FRANKLIN
VALUEMARK
FUNDS
PROSPECTUS MAY 1, 1998
AS SUPPLEMENTED DECEMBER 7, 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 HAS 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 FUND1,2 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. Investing in a portfolio which concentrates in a specialized market
sector involves increased risks. Foreign investing also 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. Investing in a portfolio which concentrates in a specialized
market sector involves increased risks.
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. Investing in a
non-diversified portfolio concentrating in a specialized market sector
involves increased risks. Foreign investing also 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 smaller 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.
SMALL CAP FUND1 seeks long-term capital growth. The Portfolio seeks to
accomplish its objective by investing primarily in equity securities of
smaller capitalization growth companies. The Portfolio may also invest in
foreign securities, including those of developing markets issuers. Because of
the Portfolio's investments in smaller 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, HIGH
INCOME, INCOME SECURITIES, INTERNATIONAL EQUITY, INTERNATIONAL SMALLER
COMPANIES, MONEY, 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 5
INTRODUCTION 8
GENERAL INVESTMENT
CONSIDERATIONS 8
PORTFOLIO INVESTMENT
OBJECTIVES AND POLICIES 9
STABILITY OF PRINCIPAL AND
INCOME 9
Money Market Fund 9
CURRENT INCOME 11
High Income Fund 11
Templeton Global Income
Securities Fund 12
U.S. Government Securities
Fund 14
Zero Coupon Funds, 2000,
2005, 2010 15
GROWTH AND INCOME 17
Global Utilities Securities
Fund (formerly Utility Equity
Fund) 17
Growth and Income Fund 18
Income Securities Fund 19
Mutual Shares Securities
Fund 21
Real Estate Securities Fund 23
Rising Dividends Fund 24
Templeton Global Asset
Allocation Fund 25
Value Securities Fund 26
CAPITAL GROWTH 28
Capital Growth Fund 28
Global Health Care
Securities Fund 29
Mutual Discovery Securities
Fund 31
Natural Resources Securities
Fund 33
Small Cap Fund 35
Templeton Developing
Markets Equity Fund 36
Templeton Global Growth
Fund 38
Templeton International
Equity Fund 39
Templeton International
Smaller Companies Fund 40
Templeton Pacific Growth
Fund 41
HIGHLIGHTED RISK
CONSIDERATIONS 42
Foreign Transactions 42
General Considerations 42
Investments in Developing
Markets 43
Certain Restrictions 45
Currency Risks and their
Management 45
Interest Rate and Currency
Swaps 47
Investments in Depositary
Receipts 47
Lower Rated Debt Obligations 48
Defaulted Debt Obligations 49
The Portfolios' Investments 50
Asset Composition Table 50
INVESTMENT METHODS AND
RISKS, COMMON TO MORE
THAN ONE PORTFOLIO 50
Borrowing 51
Concentration 51
Convertible Securities 51
Debt Obligations 52
Corporate Debt Obligations 52
Money Market Instruments 52
U.S. Government Securities 52
Zero Coupon Bonds 53
Deferred Interest and
Pay-in-Kind Bonds 53
Derivatives 54
Diversification 54
Loan Participations 54
Loans of Portfolio
Securities 54
Options and Futures
Contracts 55
Portfolio Turnover 55
Repurchase and Reverse
Repurchase Agreements 55
Restricted and Illiquid
Securities 56
"Rolls" 56
Small Capitalization Issuers 57
Structured Notes 57
Temporary Investments 57
Trade Claims 58
Warrants 58
"When-Issued" and "Delayed
Delivery" Transactions 58
INVESTMENT RESTRICTIONS 58
MANAGEMENT 58
Trustees and Officers 58
Managers 58
Management Services and
Fees 59
Portfolio Transactions 60
Subadvisor 60
Portfolio Administrator 60
Operating Expenses 60
Portfolio Operations 60
Biographical Information 61
PURCHASE, REDEMPTION, AND
EXCHANGE OF SHARES 68
INCOME DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS 69
DETERMINATION OF
NET ASSET VALUE 69
TAX CONSIDERATIONS 69
HOW THE TRUST MEASURES
PERFORMANCE 70
GENERAL INFORMATION 70
Distribution Plans 70
Reports 71
Transfer Agent 71
Year 2000 71
Voting Privileges and
Other Rights 71
APPENDIX 71
Description of Bond Ratings 71
Description of Commercial
Paper Ratings 72
FINANCIAL HIGHLIGHTS
This table summarizes financial history of each Portfolio. The information
has been audited by Coopers & Lybrand L.L.P, the Trust's independent
auditors. Their audit report covering each of the most recent five years
appears in the financial statements in the Trust's Annual Report to
Shareholders for the fiscal year ended December 31, 1997. The Annual Report
to Shareholders also includes more information about each Portfolio's
performance. For a free copy, please call 1-800-342-3863
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period) RATIOS/SUPPLEMENTAL DATA
----------------------------------------------- ----------------------------
Ratio
Distr- Distr- of net
Net Net Total butions butions invest-
asset real- from from from Net ment
value Net ized & un- invest- net net asset Net Ratio of income to Port- Average
Period Begin- Invest- realized ment invest- real- Total value assets, expenses average folio com-
Ended ning of ment gain Oper- ment ized disti- end of Total end of to average net turnover mission
Dec.31 Period Income (loss) ations Income gains butions period return+ period net assets assets rate rate***
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Growth Fund
2
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19961 $10.00 $.03 $1.33 $1.36 $ - $ - $ - $11.36 13.60% $ 44,667 .77%* .96%* 3.91% .0567
1997 11.36 .06 2.02 2.08 (.02) - (.02) 13.42 18.31 109,355 .77 .72 19.90 .0575
