File Nos. 33-23512, 811-5629
Filed under Rule 497 (c)
THE GCG TRUST
1001 JEFFERSON STREET WILMINGTON, DELAWARE 19801
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This Prospectus offers shares of twenty-two portfolios (the "Series") of The
GCG Trust (the "Trust"), an open-end, management investment company. Each
Series has its own investment objective or objectives and investment policies.
Shares of the Series may be sold to separate accounts of insurance companies
to serve as the investment medium for variable life insurance policies and
variable annuity contracts issued by the insurance companies ("Variable
Contracts") and to certain qualified pension and retirement plans. In the
case of Variable Contracts, the separate accounts invest in shares of one or
more of the Series in accordance with allocation instructions received from
owners of the insurance policies and annuity contracts. Such allocation rights
are described further in Prospectuses for the separate account.
The Series are managed by Directed Services, Inc. ("DSI"), a wholly owned
subsidiary of ING Groep, N.V. ("ING"). DSI and the Trust have retained several
investment advisory firms ("Portfolio Managers") to provide investment advisory
services to the Series. The twenty-two Series and their respective Portfolio
Managers are as follows:
SERIES PORTFOLIO MANAGER
- ---------------------------- -----------------------------------------
MULTIPLE ALLOCATION SERIES ZWEIG ADVISORS INC.
FULLY MANAGED SERIES T. ROWE PRICE ASSOCIATES, INC.
LIMITED MATURITY BOND SERIES ING INVESTMENT MANAGEMENT, LLC
HARD ASSETS SERIES VAN ECK ASSOCIATES CORPORATION
REAL ESTATE SERIES EII REALTY SECURITIES, INC.
ALL-GROWTH SERIES PILGRIM BAXTER & ASSOCIATES, LTD.
CAPITAL APPRECIATION SERIES CHANCELLOR LGT ASSET MANAGEMENT, INC.
RISING DIVIDENDS SERIES KAYNE ANDERSON INVESTMENT MANAGEMENT, LLC
EMERGING MARKETS SERIES PUTNAM INVESTMENT MANAGEMENT, INC.
VALUE EQUITY SERIES EAGLE ASSET MANAGEMENT, INC.
STRATEGIC EQUITY SERIES ZWEIG ADVISORS INC.
SMALL CAP SERIES FRED ALGER MANAGEMENT, INC.
MANAGED GLOBAL SERIES PUTNAM INVESTMENT MANAGEMENT, INC.
GROWTH OPPORTUNITIES SERIES MONTGOMERY ASSET MANAGEMENT, LLC
DEVELOPING WORLD SERIES MONTGOMERY ASSET MANAGEMENT, LLC
MID-CAP GROWTH SERIES MASSACHUSETTS FINANCIAL SERVICES COMPANY
RESEARCH SERIES MASSACHUSETTS FINANCIAL SERVICES COMPANY
TOTAL RETURN SERIES MASSACHUSETTS FINANCIAL SERVICES COMPANY
GROWTH & INCOME SERIES ROBERTSON, STEPHENS & COMPANY INVESTMENT
MANAGEMENT, L.P.
VALUE + GROWTH SERIES ROBERTSON, STEPHENS & COMPANY INVESTMENT
MANAGEMENT, L.P.
GLOBAL FIXED INCOME SERIES BARING INTERNATIONAL INVESTMENT LIMITED
LIQUID ASSET SERIES ING INVESTMENT MANAGEMENT, LLC
Information about the investment objective or objectives, investment policies,
and restrictions of each Series, along with a detailed description of the types
of securities and other assets in which each Series may invest, are set forth
in this Prospectus. There can be no assurance that the investment objective or
objectives for any Series will be achieved.
Investment in the Liquid Asset Series (or in any other Series) is neither
insured nor guaranteed by the U.S. Government. There can be no assurance that
the Liquid Asset Series will be able to maintain a stable net asset value of
$1.00 per share.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the Series. A Statement of Additional
Information, dated May 1, 1998, containing additional and more detailed
information about the Series has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. The
Statement of Additional Information is available without charge and may be
obtained by writing to the Trust at the address printed above or by calling
the Trust at the Customer Service Center at the telephone number shown in the
accompanying prospectus.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH A PROSPECTUS FOR THE
SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
The Series' shares are not insured by the FDIC or any other agency. They are
not deposits or other obligations of any bank and are not bank guaranteed.
They are subject to market fluctuation, reinvestment risk and possible loss of
principal invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
MAY 1, 1998
<PAGE>
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TABLE OF CONTENTS
Page
PROSPECTUS SYNOPSIS..................... 1
FINANCIAL HIGHLIGHTS.................... 4
INVESTMENT OBJECTIVES AND POLICIES...... 19
Diversification......................... 19
Investment Restrictions................. 19
Multiple Allocation Series.............. 19
Fully Managed Series.................... 22
Limited Maturity Bond Series............ 23
Hard Assets Series...................... 24
Real Estate Series...................... 27
All-Growth Series....................... 28
Capital Appreciation Series............. 28
Rising Dividends Series................. 29
Emerging Markets Series................. 30
Value Equity Series..................... 32
Strategic Equity Series................. 34
Small Cap Series ....................... 35
Managed Global Series................... 36
Growth Opportunities Series............. 37
Developing World Series................. 38
Mid-Cap Growth Series................... 39
Research Series......................... 40
Total Return Series..................... 41
Growth & Income Series.................. 43
Value + Growth Series................... 44
Global Fixed Income Series.............. 45
Liquid Asset Series..................... 47
Management of the Trust................. 48
The Manager............................. 48
The Portfolio Managers.................. 50
Zweig Advisors Inc...................... 50
T. Rowe Price Associates, Inc. ......... 51
Putnam Investment Management, Inc. ..... 51
Van Eck Associates Corporation.......... 51
Pilgrim Baxter & Associates, Ltd........ 52
Chancellor LGT Asset Management, Inc. .. 52
Kayne Anderson Investment
Management, LLC....................... 53
Eagle Asset Management, Inc. ........... 53
EII Realty Securities, Inc. ............ 53
Fred Alger Management, Inc. ............ 54
ING Investment Management, LLC.......... 54
Montgomery Asset Management, LLC........ 55
Massachusetts Financial Services
Company.............................. 56
Robertson, Stephens & Company
Investment Management, L.P. ......... 56
Baring International Investment
Limited.............................. 57
Total Expenses for the Series of the
Trust................................ 57
Distributor............................. 58
Custodian and Other Service Providers... 58
Page
Description of Securities and
Investment Techniques............... 58
Mortgage-Backed Securities.............. 58
Mortgage Pass-Through Securities........ 58
Other Mortgage-Backed Securities........ 58
Risks of Mortgage-Backed Securities..... 59
Other Asset-Backed Securities........... 59
High Yield Bonds........................ 59
Repurchase Agreements................... 60
Illiquid Securities..................... 60
Restricted Securities................... 60
Short Sales............................. 60
Foreign Securities...................... 61
Indexed Securities and Structured Notes. 62
Investment in Gold and Other Precious
Metals............................... 63
Futures Contracts....................... 63
Risks Associated with Futures and
Futures Options...................... 63
Options on Securities................... 64
Risks of Options Transactions........... 65
Foreign Currency Transactions........... 65
Options on Foreign Currencies........... 66
Borrowing............................... 66
Hard Assets Securities.................. 67
Real Estate Securities.................. 67
Swaps................................... 67
Zero-Coupon Bonds....................... 68
Small Companies......................... 68
Investment Restrictions................. 68
Purchase of Shares...................... 69
Net Asset Value......................... 69
Redemption of Shares.................... 70
Exchanges............................... 71
Portfolio Transactions.................. 71
Brokerage Services...................... 71
Portfolio Turnover...................... 71
Dividends and Distributions............. 72
Federal Income Tax Status............... 72
Other Information....................... 73
Capitalization.......................... 73
Voting Rights........................... 73
The History of the Managed Global
Series................................ 74
Performance Information................. 74
Legal Counsel........................... 74
Independent Auditors.................... 74
Financial Statements.................... 75
Year 2000............................... 75
<PAGE>
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PROSPECTUS SYNOPSIS
THE TRUST
The GCG Trust (the "Trust") is an open-end management investment company,
organized as a Massachusetts business trust on August 3, 1988. This Prospectus
offers shares of twenty-two portfolios (the "Series") of the Trust, each with
its own investment objective or objectives and investment policies. There can
be no assurance that any particular Series' investment objective or objectives
will be attained. The Board of Trustees may establish additional Series at any
time and may discontinue offering a Series at any time.
