American
Life & Casualty Company); Director, Preferred Life Insurance Company of New
York; and trustee of one of the investment companies in the Franklin
Templeton Group of Funds.
Harris J. Ashton (65)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment companies in the
Franklin Templeton Group of Funds.
Robert F. Carlson (70)
2120 Lambeth Way
Carmichael, CA 95608
Trustee
Member and past President, Board of Administration, California Public
Employees Retirement Systems (CALPERS); former member and past Chairman of
the Board, Sutter Community Hospitals, Sacramento, CA; former member,
Corporate Board, Blue Shield of California; former Chief Counsel, California
Department of Transportation; trustee of nine of the investment companies in
the Franklin Templeton Group of Funds.
S. Joseph Fortunato (65)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director, General
Host Corporation (nursery and craft centers); and director or trustee, as
the case may be, of 54 of the investment companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton Services, Inc. and General Host
Corporation (nursery and craft centers); and officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles E. Johnson (41)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
President and Trustee
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; President, Chief Executive Officer, Chief
Investment Officer and Director, Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer and/or director of some of the subsidiaries
of Franklin Resources, Inc.; and officer and/or director or trustee, as the
case may be, of 37 of the investment companies in the Franklin Templeton
Group of Funds.
*Rupert H. Johnson, Jr. (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
56 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (669)
20833 Stevens Creek Blvd., Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 51 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.
and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 56 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.
The preceding table also indicates those officers and trustees who are also
affiliated persons of the Managers or the Insurance Companies.
Trustees not affiliated with the Managers or the Insurance Companies ("non
affiliated trustees") are currently paid fees of $550 per month plus $183 per
meeting attended. As indicated above, certain of the nonaffiliated trustees
serve as directors, trustees or managing general partners of other investment
companies in the Franklin Group of Funds(R) and the Templeton Group of Funds
("Franklin Templeton Funds").
The following table shows the total fees paid, for the fiscal year ended
December 31, 1997, to non affiliated trustees by the Trust and by other
Franklin Templeton Funds.
<TABLE>
<CAPTION>
Aggregate Number of Franklin Total Compensation From
Compensation Templeton Funds Boards Franklin Templeton Funds,
NAME FROM TRUSTA ON WHICH EACH SERVES** INCLUDING THE TRUSTA
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frank H. Abbott............. $8,616.63 28 $165,937
Harris Ashton............... 8,616.63 52 344,642
Robert Carlson.............. 0 9 17,680
S. Joseph Fortunato......... 8,616.63 54 361,562
David Garbellano***......... 5,866.65 31 91,317
Frank W.T. LaHaye........... 8,433.30 27 141,433
Gordon Macklin.............. 8,616.63 51 337,292
</TABLE>
aFigures rounded to the nearest dollar.
**We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 57 registered investment companies, with
approximately 170 U.S. based funds or series.
***The Board noted with deep regret the passing of David W. Garbellano in
late 1997. The Board appointed Robert S. Carlson to fill the vacancy in
January 1997.
Nonaffiliated trustees are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or
indirectly from the Trust or other funds in the Franklin Templeton Group of
Funds. Certain officers or Board members who are shareholders of Resources
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
As of [February 15, 1997], no officer or trustee of the Trust owned of record
or beneficially shares of any Fund of the Trust. Many of the Trust's trustees
own shares in various of the other Trusts in the Franklin Templeton Funds.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and are the father
and uncle, respectively, of Charles E. Johnson.
Investment Management and Other Services
The Manager for all series of the Trust, except the Asset Allocation Fund,
Global Growth Fund, International Smaller Companies Fund, Developing Markets
Fund, Mutual Discovery Fund, Mutual Shares Fund, Rising Dividends Fund and
the Value Securities Fund is Franklin Advisers, Inc. ("Advisers"), 777
Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777. In
addition, Advisers employs Templeton Investment Counsel, Inc. ("Templeton
Florida"), Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida
33394, to act as subadviser to the International Equity Fund, the Pacific
Fund, and the Global Income Fund. The Manager for the Rising Dividends Fund
and the Value Securities Fund is Franklin Advisory Services, Inc. ("Franklin
New Jersey"), One Parker Plaza, Sixteenth Floor, Ft. Lee, New Jersey 07024.
The Manager for the Mutual Discovery and Mutual Shares Funds is Franklin
Mutual Advisers, Inc. ("Franklin Mutual") 51 John F. Kennedy Parkway, Short
Hills, New Jersey 07078. The Manager of the International Smaller Companies
Fund is Templeton Florida. The Manager for the Asset Allocation and Global
Growth Funds is Templeton Global Advisers Limited, formerly known as
Templeton, Galbraith & Hansberger, Ltd. ("Templeton Nassau"), Lyford Cay
Nassau, N.P. Bahamas. The Manager for Developing Markets Fund is Templeton
Asset Management Ltd. ("Templeton Singapore"), 7 Temasek Boulevard, #38-03,
Suntec Tower One, Singapore. Templeton Nassau employs Templeton Florida to
act as subadviser to the Asset Allocation Fund. Advisers, Templeton Nassau,
Templeton Singapore, Templeton Florida, Franklin New Jersey and Franklin
Mutual may be referred to as the "Manager" or "Managers" throughout the SAI
and Prospectus.
The Managers also provide management services to numerous other investment
companies or portfolios and other accounts pursuant to management agreements
with each portfolio or other account. The Managers may give advice and take
action with respect to any of the other portfolios or accounts they manage,
or for their own accounts, which may differ from action taken by the Managers
on behalf of the Portfolios. Similarly, with respect to the Portfolios, the
Managers are not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Managers and access
persons, as defined by the 1940 Act, may purchase or sell for their own
accounts or for the accounts of any other portfolio or account. Furthermore,
the Managers are not obligated to refrain from investing in securities held
by the Portfolio or other portfolios or accounts which they manage or
administer. Of course, any transactions for the accounts of the Managers and
other access persons will be made in compliance with the Portfolio's Code of
Ethics. Please see "Miscellaneous Information."
Each Portfolio, except the Global Health Care Fund, the International Equity
Fund, the Pacific Fund, the Rising Dividends Fund, the Small Cap Fund, the
International Smaller Companies Fund, the Capital Growth Fund, the Mutual
Discovery Fund, the Mutual Shares Fund, the Global Growth Fund, the
Developing Markets Fund, the Value Securities Fund and the Asset Allocation
Fund, is obligated to pay Advisers a fee as compensation for its services,
which is paid monthly and accrues daily based upon each Portfolio's average
net assets at the annual rate of 0.625% of the value of average daily net
assets up to and including $100 million; 0.50% of the value of average daily
net assets over $100 million up to and including $250 million; 0.45% of the
value of average daily net assets over $250 million up to and including $10
billion; 0.44% of the value of average daily net assets over $10 billion up
to and including $12.5 billion; 0.42% of the value of average daily net
assets over $12.5 billion up to and including $15 billion; and 0.40% of the
value of average daily net assets over $15 billion.
Templeton Florida, as subadviser for the Global Income Fund under a contract
with Advisers, receives a monthly fee from Advisers at the annual rate of
0.35% of the value of average daily net assets up to and including $100
million; 0.25% of average daily net assets over $100 million up to and
including $250 million; 0.20% of the value of net assets over $250 million.
The International Equity Fund and the Pacific Fund are each obligated to pay
Advisers a monthly fee, based upon each Portfolio's average daily net assets,
at the annual rate of 1% of the value of average daily net assets up to and
including $100 million; 0.90% of the average daily net assets over $100
million up to and including $250 million; 0.80% of average daily net assets
over $250 million up to and including $500 million and 0.75% of average net
assets over $500 million. Templeton Florida, as the subadviser for the
International Equity Fund and the Pacific Fund under a contract with
Advisers, receives a monthly fee from Advisers at the annual rate of 0.50% of
the value of average daily net assets up to and including $100 million; 0.40%
of the average daily net assets over $100 million up to and including $250
million; 0.30% of average daily net assets over $250 million up to and
including $500 million and 0.25% of average net assets over $500 million.
The Capital Growth Fund, and the Small Cap Fund are each obligated to pay
Advisers a monthly fee, based upon each Portfolio's average daily net assets,
computed at the annual rate of 0.75 of 1% of average daily net assets on the
first $500 million of average daily net assets; 0.625 of 1% on the next $500
million of average daily net assets; and 0.50 of 1% on average daily net
assets in excess of $1 billion.
The Global Health Care Fund is obligated to pay Advisers a monthly fee, based
upon the Portfolio's average daily net assets, computed at the annual rate of
0.60 of 1% of average daily net assets on the first $200 million of average
daily net assets; 0.50 of 1% up to and including $1.3 billion of average
daily net assets; and 0.40 of 1% on average daily net assets in excess of
$1.3 billion.
The Rising Dividends Fund is obligated to pay Franklin New Jersey a monthly
fee, based upon the Portfolio's average daily net assets, computed at the
annual rate of 0.75 of 1% of average daily net assets on the first $500
million of average daily net assets; 0.625 of 1% on the next $500 million of
average daily net assets; and 0.50 of 1% on average daily net assets in
excess of $1 billion.
The Value Securities Fund is obligated to pay Franklin New Jersey a monthly
fee, based upon the Portfolio's average daily net assets, computed at the
annual rate of 0.60 of 1% of average daily net assets on the first $200
million of average daily net assets; 0.50 of 1% up to and including $1.3
billion of average daily net assets; and 0.40 of 1% on average daily net
assets in excess of $1.3 billion.
The Mutual Discovery Fund and Mutual Shares Fund are obligated to pay
Franklin Mutual a monthly fee, based upon each Portfolio's average daily net
assets, computed at the annual rate of .80 and .60, of 1%, respectively of
average daily net assets.
Under the management agreement with Templeton Nassau, the Global Growth Fund
is obligated to pay Templeton Nassau a monthly fee equal to an annual rate of
1.0% of the value of the Portfolio's average daily net assets up to and
including $100 million; 0.90% of the value of the Portfolio's average daily
net assets over $100 million up to and including $250 million; 0.80% of the
value of the Portfolio's average daily net assets over $250 million up to and
including $500 million; and 0.75% of the value of the Portfolio's average
daily net assets over $500 million.
Under the management agreement with Templeton Singapore, the Developing
Markets Fund is obligated to pay Templeton Singapore a monthly fee equal to
an annual rate of 1.25% of the value of the Portfolio's average daily net
assets.
Under the management agreement with Templeton Nassau, the Asset Allocation
Fund is obligated to pay the Manager a monthly fee equal to an annual rate of
0.65% of the value of the Portfolio's average daily net assets up to and
including $200 million, 0.585% of the value of the Portfolio's average daily
net assets over $200 million up to and including $1.3 billion; and 0.52% of
the value of the Portfolio's average daily net assets over $1.3 billion.