Global Utilities Securities Fund (formerly the Utility Equity Fund)
19892 10.00 .17 1.97 2.14 - - - 12.14 21.40 15,151 -7 5.63 4.43 -
1990 12.14 .40 (.18) .22 (.10) - (.10) 12.26 1.84 77,739 .68 6.53 - -
1991 12.26 .35 2.60 2.95 (.35) - (.35) 14.86 24.56 243,626 .63 5.92 2.01 -
1992 14.86 .35 .92 1.27 (.31) - (.31) 15.82 8.69 667,118 .55 5.18 .13 -
1993 15.82 .38 1.28 1.66 (.34) - (.34) 17.14 10.54 1,589,634 .51 4.47 4.80 -
1994 17.14 .95 (2.94) (1.99) (.62) (.11) (.73) 14.42 (11.56) 1,155,110 .52 5.58 11.74 -
1995 14.42 .84 3.54 4.38 (.90) - (.90) 17.90 31.35 1,423,446 .50 5.14 13.27 -
1996 17.90 .91 .29 1.20 (.92) - (.92) 18.18 7.07 1,202,290 .50 4.20 29.69 .0252
1997 18.18 .90 3.54 4.44 (.96) (1.33) (2.29) 20.33 26.76 1,129,904 .50 3.91 17.00 .0154
Growth and Income Fund
19892 10.00 .13 .16 .29 - - - 10.29 2.90 17,850 -7 3.78 59.34 -
1990 10.29 .20 (.44) (.24) (.08) - (.08) 9.97 (2.35) 53,902 .67 3.46 45.08 -
1991 9.97 .12 2.22 2.34 (.20) - (.20) 12.11 23.63 117,944 .67 2.09 40.43 -
1992 12.11 .08 .72 .80 (.12) - (.12) 12.79 6.73 231,659 .62 1.44 25.22 -
1993 12.79 .09 1.22 1.31 (.11) - (.11) 13.99 10.32 371,484 .58 1.00 41.56 -
1994 13.99 .19 (.47) (.28) (.09) (.20) (.29) 13.42 (3.41) 517,877 .54 1.81 99.21 -
1995 13.42 .41 3.92 4.33 (.20) (.41) (.61) 17.14 32.83 889,487 .52 3.30 116.54 -
1996 17.14 .62 1.64 2.26 (.41) (1.44) (1.85) 17.55 14.19 1,077,989 .50 4.06 23.01 .0407
1997 17.55 .67 4.05 4.72 (.64) (.62) (1.26) 21.01 27.74 1,338,476 .49 3.53 36.71 .0413
High Income Fund
19892 10.00 .38 (.25) .13 - - - 10.13 1.30 7,513 -7 10.34 2.29 -
1990 10.13 1.00 (1.86) (.86) (.33) - (.33) 8.94 (8.67) 10,768 .67 12.94 13.95 -
1991 8.94 .78 1.80 2.58 (.90) - (.90) 10.62 30.15 23,675 .69 11.41 36.67 -
1992 10.62 .38 1.31 1.69 (.54) - (.54) 11.77 16.21 67,991 .68 9.76 33.36 -
1993 11.77 .37 1.45 1.82 (.46) - (.46) 13.13 15.71 196,972 .64 8.18 21.06 -
1994 13.13 .88 (1.18) (.30) (.55) (.07) (.62) 12.21 (2.26) 255,036 .60 9.45 22.94 -
1995 12.21 1.06 1.30 2.36 (.91) - (.91) 13.66 19.76 360,904 .56 9.63 20.65 -
1996 13.66 1.20 .56 1.76 (1.20) (.06) (1.26) 14.16 13.90 446,096 .54 9.63 27.16 -
1997 14.16 1.33 .22 1.55 (1.22) (.04) (1.26) 14.45 11.47 496,036 .53 9.64 36.38 -
Income Securities Fund
19892 10.00 .28 .62 .90 - - - 10.90 9.00 16,369 -7 8.63 2.54 -
1990 10.90 .82 (1.62) (.80) (.21) - (.21) 9.89 (7.42) 30,054 .67 10.39 5.53 -
1991 9.89 .77 3.06 3.83 (.90) - (.90) 12.82 39.93 61,266 .67 8.91 29.65 -
1992 12.82 .40 1.26 1.66 (.59) (.24) (.83) 13.65 13.20 182,993 .67 7.44 12.59 -
1993 13.65 .33 2.18 2.51 (.31) (.05) (.36) 15.80 18.59 737,942 .56 6.66 10.12 -
1994 15.80 .82 (1.80) (.98) (.44) (.07) (.51) 14.31 (6.27) 1,000,002 .54 7.27 13.33 -
1995 14.31 1.16 1.96 3.12 (.89) (.07) (.96) 16.47 22.40 1,266,538 .51 8.05 33.14 -
1996 16.47 1.32 .44 1.76 (.87) (.15) (1.02) 17.21 11.28 1,350,659 .50 7.96 15.28 .0519
1997 17.21 1.40 1.38 2.78 (1.33) (.29) (1.62) 18.37 17.09 1,406,787 .50 7.53 14.68 .0506
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period) RATIOS/SUPPLEMENTAL DATA
----------------------------------------------- --------------------------
Ratio
Distr- Distr- of net
Net Net Total butions butions invest-
asset real- from from from Net ment
value Net ized & un- invest- net net asset Net Ratio of income to Port- Average
Period Begin- Invest- realized ment invest- real- Total value assets, expenses average folio com-
Ended ning of ment gain Oper- ment ized disti- end of Total end of to average net turnover mission
Dec.31 Period Income (loss) ations Income gains butions period return+ period net assets assets rate rate***
- -----------------------------------------------------------------------------------------------------------------------------------
Money Market Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19892 $1.00 $.07 $ - $.07 $ (.07) $ - $(.07) $ 1.00 7.51% $ 13,731 -7 7.18% -% -
1990 1.00 .07 - .07 (.07) - (.07) 1.00 7.62 66,524 .65 7.39 - -
1991 1.00 .05 - .05 (.05) - (.05) 1.00 5.48 68,060 .67 5.43 - -
1992 1.00 .03 - .03 (.03) - (.03) 1.00 3.06 86,907 .69 2.99 - -
1993 1.00 .03 - .03 (.03) - (.03) 1.00 2.54 131,534 .66 2.53 - -
1994 1.00 .04 - .04 (.04) - (.04) 1.00 3.82 518,618 .467 4.05 - -
1995 1.00 .06 - .06 (.06) - (.06) 1.00 5.74 429,547 .407 5.58 - -
1996 1.00 .05 - .05 (.05) - (.05) 1.00 5.16 408,930 .437 5.04 - -
1997 1.00 .05 - .05 (.05) - (.05) 1.00 5.24 367,449 .457 5.11 - -
Mutual Shares Securities Fund
199610 10.00 .02 .33 .35 - - - 10.35 3.50 27,677 1.00* 2.56* 1.31 .0410
1997 10.35 .13 1.71 1.84 (.01) - (.01) 12.18 17.73 387,787 .80 2.10 49.01 .0397
Mutual Discovery Securities Fund
199610 10.00 .02 .19 .21 - - - 10.21 2.10 15,418 1.37* 2.11* .14 .0300
1997 10.21 .13 1.84 1.97 (.01) - (.01) 12.17 19.25 198,653 1.06 1.19 55.93 .0219
Natural Resources Fund
19892 10.00 .16 2.22 2.38 - - - 12.38 23.80 2,352 -7 4.46 21.30 -
1990 12.38 .13 (1.84) (1.71) (.08) (.07) (.15) 10.52 (13.97) 10,926 .69 3.25 1.02 -
1991 10.52 .38 .02 .40 (.20) (.01) (.21) 10.71 3.86 9,049 .69 3.20 .25 -
1992 10.71 .10 (1.14) (1.04) (.31) - (.31) 9.36 (10.13) 13,827 .69 2.23 - -
1993 9.36 .03 5.16 5.19 (.09) - (.09) 14.46 55.62 73,575 .68 1.58 .01 -
1994 14.46 .16 (.45) (.29) (.08) - (.08) 14.09 (2.01) 125,078 .68 1.63 7.66 -
1995 14.09 .22 .12 .34 (.20) (.15) (.35) 14.08 2.35 105,109 .66 1.40 15.66 -
1996 14.08 .15 .44 .59 (.20) (.18) (.38) 14.29 4.00 109,579 .65 1.00 21.77 .0221
1997 14.29 .15 (2.83) (2.68) (.20) - (.20) 11.41 (18.98) 74,924 .69 1.00 85.22 .0265