The purpose of the Trust is to serve as an investment medium for (i) variable
life insurance policies and variable annuity contracts ("Variable Contracts")
offered by insurance companies, and (ii) certain qualified pension and retire-
ment plans as permitted under the federal tax rules relating to the Series
serving as investment mediums for Variable Contracts. See "Purchase of Shares."
In the case of Variable Contracts, the various Series may be used independently
or in combination. Within the limitations described in the Prospectus for the
applicable Variable Contract, an owner of a Variable Contract ("Variable
Contract Owner") may allocate premiums and reallocate investment value under
his or her Variable Contract among various divisions of the applicable separate
account, which, in turn, invest in the various Series. The assets of each Series
are segregated and a Variable Contract Owner's interest is limited to the Series
in which the divisions selected by the Variable Contract Owner have invested.
INVESTMENT OBJECTIVES
The investment objective or objectives of each of the Series are as follows:
The Multiple Allocation Series seeks the highest total return, consisting of
capital appreciation and current income, consistent with the preservation of
capital. The Series seeks to achieve this objective through investment in debt
and equity securities and the use of certain sophisticated investment strategies
and techniques.
The Fully Managed Series seeks, over the long term, a high total investment
return, consistent with the preservation of capital and prudent investment risk.
The Series seeks to achieve this objective by investing primarily in common
stocks. The Series may also invest in fixed income securities and money market
instruments to preserve its principal value during uncertain or declining market
conditions. The Series' strategy is based on the premise that, from time to
time, certain asset classes are more attractive long-term investments than
others.
The Limited Maturity Bond Series seeks the highest current income consistent
with low risk to principal and liquidity. The Series seeks to achieve this
objective by investing primarily in a diversified portfolio of limited maturity
debt securities. The Series also seeks to enhance its total return through
capital appreciation when market factors indicate that capital appreciation may
be available without significant risk to principal.
The Hard Assets Series, formerly the Natural Resources Series, seeks long-term
capital appreciation. The Series seeks to achieve this objective by investing
in equity and debt securities of companies engaged in the exploration, develop-
ment, production, management and distribution of hard assets.
The Real Estate Series seeks capital appreciation through investment in publicly
traded equity securities of companies in the real estate industry. Current
income is a secondary objective.
The All-Growth Series seeks capital appreciation. The Series seeks to achieve
this objective through investment in securities selected for their long-term
growth prospects.
The Capital Appreciation Series seeks to generate long-term capital growth by
investing in common stock and preferred stock that will be allocated between
categories or "components" of stocks referred to as the growth component and the
value component.
1
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The Rising Dividends Series seeks capital appreciation by investing in equity
securities of high quality companies that meet the following four criteria:
consistent dividend increases; substantial dividend increases; reinvested
profits; and an under-leveraged balance sheet. Dividend income is a secondary
objective.
The Emerging Markets Series seeks long-term capital appreciation by investing
primarily in equity securities of companies that are considered to be in
emerging market countries.
The Value Equity Series seeks capital appreciation and, secondarily, dividend
income by investing primarily in equity securities which meet quantitative
standards believed by the Portfolio Manager to indicate above average financial
soundness and high intrinsic value relative to price.
The Strategic Equity Series seeks to achieve capital appreciation primarily
through investment in equity securities based on various equity market timing
techniques. The amount of the Series' assets allocated to equities shall vary
from time to time to seek positive investment performance from advancing equity
markets and to reduce exposures to equities when the Portfolio Manager believes
that their risk/reward characteristics are less attractive.
The Small Cap Series seeks to achieve long-term capital appreciation by invest-
ing in equity securities of companies that, at the time of purchase, have total
market capitalization within the range of companies included in the Russell 2000
Growth Index. Many of the securities in which the Series invests may be those of
new companies in a developmental stage or more seasoned companies believed by
the Portfolio Manager to be entering a new stage of growth.
The Managed Global Series seeks capital appreciation by investing primarily in
common stocks of both domestic and foreign issuers.
The Growth Opportunities Series seeks capital appreciation by investing
primarily in equity securities, usually common stocks, of domestic companies of
all sizes and emphasizes companies having market capitalizations of $1 billion
or more.
The Developing World Series seeks capital appreciation by investing primarily in
equity securities of companies in countries having economies and markets
generally considered by the World Bank or the United Nations to be emerging or
developing.
The Mid-Cap Growth Series seeks long-term growth of capital by investing
primarily in equity securities with medium market capitalization.
The Research Series seeks to provide long-term growth of capital and future
income by investing a substantial portion of its assets in common stocks or
securities convertible into common stocks of companies believed to possess
better than average prospects for long-term growth.
The Total Return Series primarily seeks to obtain above-average income
(compared to a Series entirely invested in equity securities) consistent with
the prudent employment of capital. The Series' secondary objective is to take
advantage of opportunities for growth of capital and income.
The Growth & Income Series seeks long-term total return by investing in equity
securities and debt securities, focusing on small- and mid-cap companies that
offer the potential for capital appreciation, current income, or both.
The Value + Growth Series seeks capital appreciation by investing primarily in
growth companies with favorable relationships between price/earnings ratios and
growth rates, in sectors offering the potential for above-average returns.
The Global Fixed-Income Series seeks high total return. Under normal conditions,
at least 65% of the Series' total assets will be invested in fixed income
securities of global issuers located in at least three countries, including the
United States. Under normal conditions, the Portfolio Manager expects that the
Series generally will be invested in at least six different countries, including
the United States, although the Series may at times invest all of its assets in
a single country.
2
<PAGE>
The Liquid Asset Series seeks a high level of current income consistent with the
preservation of capital and liquidity.
The Manager and Portfolio Managers
The Manager of the Series is Directed Services, Inc. (the "Manager"), a wholly
owned subsidiary of ING Groep, N.V. ("ING"). The Trust and the Manager have
retained several investment advisory firms ("Portfolio Managers") to manage the
assets of the Series. The Series and their Portfolio Managers are as follows:
SERIES PORTFOLIO MANAGER
---------------------------- ------------------------------------------
Multiple Allocation Series Zweig Advisors Inc.
Fully Managed Series T. Rowe Price Associates, Inc.