Templeton Florida, as subadviser for the Asset Allocation Fund under a
contract with Templeton Nassau, receives a monthly fee from Templeton Nassau
at the annual rate of 0.25% of the value of average daily net assets up to
and including $200 million; 0.225% of average daily net assets over $200
million up to and including $1.3 billion; 0.20% of the value of net assets
over $1.3 billion.
Under a management agreement with Templeton Florida, the International
Smaller Companies Fund is obligated to pay the Manager a monthly fee equal to
an annual rate of 0.85% of the value of the Portfolio's average daily net
assets up to and including $200 million, 0.765% of the value of the
Portfolio's average daily net assets over $200 million up to and including
$1.3 billion; and 0.68% of the value of the Portfolio's average daily net
assets over $1.3 billion.
The Managers may determine in advance to limit the management fees or to
assume responsibility for the payment of certain operating expenses relating
to the operations of any Portfolio, which may have the effect of decreasing
the total expenses and increasing the yield of such Portfolio. Any such
action is voluntary and may be terminated by the Managers at any time unless
otherwise indicated. For at least to the end of the fiscal year, December 31,
1998, Advisers has agreed to limit its management fees and, if necessary, to
assume responsibility for payment of each Zero Coupon Fund operating expenses
so that each Portfolio's total expenses will not exceed 0.40% of each
Portfolio's average net assets. With respect to the Money Fund, during 1997,
Advisors limited its management fees such that aggregate expenses, including
management fees of [ ]%, represented [ ]% of the Money Fund's average daily
net assets.
Expense reductions have not been necessary based on state requirements.
Except as indicated below, the management and subadvisory agreements with the
Managers are in effect until April 30, 1999, and may continue thereafter
provided they are approved for periods not to exceed one year by (i) the
Trust's Board of Trustees or the vote of a majority of the outstanding shares
of that Portfolio, and (ii) a majority of the Trustees who are not parties to
the Agreement or interested persons of any such party (other than as
Trustees).
The management agreements for the Mutual Discovery and Mutual Shares Funds
are in effect for an initial period of two years. These management agreements
may continue from year to year thereafter under the same provisions mentioned
above. The management agreement with respect to any Portfolio may be
terminated without penalty at any time by the Portfolio or by the Managers on
60 days' written notice and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
Pursuant to the management agreements and subadvisory agreements, the
Managers provide investment research and portfolio management services,
including the selection of securities for each Portfolio to purchase, hold or
sell, and the selection of brokers through whom each such Portfolio's
transactions are executed. The Managers' activities are subject to the review
and supervision of the Board of Trustees, and Templeton Florida as subadviser
to certain Portfolios is subject to the overview of each Portfolio's
respective Manager, to whom the Managers render periodic reports of each
Portfolio's investment activities. The Managers, or in certain cases, the
Fund Administrator, provide each Portfolio with executive and administrative
personnel, office space and facilities, and pay certain additional
administrative expenses incurred in connection with the operation of each
such Portfolio. Each such Portfolio bears all of its expenses not assumed by
the Managers or Fund Administrator. The Managers are covered by fidelity
insurance on their officers, directors and employees for the protection of
the Trust. See the Statement of Operations in the financial statements at the
end of this Statement of Additional Information for additional details of
these expenses. The table below sets forth on a per Portfolio basis the
management fees that would have been accrued by the Managers and Fund
Administrators and the management fees actually paid by the Portfolios for
the fiscal years ended December 31, 1997, 1996 and 1995.
Management Management
and Fund and Fund
Administration Administration
Fees Accrued Fees Paid
- ------------------------------------------------------------------------------
1997
Money Market Fund................................... $ $
Templeton Global Income Securities Fund.................
High Income Fund........................................
Government Fund.........................................
Zero Coupon Fund - 2000.................................
Zero Coupon Fund - 2005.................................
Zero Coupon Fund - 2010.................................
Income Securities Fund..................................
Rising Dividends Fund...................................
Global Utilities Securities Fund
(formerly the Utility Equity Fund).....................
Growth and Income Fund..................................
Natural Resources Fund
(formerly the Precious Metals Fund)....................
Real Estate Fund........................................
Small Cap Fund..........................................
International Equity Fund...............................
Pacific Fund............................................
Global Asset Allocation Fund............................
Developing Markets......................................
Global Growth...........................................
International Smaller Companies Fund....................
Capital Growth Fund.....................................
Mutual Discovery Fund...................................
Mutual Shares Fund......................................
Management Management
and Fund and Fund
AdministrationAdministration
Fees Accrued Fees Paid
- -------------------------------------------------------------------------
1996
Money Market Fund.................................. $2,225,389 $1,781,802
Templeton Global Income Securities Fund............ 1,262,055 1,262,055
High Income Fund................................... 1,985,566 1,985,566
Government Fund.................................... 3,162,073 3,162,073
Zero Coupon Fund - 2000............................ 790,492 494,949
Zero Coupon Fund - 2005............................ 503,611 299,714
Zero Coupon Fund - 2010............................ 490,108 291,798
Income Securities Fund............................. 6,130,804 6,130,804
Rising Dividends Fund.............................. 3,785,807 3,785,807
Global Utilities Securities Fund
(formerly the Utility Equity Fund)................ 6,097,507 6,097,507
Growth and Income Fund............................. 4,643,546 4,643,546
Natural Resources Fund
(formerly the Precious Metals Fund)............... 754,383 754,383
Real Estate Fund................................... 1,335,653 1,335,653
Small Cap Fund..................................... 694,975 694,975
International Equity Fund.......................... 7,945,053 7,945,053
Pacific Fund....................................... 3,343,850 3,343,850
Global Asset Allocation Fund....................... 272,732 272,732
Developing Markets................................. 2,887,400 2,887,400
Global Growth...................................... 4,016,061 4,016,061
International Smaller Companies Fund............... 56,389 56,389
Capital Growth Fund................................ 86,028 86,028
Mutual Discovery Fund.............................. 11,033 11,033
Mutual Shares Fund................................. 11,822 11,822
1995
Money Market Fund.................................. $2,295,252 $1,700,943
Templeton Global Income Securities Fund............ 1,354,128 1,354,128
High Income Fund................................... 1,700,257 1,700,257
Government Fund.................................... 3,038,772 3,038,772
Zero Coupon Fund - 2000............................ 721,943 439,204
Zero Coupon Fund - 2005............................ 425,696 249,803
Zero Coupon Fund - 2010............................ 398,959 233,644
Income Securities Fund............................. 5,335,780 5,335,780
Rising Dividends Fund.............................. 2,858,740 2,858,740
Global Utilities Securities Fund
(formerly the Utility Equity Fund)................ 6,002,369 6,002,369
Growth and Income Fund............................. 3,283,721 3,283,721
Natural Resources Fund
(formerly the Precious Metals Fund)............... 702,034 702,034
Real Estate Fund................................... 1,110,443 1,110,433
Small Cap Fund................................... 9,054 9,054
International Equity Fund.......................... 6,748,353 6,748,353
Pacific Fund....................................... 3,148,402 3,148,402
Global Asset Allocation Fund....................... 52,421 52,421
Developing Markets................................. 1,636,864 1,636,864
Global Growth Fund................................. 2,309,970 2,309,970
Please refer to the "Officers and Trustees" table which indicates officers
and trustees who are affiliated persons of the Trust, the Managers and the
Insurance Companies.
Fund Administrator
Franklin Templeton Services, Inc. ("FT Services"), 777 Mariners Island
Boulevard, San Mateo, California 94404 serves as Fund Administrator. It
provides certain administrative facilities and services for the Portfolios,
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, Global Health Care,
International Smaller Companies, Mutual Discovery, Mutual Shares and Value
Funds, and through subcontracts by the Managers of all the other Portfolios.
Transfer Agent
Franklin Templeton Investor Services, Inc., a wholly owned subsidiary of
Resources, maintains shareholder's records, processes purchases and
redemptions of each Portfolio's shares and acts as the Trust's transfer agent
and dividend-paying agent.
Custodians
The Bank of New York, Mutual Funds Division, 90 Washington Street, New York,
New York 10286, acts as custodian of the securities and other assets of the
Trust. In addition, Chase Manhattan Bank, Chase MetroTech Center, Brooklyn,
New York 11245, also acts as custodian for the Global Growth, Developing
Markets, Asset Allocation, and International Smaller Companies Funds. The
State Street Bank and Trust Company, Atlantic Division, 225 Franklin Street,
Boston, MA 02110 acts as custodian for the Mutual Discovery and Mutual Shares
Funds. The Custodians do not participate in decisions relating to the
purchase and sale of portfolio securities.
Independent Auditors
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
serve as the Trust's independent auditors. During the fiscal year ended
December 31, 1997, [their auditing services consisted of rendering an opinion
on the financial statements of the Trust included in the Trust's Annual
Report to Shareholders for the fiscal year ended December 31, 1997 and in
this Statement of Additional Information.]
Research Services
Research services may be provided to the Managers by various affiliates. Such
services may include information, analytical reports, computer screening
studies, statistical data, and factual resumes pertaining to securities
eligible for purchase by the Portfolios. Such supplemental research, when
utilized, is subject to analysis by the Managers before being incorporated
into the investment advisory process.
Policies Regarding Brokers
Used on Securities Transactions
- ------------------------------------------------------------------------------
The Managers select brokers and dealers to execute portfolio transactions in
accordance with criteria set forth in the respective management and
subadvisory agreements referenced herein and any directions that the Board of
Trustees may give.
When placing a portfolio transaction, the Managers seek to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by each
Portfolio is negotiated between the Portfolios' Managers and the broker
executing the transaction. The determination and evaluation of the
reasonableness of the brokerage commissions paid are based to a large degree
on the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are based on the experience of
these individuals in the securities industry and information available to
them concerning the level of commissions being paid by other institutional
investors of comparable size. The Managers will ordinarily place orders to
buy and sell over-the-counter securities on a principal rather than agency
basis with a principal market maker unless, in the opinion of the Managers, a
better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask price.
The Managers may pay certain brokers commissions that are higher than those
another broker may charge, if the Managers determine in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services. This may be viewed in terms of either the particular
transaction or the Managers' overall responsibilities to client accounts over
which they exercise investment discretion. The services the brokers may
provide to the Managers include, among others, supplying information about
particular companies, markets, countries, or local, regional, national, or
transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and
appropriate assistance to the Managers in carrying out the investment
advisory responsibilities. These services may not always directly benefit the
Portfolios. They must, however, be of value to the Managers in carrying out
their overall responsibilities to their clients.