Real Estate Securities Fund
19892 10.00 .25 .23 .48 - - - 10.48 4.80 808 -7 6.32 13.24 -
1990 10.48 .48 (1.72) (1.24) (.15) - (.15) 9.09 (11.98) 1,963 .72 7.66 - -
1991 9.09 .34 2.67 3.01 (.45) - (.45) 11.65 33.47 4,810 .74 6.05 7.95 -
1992 11.65 .14 1.24 1.38 (.24) - (.24) 12.79 12.12 14,859 .69 4.50 2.76 -
1993 12.79 .09 2.33 2.42 (.17) - (.17) 15.04 19.01 92,678 .67 4.05 5.84 -
1994 15.04 .38 .06 .44 (.17) - (.17) 15.31 2.89 195,697 .62 4.00 11.73 -
1995 15.31 .78 1.83 2.61 (.52) - (.52) 17.40 17.53 213,473 .59 4.74 22.15 -
1996 17.40 .79 4.74 5.53 (.78) - (.78) 22.15 32.82 322,721 .57 4.80 10.32 .0519
1997 22.15 .72 3.72 4.44 (.67) (.32) (.99) 25.60 20.70 440,554 .54 3.59 11.62 .0550
Rising Dividends Fund
19923 10.00 .06 .92 .98 - - - 10.98 9.80 97,687 .677* 2.11* 5.22 -
1993 10.98 .14 (.52) (.38) (.03) - (.03) 10.57 (3.48) 299,730 .79 2.31 13.58 -
1994 10.57 .26 (.69) (.43) (.17) - (.17) 9.97 (4.08) 309,929 .80 2.71 24.07 -
1995 9.97 .27 2.66 2.93 (.24) - (.24) 12.66 29.74 463,253 .78 2.72 18.72 -
1996 12.66 .25 2.77 3.02 (.28) - (.28) 15.40 24.18 597,424 .76 1.96 27.97 .0505
1997 15.40 .22 4.77 4.99 (.26) (.45) (.71) 19.68 33.03 780,298 .74 1.24 37.04 .0516
Small Cap Fund
19954 10.00 .03 .21 .24 - - - 10.24 2.30 13,301 .90* 2.70* 16.04 -
1996 10.24 .02 2.95 2.97 (.01) - (.01) 13.20 28.95 170,969 .77 .63 63.72 .0518
1997 13.20 .01 2.24 2.25 (.03) (.37) (.40) 15.05 17.42 313,462 .77 .06 64.07 .0482
Templeton Developing Markets Equity Fund
19945 10.00 .07 (.51) (.44) - - - 9.56 (4.40) 98,189 1.53* 1.85* 1.15 -
1995 9.56 .09 .18 .27 (.04) (.01) (.05) 9.78 2.77 158,084 1.41 2.01 19.96 -
1996 9.78 .12 1.97 2.09 (.10) (.18) (.28) 11.59 21.59 272,098 1.49 1.68 12.42 .0025
1997 11.59 .18 (1.10) (.92) (.15) (.23) (.38) 10.29 (8.72) 279,680 1.42 1.57 20.59 .0016
Templeton Global Asset Allocation Fund
19956 10.00 .18 .52 .70 (.18) - (.18) 10.52 7.01 14,729 .90* 3.84* 30.00 -
1996 10.52 .34 1.75 2.09 (.01) (.01) (.02) 12.59 19.84 56,274 .86 4.21 52.35 .0028
1997 12.59 .42 1.04 1.46 (.26) (.07) (.33) 13.72 11.71 93,402 .94 4.22 61.93 .0008
Templeton Global Growth Fund
19945 10.15 .07 .26 .33 - - - 10.48 3.25 158,856 1.14* 2.49* 7.14 -
1995 10.48 .16 1.17 1.33 (.06) - (.06) 11.75 12.72 338,755 .97 2.46 30.92 -
1996 11.75 .25 2.22 2.47 (.21) (.21) (.42) 13.80 21.28 579,877 .93 2.20 12.32 .0096
1997 13.80 .33 1.53 1.86 (.24) (.08) (.32) 15.34 13.50 758,445 .88 2.49 24.81 .0018
Templeton Global Income Securities Fund
19892 10.00 .38 .55 .93 - - - 10.93 9.30 3,077 - 9.81 12.29 -
1990 10.93 .60 .45 1.05 (.20) - (.20) 11.78 9.83 15,646 .69 10.82 61.52 -
1991 11.78 .42 .99 1.41 (.60) - (.60) 12.59 12.34 39,265 .69 7.91 130.66 -
1992 12.59 .26 (.30) (.04) (.40) (.15) (.55) 12.00 (.40) 75,062 .67 4.72 92.22 -
1993 12.00 .50 1.47 1.97 (.50) (.16) (.66) 13.31 16.68 206,594 .73 7.56 59.98 -
1994 13.31 .86 (1.52) (.66) (.33) (.13) (.46) 12.19 (4.99) 254,311 .71 7.99 79.38 -
1995 12.19 .29 1.47 1.76 (.49) - (.49) 13.46 14.68 243,194 .64 7.59 152.89 -
1996 13.46 1.02 .17 1.19 (1.04) - (1.04) 13.61 9.56 221,722 .61 7.30 140.96 -
1997 13.61 1.05 (.73) .32 (.96) - (.96) 12.97 2.55 185,016 .62 7.03 181.61 -
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period) RATIOS/SUPPLEMENTAL DATA
----------------------------------------------- --------------------------
Ratio
Distr- Distr- of net
Net Net Total butions butions invest-
asset real- from from from Net Net ment
value Net ized & un- invest- net net asset assets, Ratio of income to Port- Average
Period Begin- Invest- realized ment invest- real- Total value end of expenses average folio com-
Ended ning of ment gain Oper- ment ized disti- end of Total period to average net turnover mission
Dec.31 Period Income (loss) ations Income gains butions period return+ in(000's) net assets assets rate rate***
- -----------------------------------------------------------------------------------------------------------------------------------
Templeton International Equity Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19923 $10.00 $.14 $ (.38) $ (.24) $ - $ - $ - $ 9.76 (2.40)%$ 13,662 1.77%* 3.91%* 21.78% -
19938 9.76 .18 2.60 2.78 (.04) - (.04) 12.50 28.56 310,146 1.12 1.58 29.50 -
1994 12.50 .19 (.07) .12 (.04) (.07) (.11) 12.51 .87 785,124 .99 2.17 12.22 -
1995 12.51 .37 .94 1.31 (.22) (.28) (.50) 13.32 10.59 850,117 .92 2.87 16.42 -
1996 13.32 .40 2.58 2.98 (.38) (.47) (.85) 15.45 22.98 1,108,099 .89 3.07 27.52 .0140
1997 15.45 .30 1.51 1.81 (.45) (.69) (1.14) 16.12 11.69 1,161,430 .89 3.01 26.96 .0022
Templeton International Smaller Companies Fund
19961 10.00 .10 1.15 1.25 - - - 11.25 12.50 16,255 1.16* 2.51* - .0031
1997 11.25 .23 (.39) (.16) (.07) - (.07) 11.02 (1.50) 32,201 1.06 2.74 21.38 .0004
Templeton Pacific Growth Fund
19923 10.00 - (.12) (.12) - - - 9.88 (1.20) 5,788 1.317* - 8.41 -
1993 9.88 .05 4.68 4.73 - - - 14.61 47.87 215,882 1.14 1.29 12.36 -
1994 14.61 .22 (1.50) (1.28) (.03) (.06) (.09) 13.24 (8.79) 375,832 1.07 2.04 4.29 -
1995 13.24 .33 .71 1.04 (.26) (.11) (.37) 13.91 7.97 331,936 1.01 2.08 36.06 -
1996 13.91 .21 1.34 1.56 (.44) (.26) (.70) 14.76 11.10 356,759 .99 1.51 12.85 .0092
1997 14.76 .29 (5.49) (5.20) (.28) - (.28) 9.28 (35.95) 165,404 1.03 1.97 11.87 .0070
U.S. Government Securities Fund
19899 10.00 .19 .35 .54 - - - 10.54 5.40 12,116 -7 7.16* 1.34 -
1990 10.54 .48 .45 .93 (.11) - (.11) 11.36 8.92 62,253 .69 8.40 5.15 -
1991 11.36 .41 1.35 1.76 (.40) - (.40) 12.72 15.93 187,987 .65 7.76 11.69 -
1992 12.72 .52 .44 .96 (.43) (.01) (.44) 13.24 7.69 371,828 .59 7.07 28.64 -