Limited Maturity Bond Series ING Investment Management, LLC
Hard Assets Series Van Eck Associates Corporation
Real Estate Series EII Realty Securities, Inc.
All-Growth Series Pilgrim Baxter & Associates, Ltd.
Capital Appreciation Series Chancellor LGT Asset Management, Inc.
Rising Dividends Series Kayne Anderson Investment Management, LLC
Emerging Markets Series Putnam Investment Management, Inc.
Value Equity Series Eagle Asset Management, Inc.
Strategic Equity Series Zweig Advisors Inc.
Small Cap Series Fred Alger Management, Inc.
Managed Global Series Putnam Investment Management, Inc.
Growth Opportunities Series Montgomery Asset Management, LLC
Developing World Series Montgomery Asset Management, LLC
Mid-Cap Growth Series Massachusetts Financial Services Company
Research Series Massachusetts Financial Services Company
Total Return Series Massachusetts Financial Services Company
Growth & Income Series Robertson, Stephens & Company Investment
Management, L.P.
Value + Growth Series Robertson, Stephens & Company Investment
Management, L.P.
Global Fixed Income Series Baring International Investment Limited
Liquid Asset Series ING Investment Management, LLC
As Manager of the Series, Directed Services, Inc. has overall responsibility,
subject to the supervision of the Board of Trustees, for engaging Portfolio
Managers and for monitoring and evaluating the management of the assets of each
Series by the Portfolio Managers, for administering all operations of the
Series, and for providing or procuring all services necessary for the ordinary
operation of the Series. Pursuant to a Management Agreement, the Trust currently
pays the Manager for its services a monthly fee at an annual rate. See the fee
table under "Management of the Trust-The Manager."
Each Portfolio Manager has full investment discretion and makes all determina-
tions with respect to the investment of each Series' assets and the purchase and
sale of portfolio securities consistent with the investment objectives,
policies, and restrictions for such Series. The Portfolio Managers are compen-
sated by the Manager (and not the Trust).
The Trust is distinct in that the expense structure of the Series is simpler and
more predictable than most mutual funds. The ordinary expenses for the Trust's
Series, including custodial, administrative, transfer agency, portfolio
accounting, auditing, and ordinary legal expenses are paid by the Manager;
whereas, most mutual funds pay for these expenses directly from their own
assets.
PURCHASE AND REDEMPTION OF SHARES
Shares of each Series are offered at the net asset value of each Series. Shares
of each Series may be redeemed without cost at the net asset value per share of
the Series next determined after receipt of the redemption request. The redemp-
tion price may be more or less than the purchase price.
3
<PAGE>
SPECIAL CHARACTERISTICS AND INVESTMENT RISKS
Certain of the Series may engage in investment techniques that involve certain
risks that are described more fully in the section "Description of Securities
and Investment Techniques." For example, the Multiple Allocation Series may
engage in various types of futures transactions, may lend its portfolio securi-
ties, may invest in non-U.S. dollar-denominated securities of foreign issuers,
may engage in foreign currency transactions and options on foreign currencies,
may engage in various put and call options transactions, may invest in gold
futures contracts, and may engage in short sales of securities.
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FINANCIAL HIGHLIGHTS
The following tables present condensed financial information with respect to
each Series, except the Growth Opportunities, Developing World, Mid-Cap Growth,
Total Return, Research, Growth & Income, Value + Growth, Global Fixed Income
Series which had not commenced operations prior to December 31, 1997.
Information in the tables for the years ended December 31, 1997, 1996, 1995,
1994 and 1993 is derived from the Trust's financial statements for all Series
that have been audited by Ernst & Young LLP. Information in the tables for
years ended December 31, 1992, 1991, 1990 and 1989 is derived from the Trust's
financial statements for all Series (except the Managed Global Series) that have
been audited by another independent auditor. The information for the Managed
Global Series is presented as if the reorganization described under "Other
Information-History of the Managed Global Series" (the "Reorganization") had
always been in effect. Data shown for periods ending prior to December 31, 1996
for the Managed Global Series is derived solely from the Managed Global Account
of Separate Account D of Golden American Life Insurance Company ("Golden
American") which was the predecessor entity. The information in the tables for
the period of October 21, 1992 (commencement of operations) through December 31,
1995 for the Managed Global Series has been derived from financial statements of
the Managed Global Account of Separate Account D of Golden American (as
restated to give effect to the Reorganization) for the same periods which have
been examined by Ernst & Young LLP.
The condensed financial information below does not include deductions at the
separate account level or contract specific deductions that may be incurred
under a Variable Contract for which the Trust serves as an underlying investment
vehicle. These charges would reduce the total return to any owner of a Variable
Contract. The following tables should be read in conjunction with the Trust's
financial statements which are incorporated by reference in the Trust's State-
ment of Additional Information from the Trust's Annual Report dated as of
December 31, 1997. The Trust's Annual Report, which contains further infor-
mation about the Series' performance, are available to shareholders upon request
and without charge.
4
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FINANCIAL HIGHLIGHTS
MULTIPLE ALLOCATION SERIES
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year.............. $ 12.41 $ 12.52 $ 11.33 $ 11.89 $ 11.41 $ 11.73 $ 10.26 $ 10.34 $ 10.00
-------- -------- -------- -------- -------- -------- ------- ------- -------
INCOME/(LOSS) FROM
INVESTMENT
OPERATIONS:
Net investment
income............ 0.57 0.56 0.58 0.42 0.24 0.42 0.49 0.57 0.58
Net realized and
unrealized
gain/(loss)
on investments.... 1.58 0.52 1.56 (0.56) 1.03 (0.18) 1.57 (0.08) 0.44
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total from
investment
operations........ 2.15 1.08 2.14 (0.14) 1.27 0.24 2.06 0.49 1.02
-------- -------- -------- -------- -------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment
income............ (0.55) (0.58) (0.45) (0.42) (0.24) (0.42) (0.49) (0.57) (0.58)
Distributions from
capital gains..... (0.92) (0.61) (0.50) -- (0.55) (0.14) (0.10) -- (0.10)
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total
distributions..... (1.47) (1.19) (0.95) (0.42) (0.79) (0.56) (0.59) (0.57) (0.68)
-------- -------- -------- -------- -------- -------- ------- ------- -------
Net asset value, end
of year........... $ 13.09 $ 12.41 $ 12.52 $ 11.33 $ 11.89 $ 11.41 $ 11.73 $ 10.26 $ 10.34
======== ======== ======== ======== ======== ======== ======= ======= =======
Total return........ 17.44% 8.77% 18.93% (1.18)% 11.13% 1.88% 20.02% 4.74% 8.92%++
======== ======== ======== ======== ======== ======== ======= ======= =======
RATIOS TO AVERAGE
NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of
year
(in 000's)........ $264,599 $272,791 $307,691 $299,392 $274,231 $116,040 $ 58,578 $ 24,347 $15,513
Ratio of operating
expenses to
average net
assets............ 0.99% 1.00% 1.01% 1.00% 1.01% 1.09% 1.33% 1.24% 2.35%+
Decrease reflected
in above expense
ratio due to
expense
limitations....... -- -- -- -- 0.03% 0.10% 0.13% 0.68% 0.09%+
Ratio of net
investment income
to average
net assets........ 3.88% 3.86% 4.42% 3.56% 2.75% 3.65% 4.43% 5.73% 6.52%+
Portfolio turnover
rate.............. 79% 158% 187% 291% 348% 93% 70% 162% 115%
Average commission
rate paid(a)...... $ 0.0587 $ 0.0593 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Multiple Allocation Series commenced operations on January 24, 1989.