Since most purchases by certain of the Portfolios are principal transactions
at net prices, these Portfolios incur little or no brokerage costs. The
Portfolios deal directly with the selling or buying principal or market maker
without incurring charges for the services of a broker on their behalf,
unless that it is determined that a better price or execution may be obtained
by using the services of a broker. Purchase of portfolio securities from
underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers will include a spread between the
bid and ask prices. The Portfolios seek to obtain prompt execution of orders
at the most favorable net price. Transaction may be directed to dealers in
return for research and statistical information, as well as for special
services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services received by the Managers from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services permits the Managers to supplement
their own research and analysis activities and to make available the views
and information of individuals and research staffs of other securities firms.
As long as it is lawful and appropriate to do so, the Managers and their
affiliates may use this research and data in their investment advisory
capacities with other clients. If the Trust's officers are satisfied that the
best execution is obtained, the sale of Portfolio shares, as well as shares
of other portfolios in the Franklin Templeton Group of Funds, may also be
considered as a factor in the selection of broker dealers to execute a
Portfolio's transactions.
Because Franklin Templeton Distributors, Inc. ("Distributors"), an affiliate
of the Managers and principal underwriter for many of the mutual funds in the
Franklin Templeton Group of Funds, is a member of the National Association of
Securities Dealers, it is sometimes entitled to obtain certain fees when a
Portfolio tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of reducing the expenses of a Portfolio, any
portfolio securities tendered by a Portfolio will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the Manager under the applicable management
agreement will be reduced by the amount of any fees received by Distributors
in cash, less certain costs and expenses incurred in connection therewith.
If purchases or sales of securities of certain of the Portfolios and other
portfolios or other investment companies or clients supervised by the
Managers or their affiliates are considered at or about the same time,
transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all, by the
Managers, taking into account the respective sizes of the Portfolios or
clients and the amount of securities to be purchased or sold. It is
recognized that it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security, in so far as a
particular Portfolio is concerned. However, in other cases it is possible
that the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to all the Portfolios.
The Portfolios are authorized, to the extent consistent with their respective
investment policies and restrictions and in compliance with applicable rules
under federal security laws, to acquire securities of broker/dealers.
Most foreign stock exchange transactions are executed at fixed commission
rates. Fixed commissions on foreign stock exchange transactions are generally
higher than negotiated commissions on U.S. transactions. The Managers will
endeavor to achieve the best net results in effecting portfolio transactions
for Portfolios on foreign stock exchanges. There is also generally less
government supervision and regulation of foreign stock exchanges and brokers
than in the U.S.
During the past three fiscal years ended December 31, 1997, or since
inception, each Series paid brokerage commissions as follows:
Portfolio 1995 1996 1997
- ------------------------------------------------------------------------------
Money Market Fund............................... $ 0 $ 0 $ 0
Templeton Global Income Securities Fund......... 0 0 0
High Income Fund................................ 0 0 0
Government Fund................................. 0 0 0
Zero Coupon Fund - 2000......................... 0 0 0
Zero Coupon Fund - 2005......................... 0 0 0
Zero Coupon Fund - 2010......................... 0 0 0
Growth and Income Fund.......................... 2,368,736 848,162
Income Securities Fund.......................... 175,429 211,977
Real Estate Fund................................ 182,818 89,985
Rising Dividends Fund........................... 272,848 485,120
Global Asset Allocation Fund.................... 24,490 62,209
Global Utilities Fund
(formerly the Utility Equity Fund)............. 652,221 1,277,007
Natural Resources Fund
(formerly the Precious Metals Fund)............ 111,982 149,263
Portfolio 1995 1996 1997
- ------------------------------------------------------------------------------
Small Cap Fund.................................. $ 9,622 $ 183,601 $
Templeton Developing Markets Equity Fund........ 589,426 604,200
Global Growth Fund.............................. 956,434 --
International Equity Fund....................... 824,409 1,015,004
Pacific Growth Fund............................. 1,040,361 487,464
International Smaller Companies Fund............ -- 10,847
Capital Growth Fund............................. -- 44,722
Mutual Discovery Fund........................... -- 20,812
Mutual Shares Fund.............................. -- 31,174
As of December 31, 199[ ], the Money Market Fund owned securities issued by [
], the Templeton Global Growth Fund owned securities issued [ ], and the
Templeton Global Asset Allocation Fund owned securities issued by [ ], which
were valued in the aggregate at [ ] respectively. Except as stated above, no
Portfolio owned any securities issued by its regular broker-dealers as of the
end of such fiscal year.
Additional Information Regarding Valuation and Redemption of Shares of the
Portfolios
- ------------------------------------------------------------------------------
Calculation of Net Asset Value
As noted in the Prospectus, each Portfolio will generally calculate its net
asset value only on days when the New York Stock Exchange (the "Exchange") is
open for trading, even though trading in the portfolio securities of a
Portfolio may occur on other days in other markets or over-the-counter. As of
the date of this Statement of Additional Information, the Portfolios are
informed that the New York Stock Exchange will be closed in observance of the
following holidays: New Year's Day, Presidents' Day, Martin Luther King Jr.
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas.
Portfolios Other than Money Fund
The net asset value per share of each Portfolio except the Money Fund is
calculated as follows: the aggregate of all liabilities, including, without
limitation, the current market value of any outstanding options written by a
Portfolio, if any, accrued expenses and taxes and any necessary reserves, is
deducted from the total gross value of all assets, and the difference is
divided by the number of shares of that Portfolio outstanding at the time.
For the purpose of determining the aggregate net assets of each Portfolio
(except the Money Fund), cash and receivable are valued at their realizable
amounts, interest is recorded as accrued, and dividends are recorded on the
ex-dividend date.
Portfolio securities listed on a securities exchange or on NASDAQ for which
market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of
the most recent quoted bid and ask prices. Over-the-counter portfolio
securities for which market quotations are readily available are valued
within the range of the most recent bid and ask prices as obtained from one
or more dealers that make markets in the securities. Portfolio securities
which are traded both in the over-the-counter market and on a securities
exchange are valued according to the broadest and most representative market
as determined by the Managers. Portfolio securities underlying actively
traded options are valued at their market price as determined above. The
current market value of any option held by a Portfolio is its last sales
price on the relevant Exchange prior to the time when assets are valued.
Lacking any sales that day or if the last sale price is outside the bid and
ask prices, the options are valued within the range of the current closing
bid and ask prices if such valuation is believed to fairly reflect the
contract's market value. If a Portfolio should have an open option position
as to a security, the valuation of the contract will be within the range of
the bid and ask prices.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the close of trading on the
Exchange, if that is earlier. The value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, Eastern time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the foreign security is valued within the range of the most recent
quoted bid and ask price. Occasionally, events which affect the values of
foreign securities and foreign exchange rates may occur between the times at
which values and rates are determined and the close of the Exchange and will,
therefore, not be reflected in the computation of a Portfolio's net asset value.
If events materially affecting the value of these foreign securities occur
during such periods, then these securities will be valued in accordance with
procedures established by the Board of Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
in New York on each day on which the Exchange is open. Trading in European or
Far Eastern securities generally, or in a particular country or countries, may
not take place on every Exchange business day. Furthermore, trading takes place
in various foreign markets on days which are not business days for the Exchange
and on which the Portfolios' net asset value are not calculated. Thus, such
calculation does not take place contemporaneously with the determination of the
prices of many of the portfolio securities used in such calculation and, if
events materially affecting the value of these foreign securities occur, they
will be valued at fair market value as determined by the Managers and approved
in good faith by the Board of Trustees.
Generally, trading in corporate bonds, U.S. government securities and Money
Market Instruments is substantially completed each day at various times prior
to the close of the Exchange. The value of these securities used in
computing the net asset value of the Portfolios' shares is determined as of
such times. Occasionally, events affecting the values of such securities may
occur between the times at which they are determined and the scheduled close
of the Exchange which will not be reflected in the computation of the
Portfolios' net asset values. If events materially affecting the values of
these securities occur during such period, then the securities will be valued
at their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board of Trustees, the Portfolio may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
All Money Market Instruments owned by Portfolios other than the Money Market
Fund are valued at current market, as discussed above.
Money Market Fund
The net asset value per share of the Portfolio is calculated by adding the
value of all securities and other assets in the Portfolio (i.e., share of the
Portfolio), deducting the Portfolio's liabilities, and dividing by the number
of shares outstanding.
The valuation of the Portfolio's securities (including any securities held in
the segregated account maintained for when-issued securities) is based upon
their amortized cost, which does not take into account unrealized capital
gains or losses. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in calculation,
it may result in periods during which value, as determined by amortized cost,
is higher or lower than the price the Portfolio would receive if it sold the
instrument. During periods of declining interest rates, the daily yield on
shares of the Portfolio computed as described above may tend to be higher
than a like computation made by a portfolio with identical investments
utilizing a method of valuation based upon market prices and estimates of
market prices for all of its portfolio instruments. Thus, if the use of
amortized cost by the Portfolio resulted in a lower aggregate portfolio value
on a particular day, a prospective investor in the Portfolio would be able to
obtain a somewhat higher yield than would result from investment in a
portfolio utilizing solely market values, and existing investors in the
Portfolio would receive less investment income. The opposite would apply in a
period of rising interest rates.
The Portfolio's use of amortized cost which facilitates the maintenance of
the Portfolio's per share net asset value of $1.00 is permitted by a Rule
adopted by the SEC. Pursuant to this rule the Portfolio must adhere to
certain conditions. The Portfolio must maintain a dollar-weighted average
portfolio maturity of 90 days or less, only purchase instruments having
remaining maturities of 397 calendar days or less, and invest only in those
U.S. dollar-denominated instruments that the Board of Trustees determines
present minimal credit risks and which are, as required by the federal
securities laws, rated in one of the two highest rating categories as
determined by nationally recognized statistical rating agencies, instruments
deemed comparable in quality to such rated instruments, or instruments, the
issuers of which, with respect to an outstanding issue of short-term debt
that is comparable in priority and protection, have received a rating within
the two highest categories of nationally recognized statistical rating
agencies. Securities subject to floating or variable interest rates with
demand features in compliance with applicable rules of the SEC may have
stated maturities in excess of one year. The trustees have established
procedures designed to stabilize, to the extent reasonably possible, the
Portfolio's price per share as computed for the purpose of sales and
redemptions at $1.00. These procedures include review of the Portfolio's
holdings by the trustees, at such intervals as they may deem appropriate, to
determine whether the Portfolio's net asset value calculated by using
available market quotations deviates from $1.00 per share based on amortized
cost. The extent of any deviation will be examined by the trustees. If such
deviation exceeds 1/2 of 1%, the trustees will promptly consider what action,
if any, will be initiated. In the event the trustees determine that a
deviation exists which may result in material dilution or other unfair
results to investors or existing shareholders, they will take such corrective
action as they regard as necessary and appropriate, which may include the
sale of portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends,
redemptions of shares in kind, or establishing a net asset value per share by
using available market quotations.