1993 13.24 .50 .77 1.27 (.51) (.08) (.59) 13.92 9.71 684,303 .54 6.06 145.11 -
1994 13.92 .96 (1.59) (.63) (.67) (.05) (.72) 12.57 (4.55) 579,039 .53 6.87 18.25** -
1995 12.57 .93 1.46 2.39 (.96) - (.96) 14.00 19.46 643,165 .52 6.72 18.68** -
1996 14.00 .75 (.31) .44 (.97) - (.97) 13.47 3.62 843,858 .51 6.66 12.93** -
1997 13.47 1.00 .21 1.21 (.76) - (.76) 13.92 9.31 765,084 .50 6.49 16.84 -
Zero Coupon Fund - 2000
19899 10.00 .21 .87 1.08 - - - 11.08 10.80 2,056 -7 6.75* 158.01 -
1990 11.08 .43 .19 .62 (.13) (.17) (.30) 11.40 5.91 12,314 .377 8.55 180.49 -
1991 11.40 .57 1.67 2.24 (.38) - (.38) 13.26 20.19 27,699 .257 7.88 19.15 -
1992 13.26 .57 .58 1.15 (.53) - (.53) 13.88 9.04 48,217 .257 6.97 9.10 -
1993 13.88 .66 1.55 2.21 (.62) (.03) (.65) 15.44 16.15 76,916 .377 5.88 7.02 -
1994 15.44 .68 (1.71) (1.03) (.69) (.10) (.79) 13.62 (6.76) 94,230 .407 6.37 - -
1995 13.62 .75 2.03 2.78 (.67) - (.67) 15.73 20.67 137,357 .407 6.14 1.63 -
1996 15.73 .98 (.65) .33 (.86) (.01) (.87) 15.19 2.43 129,601 .407 6.14 .58 -
1997 15.19 1.15 (.12) 1.03 (1.06) (.02) (1.08) 15.14 7.11 111,650 .407 6.47 6.16 -
Zero Coupon Fund - 2005
19899 10.00 .20 1.33 1.53 - - - 11.53 15.30 1,372 -7 7.79* 232.71 -
1990 11.53 .55 (.32) .23 (.14) (.47) (.61) 11.15 2.69 5,151 .387 8.56 164.90 -
1991 11.15 .54 1.65 2.19 (.43) - (.43) 12.91 20.37 11,299 .257 8.00 4.54 -
1992 12.91 .65 .67 1.32 (.61) - (.61) 13.62 10.81 18,295 .257 7.46 19.48 -
1993 13.62 .44 2.55 2.99 (.52) (.01) (.53) 16.08 22.21 42,998 .377 5.67 16.59 -
1994 16.08 .71 (2.24) (1.53) (.60) (.19) (.79) 13.76 (9.60) 51,499 .407 6.53 2.00 -
1995 13.76 .78 3.53 4.31 (.69) - (.69) 17.38 31.76 83,222 .407 6.19 1.72 -
1996 17.38 .96 (1.13) (.17) (.86) - (.86) 16.35 (.50) 82,603 .407 6.15 2.06 -
1997 16.35 1.14 .63 1.77 (1.06) (.01) (1.07) 17.05 11.37 77,296 .407 6.16 4.52 -
Zero Coupon Fund - 2010
19899 10.00 .17 1.44 1.61 - - - 11.61 16.10 2,387 -7 6.57* 193.14 -
1990 11.61 .59 (.57) .02 (.13) (.25) (.38) 11.25 .57 6,846 .407 8.70 178.75 -
1991 11.25 .56 1.58 2.14 (.55) - (.55) 12.84 20.09 15,610 .257 8.05 22.44 -
1992 12.84 1.21 .03 1.24 (.73) - (.73) 13.35 10.31 13,431 .257 7.64 54.50 -
1993 13.35 .50 2.81 3.31 (.94) (.04) (.98) 15.68 25.47 29,189 .257 5.89 36.63 -
1994 15.68 .55 (2.27) (1.72) (.63) (.31) (.94) 13.02 (10.97) 45,361 .407 6.57 4.34 -
1995 13.02 .76 4.75 5.51 (.49) - (.49) 18.04 42.79 85,633 .407 6.41 31.45 -
1996 18.04 1.02 (1.66) (.63) (.88) (.24) (1.12) 16.29 (2.69) 78,816 .407 6.24 16.10 -
1997 16.29 1.02 1.54 2.56 (1.01) (.01) (1.02) 17.83 16.57 85,515 .407 6.21 12.20 -
</TABLE>
*Annualized.
**The portfolio turnover rate excludes mortgage dollar roll transactions.
***Represents the average broker commission rate per share paid by the Fund
in connection with the execution of the Fund's portfolio transactions in
equity securities. Prior to December 31, 1996, disclosure of average
commission rate was not required.
+Total return measures the change in value of an investment over the periods
indicated. It assumes reinvestment of dividends and capital gains, if any, at
net asset value and is not annualized.
1For the period May 1, 1996 (effective date) to December 31, 1996.
2For the period January 24, 1989 (effective date) to December 31, 1989.
3For the period January 27, 1992 (effective date) to December 31, 1992.
4For the period November 1, 1995 (effective date) to December 31, 1995.
5For the period March 15, 1994 (effective date) to December 31, 1994.
6For the period April 19, 1995 (seed date) to December 31, 1995.
7During the periods indicated below, the investment manager agreed in advance
to waive a portion of its management fees and made payments of other expenses
incurred by the Funds in the Trust. Had such action not been taken, ratios of
expenses to average net assets would have been as follows:
Fiscal Ratio of Expenses to
FUND NAME YEAR AVERAGE NET ASSETS__
Money Market Fund 19892 .95%
1994 .54
1995 .53
1996 .53
1997 .53
Growth and Income Fund 19892 1.01
Templeton Global Income
Securities Fund 19892 1.06
High Income Fund 19892 1.02
Income Securities Fund 19892 1.01
Templeton Pacific
Growth Fund 19923 2.57*
Natural Resources
Securities Fund
(formerly, Precious
Metals Fund) 19892 1.11
Real Estate Securities
Fund 19892 1.24
Rising Dividends Fund 19923 .76*
U.S. Government
Securities Fund 19899 .85*
Global Utility
Securities Fund
(formerly Utility
Equity Fund 19892 1.01
Zero Coupon Fund - 2000 19899 .93*
1990 .70
1991 .68
1992 .68
1993 .67
1994 .66
1995 .63
1996 .62
1997 .63
Fiscal Ratio of Expenses to
FUND NAME YEAR AVERAGE NET ASSETS
Zero Coupon Fund - 2005 19899 1.02%*
1990 .71
1991 .71
1992 .69
1993 .67
1994 .68
1995 .66
1996 .65
1997 .65
Zero Coupon Fund - 2010 19899 .93*
1990 .68
1991 .70
1992 .69
1993 .68
1994 .68
1995 .66
1996 .65
997 .65
8Per share amounts have been calculated using the average shares outstanding
during the period.
9For the period March 13, 1989 (effective date) to December 31, 1989.
10For the period November 8, 1996 (effective date) to December 31, 1996.
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 "Contract 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 strategies to pursue these objectives.
There can be no assurance that any Portfolio will achieve its investment
objective. The investment 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
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
securities 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 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.