+ Annualized
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
5
<PAGE>
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FINANCIAL HIGHLIGHTS (CONTINUED)
FULLY MANAGED SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year.............. $ 14.82 $ 13.79 $ 11.70 $ 12.99 $ 12.43 $ 11.94 $ 9.51 $10.16 $ 10.00
-------- -------- -------- ------- -------- ------- ------- ------ ------
INCOME/(LOSS) FROM
INVESTMENT
OPERATIONS:
Net investment
income............ 0.39 0.56 0.45 0.35 0.19 0.28 0.29 0.33 0.28
Net realized and
unrealized
gain/(loss) on
investments....... 1.86 1.69 1.98 (1.29) 0.75 0.49 2.43 (0.65) 0.16
-------- -------- -------- ------- -------- ------- ------- ------ ------
Total from
investment
operations........ 2.25 2.25 2.43 (0.94) 0.94 0.77 2.72 (0.32) 0.44
-------- -------- -------- ------- -------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment
income............ (0.41) (0.56) (0.34) (0.35) (0.19) (0.28) (0.29) (0.33) (0.28)
Distributions from
capital gains..... (0.93) (0.66) -- -- (0.19) -- -- -- --
-------- -------- -------- ------- -------- ------- ------- ------ ------
Total
distributions..... (1.34) (1.22) (0.34) (0.35) (0.38) (0.28) (0.29) (0.33) (0.28)
-------- -------- -------- ------- -------- ------- ------- ------ ------
Net asset value, end
of year........... $ 15.73 $ 14.82 $ 13.79 $ 11.70 $ 12.99 $ 12.43 $ 11.94 $ 9.51 $ 10.16
======== ======== ======== ======= ======== ======= ======= ====== ======
Total return........ 15.27% 16.36% 20.80% (7.27)% 7.59% 6.23% 28.93% (3.18)% 3.90%++
======== ======== ======== ======= ======== ======= ======= ====== ======
RATIOS TO AVERAGE
NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of
year (in 000's)... $169,987 $136,660 $118,589 $ 99,854 $108,690 $ 37,696 $ 10,031 $5,426 $ 5,443
Ratio of operating
expenses to
average net
assets............ 0.99% 1.00% 1.01% 1.00% 1.01% 1.04% 1.50% 1.52% 2.69%+
Decrease reflected
in above expense
ratio due to
expense
limitations....... -- -- -- -- 0.04% 0.20% 0.68% 1.27% 0.19%+
Ratio of net
investment income
to average net
assets............ 2.67% 3.83% 3.41% 2.62% 2.12% 2.38% 2.71% 3.38% 3.07%+
Portfolio turnover
rate.............. 48% 45% 113% 66% 55% 27% 68% 100% 196%
Average commission
rate paid(a)...... $ 0.0369 $ 0.0597 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Fully Managed Series commenced operations on January 24, 1989.
** Since January 1, 1995, T. Rowe Price Associates, Inc. has served as Portfolio Manager for the Fully Managed
Series. Prior to that date, a different firm served as Portfolio Manager.
+ Annualized
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
6
<PAGE>
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FINANCIAL HIGHLIGHTS (CONTINUED)
LIMITED MATURITY BOND SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97# 12/31/96# 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- --------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year............. $ 10.43 $ 11.15 $ 9.98 $ 10.62 $ 10.43 $ 10.54 $ 10.15 $10.16 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME/(LOSS) FROM
INVESTMENT
OPERATIONS:
Net investment
income........... 0.60 0.59 0.60 0.51 0.40 0.60 0.68 0.72 0.74
Net realized and
unrealized
gain/(loss) on
investments...... 0.09 (0.13) 0.57 (0.64) 0.23 (0.11) 0.42 -- 0.19
------- ------- ------- ------- ------- ------- ------- ------ ------
Total from
investment
operations....... 0.69 0.46 1.17 (0.13) 0.63 0.49 1.10 0.72 0.93
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment
income........... (0.81) (1.15) -- (0.51) (0.40) (0.60) (0.68) (0.72) (0.74)
Distributions from
capital gains.... -- (0.03) -- -- (0.04) -- (0.03) (0.01) (0.03)
------- ------- ------- ------- ------- ------- ------- ------ ------
Total
distributions.... (0.81) (1.18) -- (0.51) (0.44) (0.60) (0.71) (0.73) (0.77)
------- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value,
end of year...... $ 10.31 $ 10.43 $ 11.15 $ 9.98 $ 10.62 $ 10.43 $ 10.54 $10.15 $ 10.16
======= ======= ======= ======= ======= ======= ======= ====== ======
Total return....... 6.67% 4.32% 11.72% (1.19)% 6.20% 4.84% 11.27% 7.87% 9.69%++
======= ======= ======= ======= ======= ======= ======= ====== ======
RATIOS TO AVERAGE
NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of
year (in
000's)........... $53,839 $81,317 $ 90,081 $ 72,213 $ 72,219 $ 40,213 $ 16,144 $8,321 $ 2,631
Ratio of operating
expenses to
average net
assets........... 0.61% 0.61% 0.61% 0.60% 0.61% 0.72% 0.87% 0.81% 1.11%+
Decrease reflected
in above expense
ratio due to
expense
limitations...... -- -- -- -- 0.04% 0.27% 0.89% 2.09% 3.22%+
Ratio of net
investment income
to average net
assets........... 5.71% 5.33% 5.58% 4.73% 4.64% 5.71% 6.58% 7.47% 8.56%+
Portfolio turnover
rate............. 81% 250% 302% 209% 115% 63% 465% 373% 354%
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Limited Maturity Bond Series commenced operations on January 24, 1989.
** Since January 2, 1998, ING Investment Management, LLC has served as Portfolio Manager for the Limited
Maturity Bond Series. Prior to that date, Equitable Investment Services, Inc. served as Portfolio Manager
for the Limited Maturity Bond Series. Prior to August 13, 1997, different firms served as Portfolio Manager.
+ Annualized
++ Non-annualized
# Per share numbers have been calculated using the monthly average share method, which more appropriately
represents the per share data for the period.