Additional Information
- ------------------------------------------------------------------------------
Additional Information Regarding Taxation
As stated in the Prospectus, each Portfolio intends to be treated as a
regulated investment company under Subchapter M of the Code.
Any Portfolio's investment in options, futures contracts and forward
contracts, including transactions involving actual or deemed short sales or
foreign exchange gains or losses are subject to many complex and special tax
rules. For example, over-the-counter options on debt securities and equity
options, including options on stock and on narrow-based stock indexes, will
be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. By contrast,
the Portfolio treatment of certain other options, futures and forward
contracts entered into by a Portfolio is generally governed by Section 1256
of the Code. These "Section 1256" positions generally include listed options
on debt securities, options on broad-based stock indexes, options on
securities indexes, options on futures contracts, regulated futures contacts
and certain foreign currency contacts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held
by a Portfolio will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of the Portfolio's fiscal year,
and all gain or loss associated with fiscal year transactions and
mark-to-market positions at fiscal year end (except certain foreign currency
gain or loss covered by Section 988 of the Code) will generally be treated as
60% long-term capital gain or loss and 40% short-term capital gain or loss.
The effect of Section 1256 mark-to-market rules may be to accelerate income
or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the Portfolio. The acceleration of income on Section 1256
positions may require the Portfolio to accrue taxable income without the
corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, the Portfolio 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 Portfolio
shares. In these ways, any or all of these rules may affect both the amount,
character and timing of income distributed to shareholders by the Portfolio.
When a Portfolio holds an option or contract which substantially diminishes
the Portfolio's risk of loss with respect to another position of the
Portfolio (as might occur in some hedging transactions), this combination of
positions could be treated as a "straddle" for tax purposes, resulting in
possible deferral of losses, adjustments in the holding periods of Portfolio
securities and conversion of short-term capital losses into long-term capital
losses. Certain tax elections exist for mixed straddles (i.e., straddles
comprised of at least one Section 1256 position and at least one non-Section
1256 position) which may reduce or eliminate the operation of these straddle
rules.
In order for a Portfolio to qualify as a regulated investment company, at
least 90% of the Portfolio's annual gross income must consist of dividends,
interest and certain other types of qualifying income, and no more than 30%
of its annual gross income may be derived from the sale or other disposition
of securities or certain other instruments held for less than 3 months.
Foreign exchange gains, derived by a Portfolio with respect to the
Portfolio's business investing in stock or securities, or options or futures
with respect to such stock or securities constitute income for purposes of
this 90% limitation.
Currency speculation or the use of currency forward contracts or other
currency instruments for non-hedging purposes may generate gains deemed to be
not directly related to a Portfolio's principal business of investing in
stock or securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than 3 months are treated as derived from the
disposition of securities held less than 3 months in determining the
Portfolio's compliance with the 30% limitation. The Portfolios will limit
their activities involving foreign exchange gains to the extent necessary to
comply with these requirements.
The federal income tax treatment of interest rate and currency swaps is
unclear in certain respects and may in some circumstances result in the
realization of income not qualifying under the 90% test described above or be
deemed to be derived from the disposition of securities held less than three
months in determining a Portfolio's compliance with the 30% limitation. The
Portfolios will limit their interest rate and currency swaps to the extent
necessary to comply with these requirements.
If a Portfolio owns shares in a foreign corporation that constitutes a
"passive foreign investment company" (a "PFIC") for federal income tax
purposes and the Portfolio does not elect to treat the foreign corporation as
a "qualified electing fund" within the meaning of the Code, the Portfolio may
be subject to U.S. federal income on a portion of any "excess distribution"
it receives from the PFIC or any gain it derives from the disposition of such
shares, even if such income is distributed as a taxable dividend by the
Portfolio to its U.S. shareholders. The Portfolio may also be subject to
additional interest charges in respect of deferred taxes arising from such
distributions or gains. Any federal income tax paid by a Portfolio as a
result of its ownership on shares of a PFIC will not give rise to a deduction
or credit to the Portfolio or to any shareholder. A PFIC means any foreign
corporation if, for the taxable year involved, either (i) it derives at least
75 percent of its income from "passive income" (including, but not limited
to, interest, dividends, royalties, rents and annuities), or (ii) on average,
at least 50 percent of the value (or adjusted basis, if elected) of the
assets held by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by a
Portfolio in a PFIC would be treated as an excess distribution received by the
Portfolio in the current year, eliminating the deferral and the related
interest charge. Such excess distribution amounts are treated as ordinary
income, which the Portfolio will be required to distribute to shareholders even
though the Portfolio has not received any cash to satisfy this distribution
requirement. These regulations would be effective for taxable years ending
after the promulgation of the proposed regulations as final regulations.
How the Trust Measures Performance
From time to time, the "yield" and "effective yield" of the Money Fund may be
advertised. Both yield figures will be based on historical earnings and are
not intended to indicate future performance. The "yield" of the Money Fund
refers to the income generated by an investment in the Money Fund over a
seven-day period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly but, when annualized, the income earned by an
investment in the Money Fund is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment.
From time to time, the current yields and total returns of the other
Portfolios may be published in advertisements and communications to Contract
Owners. The current yield for each Portfolio will be calculated by dividing
the annualization of the income earned by the Portfolio during a recent
30-day period by the net asset value per share at the end of such period.
Total return information will include the Portfolio's average annual
compounded rate of return over the most recent four calendar quarters and the
period from the Portfolio's inception of operations, based upon the value of
the shares acquired through a hypothetical $1,000 investment at the beginning
of the specified period and the net asset or redemption value of such shares
at the end of the period, assuming reinvestment of all distributions at net
asset value. Aggregate and average total return information for each
Portfolio over different periods of time may also be advertised.
A distribution rate for each Portfolio may also be published in Contract
Owners communications preceded or accompanied by a copy of the Portfolios'
current Prospectus. The current distribution rate for a Portfolio will be
calculated by dividing the annualization of the total distributions made by
that Portfolio during the most recent preceding fiscal quarter by the net
asset value per share at the end of such period. The current distribution
rate may differ from current yield because the distribution rate will be for
a different period of time and may contain items of capital gain and other
items of income, while current yield reflects only earned income. Uniformly
computed yield and total return figures for each Portfolio will also be
published along with publication of its distribution rate.
In each case, the yield, distribution rates and total return figures will
reflect all recurring charges against that Portfolio's income, including
mortality and expense guarantees and other insurance-related administrative
charges (which may be pro-rated as appropriate) for the applicable time
period. In addition, yield or total return performance information computed
on a different basis may be advertised or presented. Investors should note
that the investment results of each Portfolio will fluctuate over time, and
any presentation of a Portfolio's current yield, distribution rate or total
return for any prior period should not be considered as a representation of
what an investment may earn or what an investor's yield, distribution rate or
total return may be in any future period. Hypothetical performance
information may also be prepared for sales literature or advertisements. See
"Performance Data" in the appropriate insurance company separate account
prospectus and "Calculation of Performance Data" in the appropriate insurance
company separate account SAI.
Miscellaneous Information
The organizational expenses of certain series of the Trust are being
amortized on a straight line basis over a period of five years from the
commencement of the offering of any such Portfolio's shares. Contract owners
allocating payments to shares of a Portfolio after the effective date of the
Trust's Registration Statement under the Securities Act of 1933 will be
bearing such expenses during the amortization period only as such charges are
accrued daily against the investment income of that Portfolio.
As of March 31, 1997, Allianz Life Variable Account A, Allianz Life Variable
Account B and Preferred Life Variable Account C owned, [%, %, and %]
respectively, of the issued and outstanding shares of the Trust.
Contract owners will be informed of each Portfolio's progress through
periodic reports. Financial statements certified by independent public
auditors will be available at least annually.
Employees of the Franklin Templeton Group who are access persons under the
1940 Act are permitted to engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and, (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their
securities holdings each January and inform the compliance officer (or other
designated personnel) if they own a security that is being considered for a
fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a portfolio or
other client.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of each Portfolio's assets for any shareholder held personally
liable for obligations of that Portfolio or the Trust. The Declaration of
Trust provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of a Portfolio
or the Trust and shall satisfy any judgment thereon. All such rights are
limited to the assets of the Portfolio of which a shareholder holds shares.
The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, trustees,
officers, employees and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Portfolio itself is unable to meet its obligations.
The Trust is registered with the SEC as a management investment company. Such
registration does not involve supervision of the management or policies of
the Portfolios by the SEC. The Prospectus and this Statement of Additional
Information omit certain of the information contained in the Registration
Statement filed with the SEC, copies of which may be obtained from the SEC
upon payment of the prescribed fee.
Portfolio Similarity
The investment objectives and policies of certain Portfolios are similar but
not identical to those of certain public Franklin Templeton Funds indicated
in the table below. Because of differences in portfolio size, the investments
held, the timing of purchases of similar investments, cash flows, minor
differences in certain investment policies, insurance product related tax
diversification requirements, state insurance regulations, and additional
administrative and insurance costs associated with insurance company separate
accounts, the investment performance of the Franklin Valuemark Funds will
differ from the performance of the corresponding Franklin Templeton Funds.
Franklin Valuemark Funds Franklin Templeton Funds
- ------------------------------------------------------------------------------
Franklin Custodian Funds, Inc.:
Capital Growth Fund - Growth Series
Franklin Strategic Series:
Global Health Care Securities Fund -Franklin Global Health Care Fund
Franklin Strategic Series:
Global Utilities Securities Fund -Franklin Global Utilities Fund
(formerly Utility Equity Fund)
High Income Fund AGE High Income Fund, Inc.
Franklin Custodian Funds, Inc.:
Income Securities Fund - Income Series
Money Market Fund Franklin Money Fund
Franklin Mutual Series Fund Inc.:
Mutual Shares Securities Fund Mutual Shares Fund
Mutual Discovery Securities Fund Mutual Discovery Fund
Franklin Strategic Series:
Natural Resources Fund -Franklin Natural Resources Fund
(formerly Precious Metals Fund)
Franklin Real Estate Securities
Trust:
Real Estate Securities Fund - Franklin Real Estate Securities
Fund
Franklin Managed Trust:
Rising Dividends Fund - Franklin Rising Dividends Fund
Franklin Strategic Series:
Small Cap Fund - Franklin Small Cap Growth Fund
Templeton Developing Markets Equity Fund Templeton Developing Markets Trust
Templeton Variable Products Series
Fund:
Templeton Global Asset Allocation Fund - Templeton Asset Allocation Fund
Templeton Global Growth Fund Templeton Growth Fund, Inc.