While only a few of the Portfolios elect to "concentrate," that is, invest
more than 25% of their total assets in specialized industry sectors, many of
the Portfolios do nonetheless, from time to time, invest significantly in
certain industries. Of course, these Portfolios are still diversified for
federal securities and tax law purposes and so will be issuer-diversified
within each industry. To the extent a Portfolio is less broadly diversified
across industries, the value of its securities can be more affected by
adverse developments or volatility in that industry sector. For example, 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.
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 markets" issuers located in
emerging nations generally as defined by the World Bank, derivative
instruments or complex securities, or to concentrate in specialized industry
sectors. 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, 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 $1.00 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 $1 million 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 in 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.
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. It is the Portfolio's current intention
not to invest more than 5% in debt obligations, including convertible bonds,
in the lowest rating categories, i.e., rated below Caa by Moody's or CCC by
S&P; or, if unrated, comparable obligations in the view of the Manager. 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% of its assets in
foreign securities, including those of developing markets issuers. However,
the Portfolio will limit its investments in securities of developing markets
issuers to 10% of its 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
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 issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and therefore
involve special risks; investments in such securities will not exceed 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 markets 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, and may concentrate its
investments in a smaller number of issuers. This flexibility 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. While the Portfolio is still subject to the
diversification requirements under the federal tax code and the 25% limit on
concentration of investments in a single industry, 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 assets 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 Target 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
its 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, which 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 FROM "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 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 a substantial
portion of its assets in smaller capitalization companies, which may be
subject to different and greater risks. See "Small Cap Investments" below.
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 regulation. 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.
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.
SMALL CAP INVESTMENTS. Smaller or relatively new or unseasoned companies can
be particularly sensitive to changing economic conditions, and their growth
prospects are less certain then those of larger, more established companies.
For example, smaller companies may have limited financial resources, product
lines or market share; they may lack depth of management; or they may not
find an established market for their products or services. In addition, the
prices of smaller company stocks may, to a degree, fluctuate independently
from larger company stocks. SEE "INVESTMENT METHODS AND RISKS, SMALL CAP
ISSUERS" and the SAI for more information.
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. 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 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 general economic and other factors. See "Real Estate
Securities Fund" for more information.
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 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 million 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, or, if unrated,
comparable obligations in the view of the Manager, except for defaulted
securities discussed below. 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 Manager 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 each 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, including those of developing markets issuers. The
Portfolio may also invest in sponsored or unsponsored 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 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 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 approximately 15-20% 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 obligations of
domestic entities. INVESTMENTS IN FOREIGN SECURITIES, PARTICULARLY IN
DEVELOPING MARKETS, INVOLVE SPECIAL AND ADDITIONAL RISKS. 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, 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.
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% of its net
assets 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 of Trustees, 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 of Trustees
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, which in the
opinion of the 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. From time to time,
the Portfolio may be predominantly invested in smaller capitalization
companies ("small cap companies").
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 Portfolio purchases securities for
investment purposes and not for the purpose of influencing or controlling
management of the issuer. In rare cases, however, when the Manager perceives
that the Portfolio may benefit, the Manager may itself seek to influence or
control management.
The securities in which the Portfolio may invest include common and preferred
stocks, securities convertible into common stocks, warrants, secured and
unsecured debt securities, and notes. The Portfolio may, from time to time,
hold significant Money Market Instruments, up to 100% of its total assets,
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.
There can be special risks when the Portfolio buys securities of companies
emerging from bankruptcy. Companies emerging from bankruptcy may have some
difficulty retaining customers and suppliers who prefer transacting with
solvent organizations. If new management is installed in a company emerging
from bankruptcy, the management may be considered untested; if the existing
management is retained, the management may be considered incompetent.
Further, even when a company has emerged from bankruptcy with a lower level
of debt, it may still retain a relatively weak balance sheet. During economic
downturns these companies may not have sufficient cash flow to pay their debt
obligations and may also have difficulty finding additional financing. In
addition, reduced liquidity in the secondary market may make it difficult for
the Portfolio to sell the securities or to value them based on actual trades.
The Portfolio's policy of investing in securities that may be out of favor,
including turnarounds, cyclicals and companies emerging from bankruptcy,
companies reporting poor earnings, and companies whose share prices have
declined sharply or that are not widely followed, differs from the approach
followed by many other portfolios. The Manager believes, however, that these
securities may provide a greater total investment return than securities
whose prices appear to reflect anticipated favorable developments.
RISKS ASSOCIATED WITH SMALL CAP INVESTMENTS. The Portfolio may invest without
minimum or maximum limitation in smaller 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, the prices of smaller cap companies'
stocks 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 markets issuers
and sponsored or unsponsored Depositary 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
and synthetic convertibles. 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."
CREDIT QUALITY AND DEFAULTED DEBT OBLIGATIONS. 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 comparable 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. Debt obligations rated D
by S&P are in default and may be considered speculative. 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. Because the Portfolio is
non-diversified and may concentrate its investments in a smaller number of
issuers, and because economic, political or regulatory developments may have
a greater impact on the Portfolio, the value of the Portfolio's shares may
fluctuate more widely than those of a diversified portfolio. 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 have
tended to fluctuate more dramatically over the short term. The Manager seeks
to address such risks through extensive research and emphasis on more
globally-competitive companies.
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.
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 markets 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 equity 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, medical services, 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, the prices of 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, the prices of which may fluctuate
independently from comparable foreign securities. As a global Portfolio, it
may invest in securities issued in any currency including multinational
currency units such as the European Currency Unit, and may hold currency, as
well as buy sponsored or unsponsored Depositary Receipts. The Portfolio
currently does not intend to invest more than 10% of its assets in securities
of developing markets. As a non-fundamental policy, the Portfolio will limit
its investments in securities of Russian issuers to 5% of its 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 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. Because the
Portfolio is non-diversified and may concentrate its investments in a smaller
number of issuers, and because economic, political or regulatory developments
may have a greater impact on the Portfolio, the value of the Portfolio's
shares may fluctuate more widely than those of a diversified portfolio. 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 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 engage in short sale
transactions, in which the Portfolio 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 Portfolio can
profit if the price decreases. 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
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 Portfolio.
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, the prices of 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-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.
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
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.
The Portfolio may also invest up to 10% of its assets in real estate
investment trusts ("REITs"), which may be in or outside the natural resources
sector. 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 property owned by the REITs, the quality
of any credit extended by the REITs, and general economic and other factors.
See "Real Estate Securities Fund" for more information.
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, the prices of 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. 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 $1.5 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.
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, the prices of
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 markets 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 Securities 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 of Trustees, 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 of Trustees 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 of Trustees, 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 of Trustees 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, 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 markets countries.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Portfolio expects
to invest at least 65% of its assets in equity securities of companies of any
foreign nation (including developing markets 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
Foreign securities include all of the following, 1) securities of companies
organized outside the U.S. ("foreign issuers"), whether or not publicly
traded in the U.S., 2) securities that are principally traded outside the
U.S., 3) securities denominated in foreign currency ("non-dollar
securities"). Investments in foreign 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.
Many debt obligations of foreign issuers, and especially developing market
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. 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 if so stated in the individual Portfolio section), 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 security due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in value of the 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. While short-term volatility can be disconcerting,
declines of as much as 40% to 50% are not unusual in emerging markets. In
fact, the Hong Kong market has increased 1268% in the last 15 years, but has
suffered five declines of more than 20% during that time. Many smaller Asian
markets suffered severe declines in 1997, including several which fell over
70%.