</TABLE>
7
<PAGE>
- ----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
HARD ASSETS SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of year........ $ 17.85 $ 15.04 $ 13.88 $ 13.89 $ 9.31 $ 10.46 $ 10.11 $ 11.89 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME/(LOSS)
FROM INVESTMENT
OPERATIONS:
Net investment
income/(loss)... 0.14 0.05 0.15 0.13 0.07 0.14 0.13 0.13 (0.35)
Net realized and
unrealized
gain/(loss) on
investments.... 0.99 4.92 1.34 0.23 4.58 (1.15) 0.35 (1.78) 2.26
------- ------- ------- ------- ------- ------- ------ ------- -------
Total from
investment
operations..... 1.13 4.97 1.49 0.36 4.65 (1.01) 0.48 (1.65) 1.91
------- ------- ------- ------- ------- ------- ------ ------- -------
LESS
DISTRIBUTIONS:
Dividends from
net investment
income......... (0.13) (0.07) (0.13) (0.13) (0.07) (0.14) (0.13) (0.13) --
Distributions
from capital
gains.......... (3.80) (2.09) (0.20) (0.24) -- -- -- -- (0.02)
------- ------- ------- ------- ------- ------- ------ ------- -------
Total
distributions... (3.93) (2.16) (0.33) (0.37) (0.07) (0.14) (0.13) (0.13) (0.02)
------- ------- ------- ------- ------- ------- ------ ------- -------
Net asset value,
end of year.... $ 15.05 $ 17.85 $ 15.04 $ 13.88 $ 13.89 $ 9.31 $10.46 $ 10.11 $ 11.89
======= ======= ======= ======= ======= ======= ====== ======= =======
Total return..... 6.22% 33.17% 10.69% 2.53% 49.93% (9.81)% 4.70% (13.84)% 18.96%++
======= ======= ======= ======= ======= ======= ====== ======= =======
RATIOS TO AVERAGE
NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end
of year (in
000's)......... $46,229 $43,903 $ 27,147 $ 32,879 $ 21,517 $ 2,916 $2,702 $ 2,552 $ 2,383
Ratio of
operating
expenses to
average net
assets......... 0.99% 1.00% 1.01% 1.00% 1.05% 1.50% 1.50% 1.53% 5.46%+
Decrease
reflected in
above
expense ratio
due to
expense
limitations.... -- -- -- -- 0.08% 0.89% 1.94% 1.93% 1.36%+
Ratio of net
investment
income/(loss)
to average
net assets..... 0.76% 0.34% 0.89% 1.01% 1.03% 1.38% 1.21% 1.21% (3.65)%+
Portfolio
turnover
rate........... 124% 96% 24% 25% 5% 19% 39% 54% 22%
Average
commission rate
paid(a)........ $0.0214 $0.0252 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Hard Assets Series commenced operations on January 24, 1989.
** Prior to January 23, 1997, the Hard Asset Series was named the Natural Resources Series.
+ Annualized
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
8
<PAGE
- ----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
REAL ESTATE SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year.............. $ 15.98 $ 12.63 $ 11.29 $ 11.18 $ 9.81 $ 9.02 $ 7.05 $ 9.53 $ 10.00
------- ------- ------- ------- ------- ------ ----- ------ -----
INCOME/(LOSS) FROM
INVESTMENT
OPERATIONS:
Net investment
income............ 0.69 0.70 0.75 0.60 0.32 0.52 0.42 0.50 0.05
Net realized and
unrealized
gain/(loss) on
investments....... 2.93 3.70 1.12 0.11# 1.37# 0.79 1.97 (2.48) (0.06)
------- ------- ------- ------- ------- ------ ----- ------ -----
Total from
investment
operations........ 3.62 4.40 1.87 0.71 1.69 1.31 2.39 (1.98) (0.01)
------- ------- ------- ------- ------- ------ ----- ------ -----
LESS DISTRIBUTIONS:
Dividends from net
investment
income............ (0.63) (0.77) (0.53) (0.60) (0.32) (0.52) (0.42) (0.50) (0.05)
Distributions from
capital gains..... (0.70) (0.28) -- -- -- -- -- -- (0.30)
Paid in Capital..... -- -- -- -- -- -- -- -- (0.11)
------- ------- ------- ------- ------- ------ ----- ------ -----
Total
distributions..... (1.33) (1.05) (0.53) (0.60) (0.32) (0.52) (0.42) (0.50) (0.46)
------- ------- ------- ------- ------- ------ ----- ------ -----
Net asset value, end
of year........... $ 18.27 $ 15.98 $ 12.63 $ 11.29 $ 11.18 $ 9.81 $ 9.02 $ 7.05 $ 9.53
======= ======= ======= ======= ======= ====== ===== ====== =====
Total return........ 22.79% 35.30% 16.59% 6.34% 17.27% 13.87% 34.06% (20.78)% (1.22)%++
======= ======= ======= ======= ======= ====== ===== ====== =====
RATIOS TO AVERAGE
NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of
year (in 000's)... $ 75,530 $ 51,135 $ 34,975 $ 37,336 $ 29,000 $3,739 $ 710 $ 320 $ 670
Ratio of operating
expenses to
average net
assets............ 0.99% 1.00% 1.01% 1.00% 1.04% 1.18% 1.53% 1.48% 5.79%+
Decrease reflected
in above expense
ratio due to
expense
limitations....... -- -- -- -- 0.10% 1.79% 11.17% 10.80% 1.32%+
Ratio of net
investment income
to average net
assets............ 4.49% 5.53% 5.79% 5.31% 4.69% 5.74% 5.00% 5.95% 0.55%+
Portfolio turnover
rate.............. 41% 31% 53% 64% 38% 18% 54% 47% 83%
Average commission
rate paid(a)...... $ 0.0585 $ 0.0647 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Real Estate Series commenced operations on January 24, 1989.
** Since January 1, 1995, EII Realty Securities, Inc. has served as Portfolio Manager for the Real Estate
Series. Prior to that date, a different firm served as Portfolio Manager.
+ Annualized
++ Non-annualized
# The amount shown may not accord with the change in the aggregate gains and losses of portfolio securities
due to timing of sales and redemptions of Series shares.
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
9
<PAGE>
- ----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
ALL-GROWTH SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- -------- -------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of year........... $ 13.39 $ 13.78 $ 11.86 $ 13.42 $ 12.64 $ 13.05 $ 9.65 $10.59 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME/(LOSS) FROM
INVESTMENT
OPERATIONS:
Net investment
income............ (0.06) 0.14 0.18 0.11 0.05 0.08 0.11 0.19 0.09
Net realized and
unrealized
gain/(loss) on
investments....... 0.84 (0.23) 2.47 (1.56) 0.78 (0.41) 3.40 (0.94) 0.66
------- ------- ------- ------- ------- ------- ------- ------- ------
Total from
investment
operations........ 0.78 (0.09) 2.65 (1.45) 0.83 (0.33) 3.51 (0.75) 0.75
------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Dividends from net
investment
income............ (0.03) (0.14) (0.14) (0.11) (0.05) (0.08) (0.11) (0.19) (0.09)
Distributions from
capital gains..... (0.37) (0.16) (0.59) -- -- -- -- -- --
Paid in Capital..... -- -- -- -- -- -- -- -- (0.07)
------- ------- ------- ------- ------- ------- ------- ------- ------
Total
distributions..... (0.40) (0.30) (0.73) (0.11) (0.05) (0.08) (0.11) (0.19) (0.16)
------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end
of year........... $ 13.77 $ 13.39 $ 13.78 $ 11.86 $ 13.42 $ 12.64 $ 13.05 $ 9.65 $ 10.59
======= ======= ======= ======= ======= ======= ======= ======= ======
Total return........ 5.87% (0.57)% 22.42% (10.77)% 6.56% (2.59)% 36.48% (7.35)% 7.20%++
======= ======= ======= ======= ======= ======= ======= ======= ======
RATIOS TO AVERAGE
NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of
year
(in 000's)........ $ 73,856 $ 78,750 $ 93,198 $ 71,218 $ 56,491 $ 24,202 $ 11,857 $5,005 $ 3,572
Ratio of operating
expenses to
average net
assets............ 0.99% 1.00% 1.01% 1.00% 1.01% 1.31% 1.48% 1.51% 3.23%+
Decrease reflected
in above expense
ratio due to
expense
limitations....... -- -- -- -- 0.01% 0.04% 0.40% 1.51% 0.38%+
Ratio of net
investment income
to average net
assets............ (0.47)% 0.86% 1.42% 1.08% 0.52% 0.61% 0.94% 1.99% 0.94%+
Portfolio turnover
rate.............. 325% 118% 81% 196% 29% 20% 31% 88% 54%
Average commission
rate paid(a)...... $ 0.0533 $ 0.0592 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The All-Growth Series commenced operations on January 24, 1989.