Franklin Investors Securities Trust:
Templeton Global Income Securities Fund - Franklin Global Government Income
Fund
Franklin Templeton International
Trust:
Templeton Pacific Growth Fund - Templeton Pacific Growth Fund
Franklin Custodian Funds, Inc.:
U.S. Government Securities Fund U.S. Government Securities Series
Franklin Value Investors Trust
Value Securities Fund -Franklin Value Fund
Financial Statements
- ------------------------------------------------------------------------------
[The audited financial statements contained in the Trust's Annual Report for
the fiscal year ended December 31, 1997, including the auditor's report, to
be supplied in the "B" Amendment]
FRANKLIN VALUEMARK FUNDS
File Nos. 33-23493
811-5583
FORM N-1A
PART C
Other Information
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements:
[To be supplied in later B Ammendment]
b) Exhibits:The following exhibits where applicable, are
herewith incorporated by reference to the filings as noted with
the exception of Exhibits 8(xix); 8(xx); 8(xxi); 8(xxii);
8(xxiii), which are attached.
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated April
20, 1988
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment to Agreement and
Declaration of Trust dated October 21, 1988 Filing: Post
Effective Amendment No. 16 to Registration Statement of
Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(2) copies of the By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Post Effective Amendment No. 16 to
Registration Statement of Registrant on Form
N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of By-Laws dated May 16,
1995.
Filing: Post Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(3) copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the
Registrant, including copies of all constituent
instruments, defining the rights of the holders of
such securities copies of each security being registered;
Not Applicable
(5) Copies of all investment advisory contracts relating
to the management of the assets of the Registrant;
(i) Management Agreement between Registrant and
Franklin Advisers, Inc. dated January 24, 1989
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Addendum to Investment Management Agreement
Dated March 14, 1989
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Management Agreement between Registrant, on Behalf of
International Equity Fund and Pacific Growth Fund, and
Franklin Advisers, Inc. dated January 22, 1992
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iv) Subadvisory Agreement dated between Franklin Advisers, Inc.
and Templeton Investment Counsel, Inc. January 1, 1993
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(v) Management Agreement between Registrant on Behalf of
Franklin Rising Dividends Fund, and Franklin Advisory
Services, Inc. dated July 1, 1996
Filing: Post-Effective Amendment No. 20 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(vi) Investment Management Agreement between the Trust, on
behalf of the Templeton Global Global Growth, and
Templeton, Galbraith & Hansberger Ltd. Dated March 15, 1994
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(vii) Subadvisory Agreement between Franklin Advisers,
Inc. and Templeton Investment Counsel, on behalf
of Global Income Fund dated August 1, 1994
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(viii)Investment Management Agreement between Registrant, on
behalf of Templeton Global Asset Allocation Fund, and
Templeton Galbraith & Hansberger, Ltd. dated April 19, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ix) Subadvisory Agreement between Templeton Galbraith &
Hansberger, Ltd. and Templeton Investment Counsel, Inc., on
behalf of Templeton Global Asset Allocation Fund dated
April 19, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(x) Fund Administration Agreement between Registrant on behalf
of Templeton Global Asset Allocation Fund, and Franklin
Templeton Services, Inc., dated October 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xi) Management Agreement between Registrant, on Behalf of Small
Cap Fund dated October 11, 1995 Filing: Post-Effective
Amendment No. 20 to Registration Statement of Registrant on
Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(xii) Investment Management Agreement between Registrant, on
behalf of Templeton Developing Markets Equity Fund dated
October 1, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: October 27, 1995
(xiii) Fund Administration Agreement between Registrant, on behalf
of International Smaller Companies Fund and Franklin
Templeton Services, Inc., dated October 1, 1996.
Filing: Post-Effective Amendment No. 22 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xiv) Investment Management Agreement between Registrant, on
behalf of International Smaller
Companies Fund and Templeton Investment Counsel, Inc. dated
January 18, 1996
Filing: Post-Effective Amendment No. 18 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xv) Management Agreement between Registrant, on behalf of
Capital Growth Fund and Franklin Advisers dated January 18,
1996
Filing: Post-Effective Amendment No. 18 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xvi) Amendment to Management Agreement between Registrant and
Franklin Advisers, Inc. dated August 1, 1995
Filing: Post-Effective Amendment No. 20 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(xvii) Management Agreement between Registrant, on Behalf of Mutual
Discovery Securities Fund and Mutual Shares Securities Fund
and Franklin Mutual Advisers, Inc., dated October 18, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement of Registrant on Form
N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xviii) Fund Administration Agreement between Registrant, on behalf
of Mutual Discovery Securities Fund and Mutual Shares
Securities Fund, and Franklin Templeton Services, Inc.,
dated October 18, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xix) Management Agreement between Registrant, on behalf of
Global Health Care Securities Fund dated December 9, 1997
(xx) Management Agreement between Registrant, on behalf of Value
Securities Fund dated December 9, 1997
(xxi) Fund Administration Agreement between Registrant, on behalf
of Value Securities Fund Dated December 9, 1997
(xxii) Fund Administration Agreement between Registrant, on behalf
of Global Health Care Securities Fund
Dated December 9, 1997
(xxiii) Amendment to Invesement Management Agreement between
Registrant and Templeton Developing Markets Equity Fund
dated October 1, 1995
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
Not Applicable
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
Trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish
a reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the Investment Company Act of 1940 (the "1940
Act"), with respect to securities and similar investments of the
Registrant, including the schedule of renumeration;
(i) Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the International Equity
Fund, and Morgan Guaranty Trust Company of New York, dated
March 19, 1992
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the Pacific Growth Fund, and
Morgan Guaranty Trust Company of New York, dated March 19,
1992
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Custody Agreement between the Trust, on behalf of the
Templeton Developing Markets Equity Fund and the Templeton
Global Growth Fund, and The Chase Manhattan Bank, N.A.
dated March 15, 1994
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iv) Master Custody Agreement between the Registrant, the Bank
of New York, dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(v) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(vi) Amendment to Global Custody Agreement between Franklin
Valuemark Funds and The Chase Manhattan Bank, N.A. dated
April 1, 1996
Filing: Post-Effective Amendment No. 23 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(vii) Amendment to Master Custody Agreement between Franklin
Valuemark Funds and the Bank Of New York, dated April 1,
1996.
Filing: Post-Effective Amendment No. 23 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(viii Letter Agreement between Franklin Valuemark Funds and the
Bank Of New York, dated April 22, 1996
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(ix) Custody Agreement between the Trust, on behalf of Mutual
Discovery Securities Fund and Mutual Shares Securities
Fund, and the State Street Bank and Trust dated November 8,
1996
Filing: Post-Effective Amendment No. 23 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(9) Copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when
sold be legally issued, fully paid and nonassessable;
(i) Opinion of Counsel dated September 16, 1987 Filing:
Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(11) Copies of any other rulings and consents to the use thereof
relied on in the preparation of this registration statement and
required by Section 7 of the 1933 Act;
Not Applicable
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration
for providing the initial capital between or among the
Registrant, the underwriter, adviser, promoter or initial
stockholders and written assurances from promoters or initial
stockholders that their purchases were made for investment
purposes without any present intention of redeeming or reselling;
(i) Letter of Understanding dated April 11, 1995.
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Letter of Understanding dated September 12, 1995.
Filing: Post-Effective Amendment No. 17 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: October 27, 1996
(iii) Letter of Understanding dated April 4, 1996
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(iv) Letter of Understanding dated October 21, 1996
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant offers its
securities, any instructions thereto and any other documents
making up the model plan. Such form(s) should disclose the costs
and fees charged in connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan.
Not Applicable
(16) Schedule for computation of each performance quotation provided
in the registration statement in response to Item 22 (which need
not be audited).
Not Applicable
(17) Power of Attorney
(i) Power of Attorney dated July 18, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Secretary dated July 18, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
Item 25 Persons Controlled by or under Common Control with Registrant
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1997, there are three shareholders of record of
Registrant's shares.
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or apropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) The officers and directors of the Registrant's investment adviser
also serve as officers and/or directors or trustees for (1) the corporate
parent of Franklin Advisers, Inc., ("Advisers") the investment manager of 17
of Registrant's Funds, Franklin Resources, Inc. ("Resources"), and/or (2)
othe investment companies in the Franklin Group of Funds. For additional
information, please see Part B and Schedules A and D of Form ADV of Advisers
(SEC File 801-26292), incorporated herein by reference, which sets forth the
officers and directors of Advisers and information as to any business,
profession, vocation or employment of a substantial nature engaged in by
those officers and directors during the past two years.
(b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Resources, serves as adviser to the International Smaller
Companies Fund and as sub-adviser to certain of the Funds, furnishing to
Advisers and to Templeton Global Advisers Limited in that capacity portfolio
management services and investment research. For additional information
please see Part B and Schedules A and D of Form ADV of TICI (SEC File
801-15125), incorporated herein by reference, which set forth the officers
and directors of TICI and information as to any business, profession,
vocation of employment of a substantial nature engaged in by those officers
and directors during the past two years.
(c) Templeton Global Advisers Limited, formerly known as Templeton
Galbraith and Hansberger Ltd.
Templeton Global Advisers Limited ("Templeton Nassau"), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to Templeton
Global Growth Fund and Templeton Global Asset Allocation Fund. For additional
information please see Part B and Schedules A and D of Form ADV of Templeton
Nassau (SEC File 801-42343), incorporated herein by reference, which set
forth the officers and directors of Templeton Nassau and information as to
any business, profession, vocation of employment of a substantial nature
engages in by those officers and directors during the past two years.
(d) Templeton Asset Management Ltd., formerly known as Templeton
Investment Management (Singapore) Pte Ltd.
Templeton Asset Management ("Templeton Singapore"), an indirect, wholly owned
subsidiary of Resources, serves as investment manager to Templeton Developing
Markets Equity Fund. For information please see Part B and Schedules A and D of
Form ADV of Templeton Singapore (SEC File 801-46997), incorporated herein by
reference, which set forth the officers and directors of Templeton Singapore and
information as to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during the past
two years.
(e) Franklin Advisory Services, Inc.
Franklin Advisory Services, Inc. ("Franklin New Jersey"), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to the Rising
Dividends Fund and Value Securities Fund. For information please see Part B
and Schedules A and D of Form ADV of Franklin New Jersey (SEC File
801-51967), incorporated herein by reference, which set forth the officers
and directors of Franklin New Jersey and information as to any business,
profession, vocation of employment of a substantial nature engaged in by
those officers and directors during the past
two years.
(f) Franklin Mutual Advisers, Inc.