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
Portfolios' 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. 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, MUTUAL SHARES, NATURAL RESOURCES, AND PACIFIC
FUNDS, TO THE EXTENT CONSISTENT WITH THEIR INVESTMENT OBJECTIVES AND
POLICIES, RESERVE THE RIGHT TO INVEST MORE THAN 25% OF THEIR RESPECTIVE
ASSETS IN THE SECURITIES OF ISSUERS IN ANY SINGLE FOREIGN COUNTRY. Investors
should consider the greater risk of such policy versus the safety that comes
with an investment that does not involve potential geographic concentration
and should compare these 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.
EURO. On January 1, 1999, the European Monetary Union ("EMU") plans to
introduce a new single currency, the Euro, which will replace the national
currency for participating member countries. If a Portfolio holds investments
in countries with currencies replaced by the Euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
The process to establish the Euro may result in market volatility. It is not
possible to predict the impact of the Euro on the business or financial
condition of European issuers or on the Portfolios. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets. To
the extent a Portfolio holds non-U.S. dollar (Euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
Franklin Resources, Inc. ("Resources"), the parent company of the Portfolios'
Managers, has created an interdepartmental team to handle all Euro-related
changes to enable the Franklin Templeton Group of Funds to process
transactions accurately and completely with minimal disruption to business
activities. While there can be no assurance that the Portfolios will not be
adversely affected, the Managers and their affiliated service providers are
taking steps that they believe are reasonably designed to address the Euro
issue.
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 securities or other assets denominated
in that currency or, in the case of cross-hedging, in a currency closely
correlated to that currency.
A Portfolio will generally enter into forward contracts only under two
circumstances. First, when the Portfolio 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 Portfolio 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's 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 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, if so stated in the
individual Portfolio section, 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 Portfolio's 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 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 Income Securities Fund held one position 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, 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
Moody's Securities Fund
Aaa 8.33%
Aa 0.54%
A 0.00%
Baa 4.08%
Ba 2.87%
B 30.60%
Caa 3.86%*
Ca 0.30%
C 0.15%
*2.70% of these securities, which are unrated by Moody's, have been included
in the Caa rating category.
Global Asset Global High Income
S&P Allocation Fund Income Fund Fund
AAA 66.61% 80.76% 0.00%
AA 0.02% 0.11% 0.00%
BBB+ 0.00% 0.00% 0.41%
BBB 0.00% 0.00% 1.32%
BBB- 0.05% 0.00% 3.80%
BB+ 1.85%** 0.34% 6.19%
BB 13.15%** 12.32%*** 4.99%
BB- 9.64% 5.02% 12.06%****
B+ 4.11% 0.00% 16.86%****
B 3.63%** 0.00% 30.45%****
B- 0.94%** 0.00% 19.37%****
CCC+ 0.00% 0.00% 2.15%****
CCC 0.00% 0.00% 1.23%
CCC- 0.00% 0.00% 1.17%
**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.
****Securities, which are unrated by S&P, have been included as follows:
0.48% BB-, 0.14% B+, 1.13% B, 1.08% B-, 0.31% CCC+.
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 are authorized for
more than one Portfolio, only if so stated in the descriptions of the
individual Portfolios. These are described below and in the SAI in greater
detail. Each of the Portfolios will not necessarily use the authorized
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 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 ASSETS IN ANY ONE PARTICULAR
INDUSTRY (EXCLUDING THE U.S. GOVERNMENT). PURSUANT TO THE 1940 ACT, THESE
POLICIES WILL NOT BE CHANGED WITHOUT SHAREHOLDER APPROVAL.
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 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, are 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 HEALTH CARE FUND, GLOBAL INCOME FUND, AND
THE VALUE 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 assets, not more than 5% of the market value of its 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 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
the following conditions, the Portfolios may lend their portfolio securities
to qualified securities dealers or other institutional investors, if such
loans do not exceed 30% of the value of a 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). The borrower must deposit with the Portfolio's custodian bank
collateral with an initial market value of at least 102% of the market value
of the securities loaned, including any accrued interest, with the value of
the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. This collateral shall consist 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 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 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 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 Global Income Fund which may exceed 100% per
year. The Global Income Fund's turnover rate of 181.61% 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.
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. In a repurchase agreement, the
Portfolio buys U.S. Government Securities from a bank or broker-dealer at a
higher price on a specified date. The securities subject to resale are held
on behalf of the Portfolio by a custodian bank approved by the Board of
Trustees. The bank or broker-dealer must transfer to the custodian securities
with an initial market value of at least 102% of the repurchase price to help
secure the obligation to repurchase the securities at a later date. The
securities are then marked-to-market daily to maintain coverage of at least
100%. If the bank or broker-dealer does not repurchase the securities as
agreed, the Portfolio may experience a loss or delay in the liquidation of
the securities underlying the repurchase agreement and may also incur
liquidation costs. The Portfolio, however, intends to enter into repurchase
agreements only with banks or broker-dealers that are considered creditworthy
by the Managers.
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 of Trustees, 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 of Trustees 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 UTILITY, 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 Portfolios 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 also is the
Manager for the Value 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. Michael F. Price is Chairman of the Board of
Directors of Franklin Mutual.
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 this prospectus and the 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 $232 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
Management
and Portfolio 1997Total
Administration Operating
Portfolio (Except New Portfolios) Fees Expenses
Asset Allocation Fund .80%+ .94%
Capital Growth Fund .75% .77%
Developing Markets Fund 1.25% 1.42%
Global Growth Fund .83% .88%
Global Income Fund .56% .62%
Global Utility Fund
(formerly Utility Fund) .47% .50%
Government Fund .48% .50%
Growth and Income Fund .47% .49%
High Income Fund .50% .53%
Income Securities Fund .47% .50%
International Smaller
Companies Fund 1.00%+ 1.06%
International Equity Fund .80% .89%
Natural Resources Fund
(formerly Metals Fund) .62% .69%
Money Fund* .51% .53%
Mutual Shares Fund .75%+ .80%
Mutual Discovery Fund .95%+ 1.06%
Pacific Fund .92% 1.03%
Real Estate Fund .51% .54%
Rising Dividends Fund .72% .74%
Small Cap Fund .75% .77%
Zero Coupon Fund - 2000** .60% .63%
Zero Coupon Fund - 2005** .62% .65%
Zero Coupon Fund - 2010** .62% .65%
+Includes a .15% Administration Fee which is a direct expense of the
Portfolio.
*Under an advance agreement by Advisers to limit its management fees, the
Money Fund paid management and portfolio administration fees of 0.43% and
total operating expenses of 0.45%. Advisers may end this arrangement at any
time upon notice to the Board of Trustees.
**Under an agreement by Advisers to limit its management fees, each Zero
Coupon Fund paid management and portfolio administration fees of 0.37% and
total operating expenses of 0.40%. In addition, until at least December 31,
1998, 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 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. The Global Health
Care and Value Funds' management fees do not cover portfolio administration;
these Portfolios pay separate portfolio administration fees. See "Portfolio
Administrator" below.
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
markets 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.
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 Portfolio's
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.
PORTFOLIO 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 Portfolio, it receives a monthly
fee equivalent on an annual basis to 0.15% of the average daily net assets of
the Portfolio, 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 Portfolio but are paid by the Manager from the
management fees received from the Portfolio.
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.
For the Global Health Care Securities and Value Securities Funds, the
Managers and FT Services have agreed in advance to waive or limit their
Management and Fund Administration Fees and to assume as their own expense
certain expenses otherwise payable by these portfolios as necessary so that
through at least December 31, 1998, the total expenses of each portfolio do
not exceed 1.00% of its average net assets.
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
Evan McCulloch
Rupert H. Johnson, Jr.