** Since February 3, 1997, Pilgrim Baxter & Axxociates, Ltd. has served as Portfolio Manager for the All-Growth
Series. Prior to that date, a different firm served as Portfolio Manager.
+ Annualized
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
10
<PAGE>
- - --------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
CAPITAL APPRECIATION SERIES
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92*
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year................... $ 15.06 $ 13.51 $ 11.34 $ 11.76 $ 11.00 $ 10.00
-------- -------- -------- ------- ------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income................................ 0.16 0.16 0.19 0.23 0.13 0.12
Net realized and unrealized gain/(loss) on
investments........................................ 4.19 2.57 3.22 (0.42) 0.78 1.00
-------- -------- -------- ------- ------- -------
Total from investment operations..................... 4.35 2.73 3.41 (0.19) 0.91 1.12
-------- -------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................. (0.16) (0.17) (0.15) (0.23) (0.13) (0.12)
Distributions from capital gains..................... (1.60) (1.01) (1.09) -- (0.02) --
-------- -------- -------- ------- ------- -------
Total distributions.................................. (1.76) (1.18) (1.24) (0.23) (0.15) (0.12)
-------- -------- -------- ------- ------- -------
Net asset value, end of year......................... $ 17.65 $ 15.06 $ 13.51 $ 11.34 $ 11.76 $ 11.00
======== ======== ======== ======= ======= =======
Total return......................................... 28.95% 20.26% 30.16% (1.59)% 8.31% 10.87%++
======== ======== ======== ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)................... $193,986 $148,752 $122,227 $ 88,890 $ 87,219 $18,645
Ratio of operating expenses to average net assets.... 0.99% 1.00% 1.01% 1.00% 1.02% 0.91%+
Decrease reflected in above expense ratio due to
expense limitations................................ -- -- -- -- 0.04% 0.27%+
Ratio of net investment income to average net
assets............................................. 0.95% 1.12% 1.53% 1.96% 1.69% 2.06%+
Portfolio turnover rate.............................. 51% 64% 98% 84% 67% 6%
Average commission rate paid(a)...................... $ 0.0599 $ 0.0590 N/A N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Capital Appreciation Series commenced operations on May 4, 1992.
+ Annualized
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
11
<PAGE>
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
RISING DIVIDENDS SERIES
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96# 12/31/95 12/31/94 12/31/93*
-------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 15.81 $ 13.30 $ 10.22 $ 10.30 $ 10.00
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.14 0.14 0.13 0.14 0.01
Net realized and unrealized gain/(loss) on investments...... 4.57 2.61 3.04 (0.08) 0.30
-------- -------- ------- ------- -------
Total from investment operations............................ 4.71 2.75 3.17 0.06 0.31
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income........................ (0.13) (0.13) (0.09) (0.14) (0.01)
Distributions from capital gains............................ (0.35) (0.11) -- -- --
-------- -------- ------- ------- -------
Total distributions......................................... (0.48) (0.24) (0.09) (0.14) (0.01)
-------- -------- ------- ------- -------
Net asset value, end of year................................ $ 20.04 $ 15.81 $ 13.30 $ 10.22 $ 10.30
======== ======== ======= ======= =======
Total return................................................ 29.82% 20.65% 31.06% 0.59% 3.10%++
======== ======== ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's).......................... $ 252,191 $ 126,239 $ 81,210 $ 50,712 $14,430
Ratio of operating expenses to average net assets........... 0.99% 1.00% 1.01% 1.00% 0.24%+
Ratio of net investment income to average net assets........ 0.96% 0.99% 1.24% 1.88% 0.34%+
Portfolio turnover rate..................................... 26% 15% 43% 26% 3%
Average commission rate paid(a)............................. $ 0.0600 $ 0.0600 N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Rising Dividends Series commenced operations on October 4, 1993.
+ Annualized
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
# Per share numbers have been calculated using the monthly average share method, which more appropriately
represents the per share data for the period.
</TABLE>
12
<PAGE>
- ----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
EMERGING MARKETS SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93*
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............................ $ 9.72 $ 9.06 $ 10.08 $ 12.44 $ 10.00
------- ------- ------- ------- -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income......................................... (0.01) 0.04 0.04 -- --
Net realized and unrealized gain/(loss) on investments........ (0.90) 0.62 (1.06) (1.89) 2.44
------- ------- ------- ------- -------
Total from investment operations.............................. (0.91) 0.66 (1.02) (1.89) 2.44
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income.......................... (0.01) -- -- -- --
Distributions from capital gains.............................. -- -- (0.00)# (0.47) --
------- ------- ------- ------- -------
Total distributions........................................... (0.01) -- (0.00) (0.47) --
------- ------- ------- ------- -------
Net asset value, end of year.................................. $ 8.80 $ 9.72 $ 9.06 $ 10.08 $ 12.44
======= ======= ======= ======= =======
Total return.................................................. (9.37)% 7.28% (10.11)% (15.18)% 24.40%++
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)............................ $ 39,436 $ 51,510 $ 47,974 $ 65,224 $31,181
Ratio of operating expenses to average net assets............. 1.80% 1.55% 1.53% 1.73% 0.38%++
Ratio of net investment income to average net assets.......... (0.09)% 0.38% 0.40% 0.03% 0.00%++
Portfolio turnover rate....................................... 170% 136% 141% 106% 0%
Average commission rate paid(a)............................... $ 0.0008 $ 0.0007 N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Emerging Markets Series commenced operations on October 4, 1993.
** Since March 3, 1997, Putnam Investment Management, Inc. has served as Portfolio Manager for the
Emerging Markets Series. Prior to that date, a different firm served as Portfolio Manager.
++ Non-annualized
# Amount represents less than $0.01 per share.
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
13
<PAGE>
- - --------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
VALUE EQUITY SERIES
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95*
-------- -------- ---------
<S> <C> <C> <C>
Net asset value, beginning of year....................................... $ 13.92 $ 13.18 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................... 0.16 0.22 0.08
Net realized and unrealized gain on investments.......................... 3.63 1.18 3.44
------- ------- -------
Total from investment operations......................................... 3.79 1.40 3.52
------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income..................................... (0.18) (0.19) (0.06)
Distributions from capital gains......................................... (1.40) (0.47) (0.28)
------- ------- -------
Total distributions...................................................... (1.58) (0.66) (0.34)
------- ------- -------
Net asset value, end of year............................................. $ 16.13 $ 13.92 $ 13.18
======= ======= =======
Total return............................................................. 27.28% 10.62% 35.21%
======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)....................................... $80,048 $ 44,620 $28,830
Ratio of operating expenses to average net assets........................ 0.99 1.00% 1.01%
Ratio of net investment income to average net assets..................... 1.31% 1.80% 1.53%
Portfolio turnover rate.................................................. 128% 131% 86%
Average commission rate paid(a).......................................... $0.0589 $ 0.0575 N/A
</TABLE>
- -------------------
<TABLE>
<C> <S>
* The Value Equity Series commenced operations on January 3, 1995.