Franklin Mutual Advisers, Inc. ("Mutual Advisers"), an indirect, wholly owned
subsidiary of Resources, will serve as investment manager to the Mutual
Discovery Growth Fund and the Mutual Series Securities Fund. For information
please see Part B and Schedules A and D of Form ADV of Mutual Advisers (SEC File
801-53068), incorporated herein by reference, which set forth the officers and
directors of Mutual Advisers and information as to any business, profession,
vocation of employment of a substantial nature engaged in by those officers and
directors during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
Not applicable.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31 of the 1940 Act are kept by the Registrant or its shareholder services
agent, Franklin Templeton Investors Services, Inc., both of whose address is
777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
(a) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee or trustees when requested in writing to do so by the record
holders of not less than 10 per cent of the Registrant's outstanding shares
to assist its shareholders in the communicating with other shareholders in
accordance with the requirements of Section 16(c)of the Investment Company
Act of 1940.
(b) The Registrant hereby undertakes to file a post-effective
amendment using financial statements which need not be certified, within four
to six months from the effective date of Registrant's Registration Statement
for its two new series, the Global Health Care Securities Fund (proposed
effective May 1, 1998), and the Value Securities Fund (proposed effective
date May 1, 1998),under the Securities Act of 1933.
(c) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Fund's annual report and to furnish each person to whom a
prospectus is delivered a copy of the annual report upon request and without
charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this post-effective
amendment to the Registrant's Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of San Mateo
and the State of California, on the 29th day of April, 1997.
FRANKLIN VALUEMARK FUNDS
(Registrant)
By: Charles E. Johnson*
Charles E. Johnson, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:
Charles E. Johnson* Principal Executive Officer
Charles E. Johnson and Trustee
Dated: February 12, 1998
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: February 12, 1998
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: February 12, 1998
Frank H. Abbott III* Trustee
Frank H. Abbott III Dated: February 12, 1998
Lowell C. Anderson* Trustee
Lowell C. Anderson Dated: February 12, 1998
Harris J. Ashton* Trustee
Harris J. Ashton Dated: February 12, 1998
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: February 12, 1998
Robert I. Carlson Trustee
Robert I. Carlson Dated: February 12, 1998
Charles B. Johnson* Trustee
Charles B. Johnson Dated: February 12, 1998
Rupert H. Johnson, Jr.* Trustee
Rupert H. Johnson, Jr. Dated: February 12, 1998
Frank W. LaHaye* Trustee
Frank W. LaHaye Dated: February 12, 1998
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: February 12, 1998
*By /s/ Karen L. Skidmore, Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN VALUEMARK FUNDS
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Declaration of Trust *
EX-99.B2 By-Laws *
EX-99.B5(i) Management Agreement between Registrant and *
Franklin Advisers, Inc.
EX-99.B5(ii) Addendum to Investment Management Agreement *
dated March 14, 1989
EX-99.B5(iii) Management Agreement between Registrant on *
Behalf of International Equity and Pacific
Growth Fund, and Franklin Advisers, Inc.
dated January 27, 1992
EX-99.B5(iv) Subadvisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment Counsel
Inc. dated January 1, 1993.
EX-99.B5(v) Management Agreement between Registrant on *
Behalf of Franklin Rising Dividends Fund,
and Franklin Advisory Services, Inc. dated
July 1, 1996
EX-99.B5(vi) Investment Management Agreement between the *
trust, on behald of the Templeton Global Growth
Fund and Templeton, Galbraith & Hansberger Ltd.,
dated March 15, 1994
EX-99.B5(vii) Subadvisory Agreement between Franklin *
Advisers, Inc. and Tempelton Investment Counsel,
on behal of Global Income Fund dated August 1,
1994
EX-99.B5(viii) Investment Management Agreement between *
Registrant, on behalf of Templeton Global
Asset Allocation Fund and Tempelton,
Galbraith & Hansberger Ltd. dated April 19,
1995
EX-99.B5(ix) Subadvisory Agreement between Tempelton, *
Galbraith & Hansberger Ltd and Tempelton
Investment Counsel, on behalf of Templeto
Global Asset Allocation Fund dated April 19,
1995
EX-99.B5(x) Fund Adminsitration Agreement between *
Registrant on behalf of Templeton Global
Asset Allocation Fund, and Franklin Templeton
Services, dated October 1, 1996
EX-99.B5(xi) Management Agreement between Registrant on *
behalf of Small Cap Fund and Franklin
Advisers, Inc., dated October 11, 1995
EX-99.B5(xii) Investment Management Agreement between *
Registrant on behalf of Templeton Developing
Markets Equity Fund, and Tempelton,
Galbriath & Hansberger, dated October 1,
1995
EX-99.B5(xiii) Fund Administration Agreement between *
Registrant, on behalf of International
Smaller Companies Fund and Franklin
Tempelton Services, Inc., dated October 1,
1996
EX-99.B5(xiv) Investment Management Agreement between *
Registrant, on behalf of International
Smaller Companies Fund and Tempelton
Investment Counsel, Inc., dated January 18,
1996
EX-99.B5(xv) Management Agreement between Registrant, on *
behalf of Captial Growth Fund and Franklin
Advisers, Inc., dated January 18, 1996
EX-99.B5(xvi) Amendment to Management Agreement between *
Registrant and Franklin Advisers, Inc.,
Dated August 1, 1995
EX-99.B5(xvii) Management Agreement between Registrant, on *
Behalf of Mutual Discovery Securities Fund
and Mutual Shares Securities Fund and
Franklin Mutual Adivsers, Inc., dated
October 18, 1996
EX-.B5(xviii) Fund Administration Agreement between *
Registrant, on behalf of Mutual Discovery
Securities Fund and Mutual Shares Securities
Fund and Franklin Tempelton
Services, Inc., dated October 18, 1996
EX-99.B5(xix) Management Agreement between ATTACHED
Registrant, on behalf of Global Health Care
Securities Fund dated December 9, 1997
EX-99.B5(xx) Management Agreement between ATTACHED
Registrant, on behalf of Value Securities
Fund dated December 9, 1997
EX-99.B5(xxi) Fund Administration Agreement between ATTACHED
Registrant,on behalf of Value
Securities Fund Dated December 9, 1997
EX-99.B5(xxii) Fund Administration Agreement between ATTACHED
Registrant,on behalf of Global Health
Care Securities Fund dated December 9,
1997
EX-99.B5(xxiii) Amendment to Invesement Management ATTACHED
Agreement between Registrant and
Templeton Developing Markets Equity Fund
dated December 1, 1997
EX-99.B8(i) Foreign Exchange Netting Agreement between *
Franklin Valuemark Funds, on behalf of the
International Equity Fund, and Morgan
Guaranty Trust Company of New York, dated
March 19, 1992
EX-99.B8(ii) Foreign Exchange Netting Agreement between *
Franklin Valuemark Funds, on behalf of th
Pacific Growt Fund, and Morgan Guaranty
Trust Company of New York, dated March 19,
1992
EX-99.B8(iii) Custody Agreement between the Registrant, *
On behalf of the Templeton Developing
Markets Equity Fund and the Tempelton Global
Growth Fund, and the Chase Manhattan Bank,
N.A. dated March 15, 1994
EX-99.B8(iv) Master Custody Agreement between the *
Registrant,and the bank of new York, dated
February 16, 1996
EX-99.B8(v) Terminal Link Agreement between Registrant *
And Bank of New York, dated February 16,
1996
EX-99.B8(vi) Amendment to Global Custody Agreement *
Between Franklin Valuemark Funds
and the Chase Manhattan Bank, N.A. dated
April 1, 1996
EX-99B8(vii) Amendment to Master Custody Agreement *
between Franklin Valuemark Funds
and the Bank Of New York, dated April 1,
1996
EX-99.B8(viii) Letter Agreement between Franklin *
ValuemarkFunds and the Bank Of New York,
dated April 22, 1996.
EX-99.B8(ix) Custody Agreement between Registrant on *
behalf of Mutual Discovery Investments Fund
and Mutual Shares Investments Fund, and the
State Street Bank and Trust
EX-99.B10(i) Opinion of Counsel *
EX-99.B13(i) Letter of Understanding dated April 11, 1995 *
EX-99.B13(ii) Letter of Understanding dated September 12, *
1995
EX-99.B13(iii) Letter of Understanding dated April 4, 1996 *
EX-99.B13(iv) Letter of Understanding dated October 21, *
1996
EX-99.B17(i) Power of Attorney from Officers and *
Directors of the Registrant executed July
15, 1995
EX-99.B17(ii) Certificate of Secretary dated July 18, 1995 *
FRANKLIN VALUEMARK FUNDS
on behalf of the
GLOBAL HEALTH CARE SECURITIES FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN VALUEMARK FUNDS, a
Massachusetts business trust (the "Trust"), on behalf of GLOBAL HEALTH CARE
SECURITIES FUND (the "Fund"), a series of the Trust, and FRANKLIN ADVISERS,
INC., a California corporation, (the "Manager").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment manager and to have an investment manager perform
various management, statistical, research, investment advisory and other
services for the Fund; and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. Employment of the Manager. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Manager
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Manager shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.
2. Obligations of and Services to be Provided by the Manager. The Manager
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. Investment Management Services.
(a) The Manager shall manage the Fund's assets subject to
and in accordance with the investment objectives and policies of the Fund and
any directions which the Trust's Board of Trustees may issue from time to time.
In pursuance of the foregoing, the Manager shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of its
investment securities, and shall take such steps as may be necessary to
implement the same. Such determinations and services shall include determining
the manner in which any voting rights, rights to consent to corporate action and
any other rights pertaining to the Fund's investment securities shall be
exercised. The Manager shall render or cause to be rendered regular reports to
the Trust, at regular meetings of its Board of Trustees and at such other times
as may be reasonably requested by the Trust's Board of Trustees, of (i) the
decisions made with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, (ii) the reasons for such
decisions and (iii) the extent to which those decisions have been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Manager shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Manager to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Manager in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Manager may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e) (3) of the Securities Exchange Act of 1934) provided by
that broker.
Accordingly, the Trust and the Manager agree that the
Manager shall select brokers for the execution of the Fund's transactions from
among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the
quotations necessary to determine the Fund's net assets, in
such amount of total brokerage as may reasonably be required
in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its affiliates
which the Manager or its affiliates may lawfully and
appropriately use in their investment advisory capacities,
which relate directly to securities, actual or potential, of
the Fund, or which place the Manager in a better position to
make decisions in connection with the management of the
Fund's assets and securities, whether or not such data may
also be useful to the Manager and its affiliates in managing
other portfolios or advising other clients, in such amount
of total brokerage as may reasonably be required. Provided
that the Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the Fund may
also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
(c) When the Manager has determined that the Fund should
tender securities pursuant to a "tender offer solicitation," Franklin/Templeton
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
federal securities laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member. Neither the
Manager nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Manager or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Manager and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Manager, on behalf of the Fund, with brokers falling into
each of the categories referred to above and the manner in which the allocation
has been accomplished.