GLOBAL UTILITIES SECURITIES FUND
(FORMERLY UTILITY EQUITY FUND)
Sally Edwards-Haff
Ian Link
GROWTH AND INCOME FUND
Frank Felicelli
Kent Shepherd
HIGH INCOME FUND
Jeff Holbrook
Chris Molumphy
R. Martin Wiskemann
INCOME SECURITIES FUND
Charles B. Johnson
Matthew F. Avery
Frederick G. Fromm
MUTUAL DISCOVERY SECURITIES FUND
Peter A. Langerman
Robert L. Friedman
David E. Marcus
MUTUAL SHARES SECURITIES FUND
Peter A. Langerman
Robert L. Friedman
Lawrence N. Sondike
David E. Marcus
NATURAL RESOURCES SECURITIES FUND
(FORMERLY PRECIOUS METALS FUND)
Suzanne Willoughby Killea
Ed Perks
REAL ESTATE SECURITIES FUND
Matthew F. Avery
Douglas Barton
RISING DIVIDENDS FUND
Donald G. Taylor
William Lippman
Bruce C. Baughman
Gerard P. Sullivan
Margaret McGee
SMALL CAP FUND
Edward B. Jamieson
Michael McCarthy
Aidan O'Connell
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
TEMPLETON INTERNATIONAL EQUITY FUND
Howard J. Leonard
Mark Beveridge
William Howard
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
Simon Rudolph
Peter Nori
Juan J. Benito
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
William Lippman
Gerard P. Sullivan
Bruce C. Baughman
Margaret McGee
Zero Coupon Funds
David Capurro
Jack Lemein
Tony Coffey
BIOGRAPHICAL INFORMATION
Matthew F. Avery
Senior Vice President
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 from inception.
Douglas Barton
Vice President
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 has been with the Franklin Templeton Group since July 1988 and has
managed the Real Estate Fund from May 1998.
Bruce C. Baughman
Senior Vice President
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.
Mr. Baughman has been with the Franklin Templeton Group since 1988. He has
managed the Rising Dividends Fund and the Value Fund from their 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. Mr.
Bayston has been with the Franklin Templeton Group since 1991. Mr. Bayston
has managed the Government Fund since 1993.
Juan J. Benito
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. Before joining the Franklin Templeton Group in
1996, Mr. Benito 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 International Smaller Companies
Fund since 1997.
Mark R. Beveridge
Senior Vice President
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
has been with the Franklin Templeton Group since 1985 and has managed the
International Equity and Pacific Funds since 1994, and the International
Smaller Companies Fund from inception.
David Capurro
Vice President
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 has been with the Franklin Templeton Group since 1983 and has
managed the Government Fund and the Zero Coupon Funds from 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. Before 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 1996.
Gary Clemons
Senior Vice President
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 has been with the
Franklin Templeton Group since 1990 and has managed the Pacific Fund since
1994, and the 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 has been with
the Franklin Templeton Group since 1989. He has managed the Zero Coupon Funds
since 1989, and the Government Fund since 1996.
Neil S. Devlin
Chief Investment Officer and
Executive Vice President
of Templeton Global Bond Managers, a division of
Templeton Investment Counsel Inc.
Mr. Devlin holds a Bachelor of Arts degree in Economics and Philosophy from
Brandeis University and is a Chartered Financial Analyst. Before 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
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 Global Income Fund since 1994,
and the Asset Allocation Fund from inception.
Jeffrey A. Everett
Executive Vice President
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 has been with
the Franklin Templeton Group since 1990 and has managed the Global Growth
Fund and the Asset Allocation Fund from inception.
Sally Edwards-Haff
Senior 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 has been with the Franklin Templeton Group since 1986 and
has managed the Global Utility Fund (formerly the "Utility Fund") since 1990.
Sean Farrington
Vice President
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 has been with the Templeton organization since 1991. He has
managed the Global Growth Fund since 1995, and the Asset Allocation Fund from
inception.
Frank Felicelli, CFA
Senior Vice President
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 1995.
Robert L. Friedman
Chief Investment Officer and 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. Before November 1996, Mr. Friedman was a
research analyst for Heine Securities Corporation, the predecessor of
Franklin Mutual. He has been with the Franklin Templeton Group since November
1996 and has managed the Mutual Discovery Fund and Mutual Shares Fund from
inception.
Frederick G. Fromm
Vice President
Franklin Advisers, Inc.
Mr. Fromm holds a Bachelor of Arts degree in Business Economics from the
University of California, Santa Barbara. He has been with the Franklin
Templeton Group since 1992 and has managed the Income Securities Fund since
January 1998.
Conrad B. Herrmann, CFA
Vice President
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,
a Chartered Financial Analyst, has been with the Franklin Templeton Group
since 1989. 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 has been with the
Franklin Templeton Group since July 1992. Mr. Holbrook is a member of several
securities industry-related associations. He has managed the High Income Fund
since 1997.
Mark G. Holowesko
Director of Global Equity Research
Templeton Worldwide, Inc. and
President
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 has been with the Franklin Templeton Group since 1985 and has
managed the Global Growth Fund from inception.
William T. Howard, Jr.
Senior Vice President
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. Before joining the Templeton Group in 1993, 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
Executive Vice President
Franklin Advisers, Inc.
Mr. Jamieson holds a Masters degree in Accounting and Finance from the
University of Chicago Graduate School of Business and a Bachelor of Arts
degree from Bucknell University. He has been with the Franklin Templeton
Group since 1987 and has managed the Small Cap Fund from inception.
Charles B. Johnson
Chairman of the Board and Director
Franklin Advisers, Inc., Franklin Advisory Services
and Franklin Investment Advisory Services, 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 from inception.
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 officer with
the U.S. Marine Corps. Mr. Johnson has managed the Global Health Care
Securities Fund from inception.
Suzanne Willoughby Killea
Vice President
Franklin Advisers, Inc.
Ms. Killea holds a Master of Business Administration degree from Stanford
University, and a Bachelor of Arts degree from Princeton University. Ms.
Killea has been with the Franklin Templeton Group since 1991. Ms. Killea has
managed the Natural Resources Fund since 1994.
H. Allan Lam
Vice President
Templeton Investment Management
(Hong Kong) Limited.
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 has been with the Franklin Templeton Group
since 1987 and has managed the Developing Markets Fund from inception.
Peter A. Langerman
Senior Vice President and Chief Operating Officer
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. Before November 1996, he was a
research analyst for Heine Securities Corporation, the predecessor of
Franklin Mutual. He has been with the Franklin Templeton Group since November
1996 and has managed the Mutual Discovery and Mutual Shares Funds from
inception.
Jack Lemein
Executive Vice President
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 has been with the Franklin Templeton Group since 1984 and has
managed the Government Fund and the Zero Coupon Funds from inception.
Howard J. Leonard
Executive Vice President
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. Before
joining the Franklin Templeton organization in 1989, Mr. Leonard was director
of investment research at First Pennsylvania Bank. Mr. Leonard has managed
the International Equity Fund since 1997.
Dennis Lim
Vice President
Templeton Asset Management Ltd.
Mr. Lim holds a Master of Science degree in Management (Finance Analysis),
from the University of Wisconsin-Milwaukee, (Beta Gamma Sigma, Delta Chapter
of Wisconsin). He earned a Bachelor of Science degree in Building Engineering
from the National University of Singapore. Prior to joining the Franklin
Templeton Group, in 1990, he worked for the Government of Singapore's
Ministry of National Development. He has managed the Developing Markets Fund
since 1996.