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
14
<PAGE>
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
STRATEGIC EQUITY SERIES
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/97 12/31/96## 12/31/95*
-------- ---------- ---------
<S> <C> <C> <C>
Net asset value, beginning of year....................................... $ 11.68 $ 10.01 $ 10.00
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................... 0.20 0.23 0.06
Net realized and unrealized gain/(loss) on investments................... 2.49 1.71 (0.03)#
------- ------- ------
Total from investment operations......................................... 2.69 1.94 0.03
------- ------- ------
LESS DISTRIBUTIONS:
Dividends from net investment income..................................... (0.19) (0.14) (0.02)
Distributions from capital gains......................................... (0.55) (0.13) --
------- ------- ------
Total distributions...................................................... (0.74) (0.27) (0.02)
------- ------- ------
Net asset value, end of year............................................. $ 13.63 $ 11.68 $ 10.01
======= ======= ======
Total return............................................................. 23.16% 19.39% 0.33%++
======= ======= ======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)....................................... $ 51,789 $ 30,423 $ 8,067
Ratio of operating expenses to average net assets........................ 0.99% 1.00% 1.00%+
Ratio of net investment income to average net assets..................... 1.88% 2.05% 4.04%+
Portfolio turnover rate.................................................. 105% 133% 29%
Average commission rate paid(a).......................................... $0.0288 $ 0.0269 N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Strategic Equity Series commenced operations on October 2, 1995.
+ Annualized
++ Non-annualized
# The amount shown may not accord with the change in the aggregate gains and losses of portfolio securities
due to timing of sales and redemptions of Series shares.
## Per share numbers have been calculated using the monthly average share method, which more appropriately
represents the per share data for the period since the use of the undistributed income method did not
accord with the results of operations.
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
15
<PAGE>
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL CAP SERIES
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/97 12/31/96*
-------- ---------
<S> <C> <C>
Net asset value, beginning of year.................................................. $ 12.01 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss................................................................. (0.03) (0.01)
Net realized and unrealized gain on investments..................................... 1.27 2.02
------- -------
Total from investment operations.................................................... 1.24 2.01
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................................................ -- --
Distributions from capital gains.................................................... -- --
------- -------
Total distributions................................................................. -- --
-------
Net asset value, end of year........................................................ $ 13.25 $ 12.01
======= =======
Total return........................................................................ 10.32% 20.10%++
======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's).................................................. $66,396 $34,365
Ratio of operating expenses to average net assets................................... 0.99% 0.99%++
Ratio of net investment loss to average net assets.................................. (0.34)% (0.08)%++
Portfolio turnover rate............................................................. 130% 117%
Average commission rate paid(a)..................................................... $0.0706 $0.0621
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Small Cap Series commenced operations on January 3, 1996.
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
16
<PAGE>
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
MANAGED GLOBAL SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96***# 12/31/95# 12/31/94# 12/31/93# 12/31/92*#
-------- ------------ --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year............... $ 11.13 $ 9.96 $ 9.26 $ 10.67 $ 10.01 $ 10.00
-------- ------ ------ ------ ------ -------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS:
Net investment income............................ 0.02 0.04 0.05 0.07 0.06 0.02
Net realized and unrealized gain/(loss) on
investments.................................... 1.33 1.18 0.65 (1.48) 0.60 (0.01)
-------- ------ ------ ------ ------ -------
Total from investment operations................. 1.35 1.22 0.70 (1.41) 0.66 0.01
-------- ------ ------ ------ ------ -------
LESS DISTRIBUTIONS:
Dividends from net investment income............. (0.17) -- -- -- -- --
Dividends in excess of net investment income (0.07) -- -- -- -- --
Distributions from capital gains................. (0.78) (0.05) -- -- -- --
-------- ------ ------ ------ ------ -------
Total distributions.............................. (1.02) (0.05) -- -- -- --
-------- ------ ------ ------ ------ -------
Net asset value, end of year..................... $ 11.46 $ 11.13 $ 9.96 $ 9.26 $ 10.67 $ 10.01
======== ====== ====== ====== ====== =======
Total return..................................... 12.17% 12.27% 7.56% (13.21)% 6.59% 0.10%++
======== ====== ====== ====== ====== =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)............... $ 105,305 $ 86,376 $72,375 $86,209 $88,477 $ 38,699
Ratio of operating expenses to average net
assets......................................... 1.36% 1.26% 1.26% 1.31% 1.69% 0.34%++
Decrease reflected in above expense ratio due to
expense limitations............................ -- -- 0.09% 0.09% 0.03% --
Ratio of net investment income to average net
assets......................................... 0.06% 0.39% 0.51% 0.69% 0.56% 0.28%++
Portfolio turnover rate.......................... 199% 141% 44% N/A N/A N/A
Average commission rate paid(a).................. $ 0.0242 $ 0.0222 N/A N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Managed Global Account of Separate Account D of Golden American Life Insurance Company (the "Account")
commenced operations on October 21, 1992.
** Since March 3, 1997, Putnam Investment Management, Inc. has served as Portfolio Manager of the Series.
Prior to that date, a different firm served as Portfolio Manager.
*** On September 3, 1996, the Account was reorganized into the Trust. Net investment income and net realized
gains earned prior to September 3, 1996 are not subject to Internal Revenue Code distribution requirements
for regulated investment companies. Financial highlights from prior periods have been restated to account
for the entity as if it had been a regulated investment company since the commencement of operations.
++ Non-annualized
# Per share numbers have been calculated using the monthly average share method, which more appropriately
represents the per share data for the period.
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
17
<PAGE>
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
LIQUID ASSET SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------ ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.050 0.049 0.054 0.040 0.030 0.030 0.050 0.070 0.080
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............ 0.050 0.049 0.054 0.040 0.030 0.030 0.050 0.070 0.080
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income..... (0.050) (0.049) (0.054) (0.040) (0.030) (0.030) (0.050) (0.070) (0.080)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions..... (0.050) (0.049) (0.054) (0.040) (0.030) (0.030) (0.050) (0.070) (0.080)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= =======
Total return............ 5.07% 5.01% 5.51% 3.89% 2.64% 3.13% 5.66% 7.75% 7.67%++
======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)........... $ 59,453 $ 39,096 $ 38,589 $ 46,122 $ 16,808 $ 13,206 $ 9,790 $ 8,709 $ 2,352
Ratio of operating
expenses to average net
assets................ 0.61% 0.61% 0.61% 0.61% 0.61% 0.74% 0.76% 0.66% 0.90%+
Decrease reflected in
above expense ratio due
to expense
limitations........... -- -- -- -- 0.08% 0.50% 1.01% 1.84% 3.26%+
Ratio of net investment
income to average net
assets................ 4.99% 4.89% 5.39% 3.89% 2.60% 3.04% 5.48% 7.56% 8.99%+
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Liquid Assets Series commenced operations on January 24, 1989.
** Since January 2, 1998 ING Investment Management, LLC has served as Portfolio Manager for the Liquid Asset
Series. Prior to that date, Equitable Investment Services, Inc. served as Portfolio Manager for the Liquid
Asset Series. Prior to that August 13, 1996, different firms served as Portfolio Manager.