(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in accordance
with the foregoing, and that the right to make such allocation of brokerage
shall not interfere with the Manager's paramount duty to obtain the best net
price and execution for the Fund.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. Other Obligations and Services. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. Expenses of the Fund. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value
of the Fund's net assets;
E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Manager
or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing
money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the registration
of the Fund and its shares under federal and any applicable state laws;
including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. Compensation of the Manager. The Fund shall pay a management fee in
cash to the Manager based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services rendered
and obligations assumed by the Manager, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net assets
of the Fund shall be determined in the same manner as that Fund uses to compute
the value of its net assets in connection with the determination of the net
asset value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the following annual rates:
0.60% of the value of net assets up to and including $200
million;
0.50% of the value of net assets up to $1.3 billion; and
0.40% of the value of net assets over $1.3 billion.
B. The management fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Manager shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any month,
the accrued management fee shall be paid to the date of termination.
5. Activities of the Manager. The services of the Manager to the Fund
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Manager or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Manager or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Manager or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Manager, the Manager shall not be subject to liability to the Trust or
the Fund or to any shareholder of the Fund for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Manager agrees to reimburse
the Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and distribution
of proxy statements, amendments to its Registration Statement, holdings of
meetings of its shareholders or trustees, the conduct of factual investigations,
any legal or administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange Commission) which
the Trust incurs as the result of action or inaction of the Manager or any of
its affiliates or any of their officers, directors, employees or stockholders
where the action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock or
control of the Manager or its affiliates (or litigation related to any pending
or proposed or future transaction in such shares or control) which shall have
been undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Manager or any of its affiliates
or any of their officers, directors, employees or stockholders. The Manager
shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any stockholder
of the Manager or any of its affiliates from the sale of his shares of the
Manager, or similar matters. So long as this Agreement is in effect, the Manager
shall pay to the Trust the amount due for expenses subject to this Subparagraph
6(B) within 30 days after a bill or statement has been received by the Manager
therefor. This provision shall not be deemed to be a waiver of any claim the
Trust may have or may assert against the Manager or others for costs, expenses
or damages heretofore incurred by the Trust or for costs, expenses or damages
the Trust may hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or director or officer of the Manager, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. Renewal and Termination.
A. This Agreement shall become effective on the date written below
and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter for
periods not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting securities
of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a
vote of a majority of the Trustees of the Trust who are not parties to the
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Fund on 60 days' written
notice to the Manager;
(ii) shall immediately terminate with respect to the Fund in
the event of its assignment; and
(iii) may be terminated by the Manager on 60 days'
written notice to the Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any office
of such party.
8. Distribution Plan.
A. The provisions set forth in this paragraph 8 (hereinafter
referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under the
Act by the Trust, having been approved by a majority of the Trust's Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the operation
of the Plan (the "non-interested Trustees"), cast in person at a meeting called
for the purpose of voting on such Plan. The Board of Trustees concluded that the
rate of compensation to be paid to the Manager by the Fund was fair and not
excessive, but that due solely to the uncertainty that may exist from time to
time with respect to whether payments made by the Fund to the Manager or to
other firms may nevertheless be deemed to constitute distribution expenses, it
was determined that adoption of the Plan would be prudent and in the best
interests of the Fund. The Trustees' approval included a determination that in
the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders or policyholders investing in the Fund.
B. No additional payments are to be made by the Fund as a result of
the Plan other than the payments the Fund is otherwise obligated to make (i) to
the Manager pursuant to paragraph 4 of this Agreement, (ii) to the Transfer and
Dividend Paying Agents or Custodian, pursuant to their respective Agreements as
in effect at any time, and (iii) in payment of any expenses by the Fund in the
ordinary course of its respective businesses that may be deemed primarily
intended to result in the sale of shares issued by such Fund. However, to the
extent any of such other payments by the Fund, to or by the Manager, or to the
Fund's Agents, are nevertheless deemed to be payments for the financing of any
activity primarily intended to result in the sale of shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan as set forth herein. The cost and
activities, the payment of which are intended to be within the scope of the
Plan, shall include, but not necessarily be limited to, the following:
(a) the costs of the preparation, printing and mailing of all
required reports and notices to shareholders or policyholders investing in
the Fund;
(b) the costs of the preparation, printing and mailing of all
prospectuses and statements of additional information;
(c) the costs of preparation, printing and mailing of any
proxy statements and proxies;
(d) all legal and accounting fees relating to the preparation of any
such reports, prospectuses, proxies and proxy statements;
(e) all fees and expenses relating to the qualification of the Fund
and/or its shares under the securities or "Blue Sky" laws of any jurisdiction;
(f) all fees under the Securities Act of 1933 and the Act, including
fees in connection with any application for exemption relating to or directed
toward the sale of the Fund's shares;
(g) all fees and assessments of the Investment Company Institute or
any successor organization, irrespective of whether some of its activities are
designed to provide sales assistance;
(h) all costs of the preparation and mailing of confirmations of
shares sold or redeemed, and reports of share balances;
(i) all costs of responding to telephone or mail inquiries of
investors or prospective investors; and
(j) payments to dealers, financial institutions, advisers, or other
firms, any one of whom may receive monies in respect of the Fund's shares held
in accounts for policyholders for whom such firm is the dealer of record or
holder of record, or with whom such firm has a servicing relationship. Servicing
may include, among other things: (i) answering client inquiries regarding the
Fund; (ii) assisting clients in changing account designations and addresses;
(iii) performing sub-accounting; (iv) establishing and maintaining shareholder
or policyholder accounts and records; (v) processing purchase and redemption
transactions; (vi) providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by such firm; (vii) arranging
for bank wires; and (viii) such other services as the Fund may request, to the
extent such are permitted by applicable statute, rule or regulation.
C. The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of Trustees of the Trust
at least quarterly on payments for any of the activities in subparagraph B of
this paragraph 8, and shall furnish the Board of Trustees of the Trust with such
other information as the Board may reasonably request in connection with such
payments in order to enable the Board to make an informed determination of
whether the Plan should be continued.
(b) The Plan shall continue in effect for a period of more than one
year from the date written below only so long as such continuance is
specifically approved at least annually (from the date below) by the Trust's
Board of Trustees, including the non-interested Trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to the Fund at any time
by vote of a majority of non-interested Trustees or by vote of a majority of
such Fund's outstanding voting securities on not more than sixty (60) days'
written notice to any other party to the Plan, and the Plan shall terminate
automatically with respect to the Fund in the event of any act that constitutes
an assignment of this Management Agreements.
(d) The Plan may not be amended to increase materially the amount
deemed to be spent for distribution without approval by a majority of the Fund's
outstanding shares (as defined by the Act) and all material amendments to the
Plan shall be approved by the non-interested Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
(e) So long as the Plan is in effect, the selection and nomination
of the Trust's non-interested Trustees shall be committed to the discretion of
such non-interested Trustees.
(f) Any termination of the Plan shall not terminate this Management
Agreement or affect the validity of any of the provisions of this Agreement
other than this paragraph 8.
9. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 9th day of December, 1997.
FRANKLIN VALUEMARK FUNDS on behalf of
Global Health Care Securities Fund
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
FRANKLIN VALUEMARK FUNDS
on behalf of the
VALUE SECURITIES FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN VALUEMARK FUNDS, a
Massachusetts business trust (the "Trust"), on behalf of VALUE SECURITIES FUND
(the "Fund"), a series of the Trust, and FRANKLIN ADVISORY SERVICES, Inc., a
Delaware corporation, (the "Manager").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment manager and to have an investment manager perform
various management, statistical, research, investment advisory and other
services for the Fund; and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. Employment of the Manager. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Manager
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Manager shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.
2. Obligations of and Services to be Provided by the Manager. The Manager
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. Investment Management Services.
(a) The Manager shall manage the Fund's assets subject to
and in accordance with the investment objectives and policies of the Fund and
any directions which the Trust's Board of Trustees may issue from time to time.
In pursuance of the foregoing, the Manager shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of its
investment securities, and shall take such steps as may be necessary to
implement the same. Such determinations and services shall include determining
the manner in which any voting rights, rights to consent to corporate action and
any other rights pertaining to the Fund's investment securities shall be
exercised. The Manager shall render or cause to be rendered regular reports to
the Trust, at regular meetings of its Board of Trustees and at such other times
as may be reasonably requested by the Trust's Board of Trustees, of (i) the
decisions made with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, (ii) the reasons for such
decisions and (iii) the extent to which those decisions have been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Manager shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Manager to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Manager in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Manager may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e) (3) of the Securities Exchange Act of 1934) provided by
that broker.
Accordingly, the Trust and the Manager agree that the
Manager shall select brokers for the execution of the Fund's transactions from
among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the
quotations necessary to determine the Fund's net assets, in
such amount of total brokerage as may reasonably be required
in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its affiliates
which the Manager or its affiliates may lawfully and
appropriately use in their investment advisory capacities,
which relate directly to securities, actual or potential, of
the Fund, or which place the Manager in a better position to
make decisions in connection with the management of the
Fund's assets and securities, whether or not such data may
also be useful to the Manager and its affiliates in managing
other portfolios or advising other clients, in such amount
of total brokerage as may reasonably be required. Provided
that the Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the Fund may
also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
(c) When the Manager has determined that the Fund should
tender securities pursuant to a "tender offer solicitation," Franklin/Templeton
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
federal securities laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member. Neither the
Manager nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Manager or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Manager and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Manager, on behalf of the Fund, with brokers falling into
each of the categories referred to above and the manner in which the allocation
has been accomplished.
(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in accordance
with the foregoing, and that the right to make such allocation of brokerage
shall not interfere with the Manager's paramount duty to obtain the best net
price and execution for the Fund.
B. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. Other Obligations and Services. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. Expenses of the Fund. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value
of the Fund's net assets;
E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Manager
or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing
money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the registration
of the Fund and its shares under federal and any applicable state laws;
including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. Compensation of the Manager. The Fund shall pay a management fee in
cash to the Manager based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services rendered
and obligations assumed by the Manager, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net assets
of the Fund shall be determined in the same manner as that Fund uses to compute
the value of its net assets in connection with the determination of the net
asset value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the following annual rates:
0.60% of the value of net assets up to and including $200
million;
0.50% of the value of net assets up to 1.3 billion; and
0.40% of the value of net assets over $1.3 billion.
B. The management fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Manager shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any month,
the accrued management fee shall be paid to the date of termination.