Ian Link
Vice President
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 has
been with the Franklin Templeton Group since 1989, and has managed the Global
Utility Fund (formerly the Utility Fund) since March 1995.
William Lippman
President
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 and the Value Fund from inception.
David E. Marcus
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Marcus holds a Bachelor of Science in Business Administration/Finance
from Northeastern University. Before November 1996, he was a research analyst
for Heine Securities Corporation, the predecessor of Franklin Mutual. He has
been with the Franklin Templeton Group since November 1996 and has managed
the Mutual Discovery and Mutual Shares Funds since March 1998.
Michael McCarthy
Vice President
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 and has managed the Small Cap Fund from inception.
Evan McCulloch
Vice President
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 has managed the Global Health Care Fund from
inception.
Margaret McGee
Vice President
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. She has managed the Rising Dividends Fund and the
Value Fund from inception.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Asset Management Ltd.
Dr. Mobius holds a Doctor of Philosophy degree in Economics and Political
Science from the Massachusetts Institute of Technology. He earned his
Bachelor's and Master's degrees from Boston University. He is a member of
several industry-related associations. Dr. Mobius joined the Franklin
Templeton Group in 1987 and has managed the Developing Markets Fund from
inception.
Chris Molumphy
Senior Vice President
Franklin Advisers, Inc.
Mr. Molumphy is a Chartered Financial Analyst and holds a Master 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 has been
with the Franklin Templeton Group since 1988 and has managed the High Income
Fund from inception.
Peter A. Nori
Vice President
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 International Smaller Companies Fund since 1997.
Aidan O'Connell
Portfolio Manager
Franklin Advisers, Inc.
Mr. O'Connell holds a Master of Business Administration degree in Finance
from the University of Pennsylvania, a Master of Arts degree in International
Relations from Johns Hopkins University and a Bachelor of Arts degree from
Dartmouth College. Before joining the Franklin Templeton Group in May 1998,
Mr. O'Connell was at Hambrecht & Quist (1991-1997). Mr. O'Connell has managed
the Small Cap Fund since September 1998.
Tek-Khoan Ong
Portfolio Manager
Templeton Asset Management Ltd.
Mr. Ong holds a Masters of Business Administration degree from the Wharton
School, University of Pennsylvania, graduating with distinction and on the
director's list. He earned a Masters of Science degree in Computing Science
and a Bachelor of Science degree in Civil Engineering, with honors, both from
Imperial College, University of London, UK. Before 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 1996.
Vivian J. Palmieri
Vice President
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 and has
managed the Capital Growth Fund from inception.
Edward D. Perks
Vice President
Franklin Advisers, Inc.
Mr. Perks holds a Bachelor of Arts in Economics and Political Science from
Yale University. Mr. Perks has been with the Franklin Templeton Group since
October 1992 and has managed the Natural Resources Fund since 1997.
Simon Rudolph
Vice President
Templeton Investment Counsel, Inc.
Mr. Rudolph is a Chartered Accountant and holds a Bachelor of Arts degree in
Economic History from Durham University in England. Mr. Rudolph has been a
securities analyst since 1986. Before joining the Franklin Templeton
organization in 1997, he was an executive director with Morgan Stanley. Mr.
Rudolph has managed the International Smaller Companies Fund since 1997.
Kent P. Shepherd
Portfolio Manager or Vice President
Franklin Advisers, Inc.
Mr. Shepherd holds undergraduate degrees in Economics and Political Science
from Northwestern University and an MBA in International Finance from UCLA.
In addition, Mr. Shepherd is a Chartered Financial Analyst and a Chartered
Investment Counselor. Mr. Shepherd has been with the Franklin Templeton Group
since xxx. and has managed the Growth and Income Fund since August 1998.
Lawrence N. 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. Before November 1996, he was a research analyst for Heine
Securities Corporation, the predecessor of Franklin Mutual. He has been with
the Franklin Templeton Group since November 1996, and has managed the Mutual
Shares Fund from inception.
Gerard P. Sullivan
Senior Vice President
Franklin Advisory Services, Inc.
Mr. Sullivan holds a Master of Business Administration in Finance and
Accounting from the Columbia Graduate School of Business and a Bachelor of
Arts degree in Political Science from Columbia University. Before joining the
Franklin Templeton Group, he was a Portfolio Manager for SunAmerica Asset
Management from February 1995 to February 1998 and prior to that he was a
Portfolio Manager for Texas Commerce Investment Management & Co. from July
1993 to February 1995. Mr. Sullivan has managed the Rising Dividends Fund
since March 1998 and the Value Securities Fund from its inception.
Donald G. Taylor
Senior Vice President
Franklin Advisory Services, Inc.
Mr. Taylor holds a Bachelor of Science degree in Economics from the
University of Pennsylvania - the Wharton School. Mr. Taylor has been with the
Franklin Templeton Group since June 1996. Before 1996 Mr. Taylor was a
portfolio manager for Fidelity Management & Research Co. Mr. Taylor has
managed the Rising Dividends Fund since 1996.
Kurt von Emster
Vice President
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 has managed the Global Health Care Fund from 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 and before that he was a
credit analyst at Mitsui Trust, London for 5 years. He has managed the Asset
Allocation Fund since 1997.
R. Martin Wiskemann
Executive Vice President
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 has been with the Franklin
Templeton Group since 1972 and has managed the High Income Fund from
inception.
Tom Wu
Director
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. Before 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 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 Contract
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 Contract 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 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 Portfolio's annual gross income
may be derived from income from nonqualifying sources, including gain from
the disposition of gold bullion or gold derivative instruments.
Holders of Policies under which assets are invested in the Trust should refer
to the prospectus for the Policies for information regarding the tax aspects
of ownership of such Policies.
HOW THE TRUST MEASURES PERFORMANCE
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
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.
YEAR 2000 PROBLEM. The Portfolios' business operations depend upon a
worldwide network of computer systems that contain date fields, including
securities trading systems, securities transfer agent operations and stock
market links. Many of the systems currently use a two digit date field to
represent the date, and unless these systems are changed or modified, they
may not be able to distinguish the Year 1900 from the Year 2000 (commonly
referred to as the Year 2000 problem). In addition, the fact that the Year
2000 is a non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the Portfolios' operations could be adversely
affected if the computer systems used by the Managers, their service
providers and other third parties they do business with are not Year 2000
ready. For example, the Portfolios' portfolio holdings and operational areas
could be impacted, including securities trade processing, interest and
dividend payments, securities pricing, shareholder account services,
reporting, custody functions and others. The Portfolios could experience
difficulties in effecting transactions
if any of their foreign subcustodians, or if foreign broker/dealers or
foreign markets are not ready for Year 2000.
In evaluating current and potential portfolio positions, Year 2000 is only
one of the factors that the Portfolios' Managers take into consideration. The
Managers will rely upon public filings and other statements made by companies
regarding their Year 2000 readiness. Issuers in countries outside of the
U.S., and in particular in emerging markets, may not be required to make the
same level of disclosure regarding Year 2000 readiness that is required in
the U.S. The Managers, of course, cannot audit each company and their major
suppliers to verify their Year 2000 readiness. If a company any Portfolio is
invested in is adversely affected by Year 2000 problems, it is likely that
the price of its security will also be adversely affected. A decrease in the
value of one or more of a Portfolio's portfolio holdings will have a similar
impact on the price of the Portfolio's shares.
The Managers and their affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their
Year 2000 problems. Of course, the Portfolios' ability to reduce the effects
of the Year 2000 problem is also very much dependent upon the efforts of
third parties over which the Portfolios and their Managers may have no
control.
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.