5. Activities of the Manager. The services of the Manager to the Fund
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Manager or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Manager or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Manager or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Manager, the Manager shall not be subject to liability to the Trust or
the Fund or to any shareholder of the Fund for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Manager agrees to reimburse
the Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and distribution
of proxy statements, amendments to its Registration Statement, holdings of
meetings of its shareholders or trustees, the conduct of factual investigations,
any legal or administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange Commission) which
the Trust incurs as the result of action or inaction of the Manager or any of
its affiliates or any of their officers, directors, employees or stockholders
where the action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock or
control of the Manager or its affiliates (or litigation related to any pending
or proposed or future transaction in such shares or control) which shall have
been undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Manager or any of its affiliates
or any of their officers, directors, employees or stockholders. The Manager
shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any stockholder
of the Manager or any of its affiliates from the sale of his shares of the
Manager, or similar matters. So long as this Agreement is in effect, the Manager
shall pay to the Trust the amount due for expenses subject to this Subparagraph
6(B) within 30 days after a bill or statement has been received by the Manager
therefor. This provision shall not be deemed to be a waiver of any claim the
Trust may have or may assert against the Manager or others for costs, expenses
or damages heretofore incurred by the Trust or for costs, expenses or damages
the Trust may hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or director or officer of the Manager, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. Renewal and Termination.
A. This Agreement shall become effective on the date written below
and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter for
periods not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting securities
of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a
vote of a majority of the Trustees of the Trust who are not parties to the
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Fund on 60 days' written
notice to the Manager;
(ii) shall immediately terminate with respect to the Fund in
the event of its assignment; and
(iii) may be terminated by the Manager on 60 days' written
notice to the Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any office
of such party.
8. Distribution Plan.
A. The provisions set forth in this paragraph 8 (hereinafter
referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under the
Act by the Trust, having been approved by a majority of the Trust's Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the operation
of the Plan (the "non-interested Trustees"), cast in person at a meeting called
for the purpose of voting on such Plan. The Board of Trustees concluded that the
rate of compensation to be paid to the Manager by the Fund was fair and not
excessive, but that due solely to the uncertainty that may exist from time to
time with respect to whether payments made by the Fund to the Manager or to
other firms may nevertheless be deemed to constitute distribution expenses, it
was determined that adoption of the Plan would be prudent and in the best
interests of the Fund. The Trustees' approval included a determination that in
the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders or policyholders investing in the Fund.
B. No additional payments are to be made by the Fund as a result of
the Plan other than the payments the Fund is otherwise obligated to make (i) to
the Manager pursuant to paragraph 4 of this Agreement, (ii) to the Transfer and
Dividend Paying Agents or Custodian, pursuant to their respective Agreements as
in effect at any time, and (iii) in payment of any expenses by the Fund in the
ordinary course of its respective businesses that may be deemed primarily
intended to result in the sale of shares issued by such Fund. However, to the
extent any of such other payments by the Fund, to or by the Manager, or to the
Fund's Agents, are nevertheless deemed to be payments for the financing of any
activity primarily intended to result in the sale of shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan as set forth herein. The cost and
activities, the payment of which are intended to be within the scope of the
Plan, shall include, but not necessarily be limited to, the following:
(a) the costs of the preparation, printing and mailing of all
required reports and notices to shareholders or policyholders investing in
the Fund;
(b) the costs of the preparation, printing and mailing of all
prospectuses and statements of additional information;
(c) the costs of preparation, printing and mailing of any
proxy Statements and proxies;
(d) all legal and accounting fees relating to the preparation of any
such reports, prospectuses, proxies and proxy statements;
(e) all fees and expenses relating to the qualification of the Fund
and/or its shares under the securities or "Blue Sky" laws of any jurisdiction;
(f) all fees under the Securities Act of 1933 and the Act, including
fees in connection with any application for exemption relating to or directed
toward the sale of the Fund's shares;
(g) all fees and assessments of the Investment Company Institute or
any successor organization, irrespective of whether some of its activities are
designed to provide sales assistance;
(h) all costs of the preparation and mailing of confirmations of
shares sold or redeemed, and reports of share balances;
(i) all costs of responding to telephone or mail inquiries of
investors or prospective investors; and
(j) payments to dealers, financial institutions, advisers, or other
firms, any one of whom may receive monies in respect of the Fund's shares held
in accounts for policyholders for whom such firm is the dealer of record or
holder of record, or with whom such firm has a servicing relationship. Servicing
may include, among other things: (i) answering client inquiries regarding the
Fund; (ii) assisting clients in changing account designations and addresses;
(iii) performing Sub-accounting; (iv) establishing and maintaining shareholder
or policyholder accounts and records; (v) processing purchase and redemption
transactions; (vi) providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by such firm; (vii) arranging
for bank wires; and (viii) such other services as the Fund may request, to the
extent such are permitted by applicable statute, rule or regulation.
C. The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of Trustees of the Trust
at least quarterly on payments for any of the activities in subparagraph B of
this paragraph 8, and shall furnish the Board of Trustees of the Trust with such
other information as the Board may reasonably request in connection with such
payments in order to enable the Board to make an informed determination of
whether the Plan should be continued.
(b) The Plan shall continue in effect for a period of more than one
year from the date written below only so long as such continuance is
specifically approved at least annually (from the date below) by the Trust's
Board of Trustees, including the non-interested Trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to the Fund at any time
by vote of a majority of non-interested Trustees or by vote of a majority of
such Fund's outstanding voting securities on not more than sixty (60) days'
written notice to any other party to the Plan, and the Plan shall terminate
automatically with respect to the Fund in the event of any act that constitutes
an assignment of this Management Agreements.
(d) The Plan may not be amended to increase materially the amount
deemed to be spent for distribution without approval by a majority of the Fund's
outstanding shares (as defined by the Act) and all material amendments to the
Plan shall be approved by the non-interested Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
(e) So long as the Plan is in effect, the selection and nomination
of the Trust's non-interested Trustees shall be committed to the discretion of
such non-interested Trustees.
(f) Any termination of the Plan shall not terminate this Management
Agreement or affect the validity of any of the provisions of this Agreement
other than this paragraph 8.
9. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 9th day of December, 1997.
FRANKLIN VALUEMARK FUNDS on behalf of
Value Securities Fund
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISORY SERVICES, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of December 9, 1997 between FRANKLIN VALUEMARK
FUNDS, a Massachusetts business trust ("the Investment Company"), on behalf of
its series VALUE SECURITIES FUND (the "Fund") and FRANKLIN TEMPLETON SERVICES,
INC. (the "Administrator").
In consideration of the mutual agreements herein made, the parties
hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to Shareholders,
notices of dividends, capital gains distributions and tax credits; and attending
to routine correspondence and other communications with individual Shareholders
when asked to do so by the Fund's shareholder servicing agent or other agents of
the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's income
tax returns, and monitoring the Fund's compliance with subchapter M of the
Internal Revenue Code and provisions of the Code applicable to insurance company
separate accounts, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;
(j) providing executive, clerical and secretarial personnel needed
to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for such
services a monthly fee equal on an annual basis to 0.15% of the first $200
million of the average daily net assets of the Fund during the month preceding
each payment, reduced as follows: on such net assets in excess of $200 million
up to $700 million, a monthly fee equal on an annual basis to 0.135%; on such
net assets in excess of $700 million up to $1.2 billion, a monthly fee equal on
an annual basis to 0.10%; and on such net assets in excess of $1.2 billion, a
monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for one
year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any time
on sixty (60) days' written notice without payment of penalty, provided that
such termination by the Investment Company shall be directed or approved by the
vote of a majority of the Board of the Investment Company in office at the time
or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Administrator, or of reckless disregard of its duties and
obligations hereunder, the Administrator shall not be subject to liability for
any act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers.
FRANKLIN VALUEMARK FUNDS on behalf of
Value Securities Fund
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of December 9, 1997 between FRANKLIN VALUEMARK
FUNDS, a Massachusetts business trust ("the Investment Company"), on behalf of
its series GLOBAL HEALTH CARE SECURITIES FUND (the "Fund") and FRANKLIN
TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the parties
hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to Shareholders,
notices of dividends, capital gains distributions and tax credits; and attending
to routine correspondence and other communications with individual Shareholders
when asked to do so by the Fund's shareholder servicing agent or other agents of
the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's income
tax returns, and monitoring the Fund's compliance with subchapter M of the
Internal Revenue Code and provisions of the Code applicable to insurance company
separate accounts, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;
(j) providing executive, clerical and secretarial personnel needed
to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for such
services a monthly fee equal on an annual basis to 0.15% of the first $200
million of the average daily net assets of the Fund during the month preceding
each payment, reduced as follows: on such net assets in excess of $200 million
up to $700 million, a monthly fee equal on an annual basis to 0.135%; on such
net assets in excess of $700 million up to $1.2 billion, a monthly fee equal on
an annual basis to 0.10%; and on such net assets in excess of $1.2 billion, a
monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for one
year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any time
on sixty (60) days' written notice without payment of penalty, provided that
such termination by the Investment Company shall be directed or approved by the
vote of a majority of the Board of the Investment Company in office at the time
or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Administrator, or of reckless disregard of its duties and
obligations hereunder, the Administrator shall not be subject to liability for
any act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers.
FRANKLIN VALUEMARK FUNDS on behalf of
Global Health Care Securities Fund
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
ADDENDUM PURSUANT TO SECTION 6.2 OF THE CODE OF CONDUCT OF
THE HONG KONG SECURITIES & FUTURES COMMISSION (THE "SFC")
This Addendum (the "Addendum") is made and entered into as of this 9th day
of December, 1997 by the Franklin Valuemark Funds (the "Trust"), on behalf of
Templeton Developing Markets Equity Fund (the "Fund"), and Templeton Asset
Management Ltd. (the "Investment Manager").
WHEREAS, the Trust and the Investment Manager are parties to the Investment
Management Agreement dated as of October 1, 1995 (the "Investment Management
Agreement"); and
WHEREAS, Section 6.2 of the SFC's Code of Conduct for Persons Registered
with the Securities and Futures Commission (the "Code") requires that certain
additional information be included in the Investment Management Agreement.
NOW THEREFORE, the parties hereto agree that, pursuant to Section 6.2 of
the Code, the following information is included in the Investment Management
Agreement:
SECTION 1. UNDERTAKINGS. Each Party undertakes to notify the other party in
the event of any material change to the information provided in the Investment
Management Agreement.
SECTION 2. CERTAIN INFORMATION ABOUT THE INVESTMENT MANAGER.
(a) The Investment Manager's full name and address is:
Templeton Asset Management Ltd.
7 Temasek Boulevard
#38-03 Suntec Tower One
Singapore 038987
(b) The Investment Manager's registration status with the SFC is active.
SECTION 3. CERTAIN INFORMATION ABOUT THE TRUST. The Trust's full name and
verified address is:
Franklin Valuemark Funds
777 Mariners Island Boulevard
San Mateo, California 94403
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be duly
executed by their respective duly authorized officers.
FRANKLIN VALUEMARK FUNDS on behalf of
Templeton Developing Markets Equity Fund
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
TEMPLETON ASSET MANAGEMENT LTD.
By: /s/ Martin L. Flanaga
Martin L. Flanagan
Director