+ Annualized
++ Non-annualized
</TABLE>
18
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
Each of the Series has a different investment objective or objectives that are
described below. Each Series' portfolio is managed by its own Portfolio Manager.
There can be no assurance that any Series will achieve its investment objective
or objectives. Because each Series seeks a different investment objective or
objectives and has different policies, each is subject to varying degrees of
financial, market, and credit risks. Each Series is subject to the risk of
changing economic conditions. As with any security, a risk of loss is inherent
in investment in a Series' shares. Therefore, investors should carefully con-
sider the investment objective or objectives, investment policies, and potential
risks of any Series before investing.
The different types of securities and investment techniques used by the
individual Series all have attendant risks of varying degrees. For example, 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 securities,
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 called for by the
instrument. In addition, the value of debt instruments generally rises and falls
inversely with interest rates.
Certain types of investments and investment techniques common to one or more
Series are described in greater detail, including the risks of each, in this
Prospectus under "Description of Securities and Investment Techniques" and in
the Statement of Additional Information.
DIVERSIFICATION
Each Series, unless specifically noted otherwise in the Series' investment
objective and policies section, is diversified, as defined in the Investment
Company Act of 1940. A diversified Series may not invest more than 5% of the
value of its total assets in any one issuer and it may not purchase more than
10% of the outstanding voting securities of any one issuer with respect to 75%
of its total assets, exclusive of amounts held in cash, cash items, and U.S.
Government securities. A Series classified as "non-diversified" is not limited
by the Investment Company Act of 1940 in the amount of assets that it may invest
in the securities of a single issuer. However, that Series will meet the diver-
sification requirements under the Internal Revenue Code applicable to mutual
funds and variable contracts. Because a Series is "non-diversified" and may
invest in a smaller number of individual issuers than a series which is "diver-
sified," an investment in any non-diversified Series may, under certain circum-
stances, present greater risk to an investor than an investment in a series
which is diversified. This risk may include greater exposure to the risk of
poor earnings or default of one issuer than would be the case for a more diver-
sified series. Each Series' policy on diversification is a fundamental policy
and may not be changed without approval of a majority of the outstanding voting
shares of that Series.
INVESTMENT RESTRICTIONS
Each Series is subject to investment restrictions that are described in the
Statement of Additional Information. The investment restrictions so designated
and, unless otherwise noted, the investment objective or objectives of each
Series are "fundamental policies" of each Series, which means that they may not
be changed without a majority vote of shareholders of the affected Series.
Except for these fundamental policies, all investment policies and practices
described in this Prospectus and in the Statement of Additional Information are
not fundamental, meaning that the Board of Trustees may change them without
shareholder approval.
MULTIPLE ALLOCATION SERIES
The investment objective of the Multiple Allocation Series is to seek the
highest total return, consisting of capital appreciation and current income,
consistent with the preservation of capital. The Series seeks to achieve this
objective through investment in debt and equity securities and the use of cer-
tain sophisticated investment strategies and techniques. The Portfolio Manager
for the Series is Zweig Advisors Inc.
In seeking to maximize total return, the Series will follow an asset allocation
strategy contemplating shifts (which may be frequent) among a wide range of
investments, market sectors and cash and cash equivalents. The Series' invest-
ments will be designed to maximize total return during all economic and
financial
19
<PAGE>
environments, consistent with the preservation of capital. The Portfolio Manager
seeks to reduce the risks associated with investing in debt and equity securit-
ies by using market timing techniques developed by Dr. Martin E. Zweig, the
President of the Portfolio Manager, and his staff. The extent of the Series'
investment in debt and equity securities will be determined primarily on the
basis of such market timing techniques, but such techniques cannot eliminate the
risk of investment in debt and equity securities.
The Series will invest up to 60% of its total assets in U.S. Government secur-
ities, including mortgage- and asset-backed securities, and investment grade
debt securities of domestic and foreign issuers (generally those rated Baa or
better by Moody's Investor Services, Inc. ("Moody's") or BBB or better by
Standard & Poor's Ratings Group ("Standard & Poor's"), and up to 50% of its
total assets in equity securities, including common and preferred stocks, con-
vertible debt securities, and warrants. If the Portfolio Manager deems stock
market conditions to be favorable or debt market conditions to be uncertain or
unfavorable, a substantially higher percentage but generally not more than 60%
of the Series' total assets may be invested in such equity securities. If, how-
ever, the Portfolio Manager believes that the stock market investment environ-
ment is uncertain or unfavorable and justifies a defensive position, then the
Series may decrease its investments in equity securities and increase its
investments in debt securities and/or money market instruments. During periods
when the Portfolio Manager believes an overall defensive position is advis-
able, greater than 50% (and under certain circumstances perhaps all) of the
Series' total assets may be invested in money market instruments and cash. The
Portfolio Manager expects that the Series will be fully invested in debt and
equity securities only when the Portfolio Manager believes that there is very
low risk in the respective debt and stock markets.
Furthermore, if the Portfolio Manager believes that inflationary or monetary
conditions warrant a significant investment in companies involved in gold
operations, the Series may invest up to 10% of its total assets in the equity
securities of companies exploring, mining, developing, producing, or distribut-
ing gold or other precious metals. The Series may invest in issuers located in
any part of the world. The Portfolio Manager believes that the securities of
companies involved in gold operations may offer protection against inflation and
monetary instability. The Series may also invest in the securities of other
companies primarily engaged in the exploration, mining, processing, fabrication,
or distribution of other natural resources/hard assets, including minerals and
metals such as silver, platinum, uranium, strategic metals, diamonds, coal, oil,
and phosphates, but the Series expects that such investments would be secondary
to investments in companies involved in gold operations as protection against
inflation and monetary instability. Investment in gold and other natural
resources presents risks because the prices of gold and such other resources may
fluctuate substantially over short periods of time. See "Description of
Securities and Investment Techniques-Investment in Gold and Other Precious
Metals" and "Hard Asset Securities" for more information on these securities.
The Portfolio Manager will determine the extent of the Series' investment in
debt and equity securities, primarily on the basis of various debt and equity
market timing techniques developed by Dr. Martin Zweig (Ph.D. in Finance) and
his staff. The debt market timing techniques incorporate various indicators,
including the momentum of bond prices, short-term interest rate trends, infla-
tion indicators and general economic and liquidity indicators, as well as other
market indicators and statistics which the Portfolio Manager believes tend to
point to significant trends in the overall performance and the risk of the debt
markets. The equity market timing techniques incorporate general market indica-
tors, including interest rate and monetary analysis, market sentiment indica-
tors, price and trading volume statistics, and measures of valuation, as well
as other market indicators and statistics which the Portfolio Manager believes
tend to point to significant trends in the overall performance and the risk of
the stock market. There is no assurance that these debt or equity market timing
techniques will eliminate the risks of debt and equity investments, correctly
predict market trends, or enable the Series to achieve its investment objective.
The Series may use various investment strategies and techniques when the Port-
folio Manager determines that such use is appropriate in an effort to meet the
Series' investment objective including: writing "covered" listed put and call
equity options, including options on stock indexes, and purchasing such options
such that premiums paid at time of purchase on listed put and call options
shall not exceed 2% of net assets; purchasing and selling stock index, interest
rate, gold, and other futures contracts; purchasing options on stock index
futures contracts and futures contracts based upon other financial instruments;
investing in
20
<PAGE>
securities of "special situation" companies, "gold operations" companies;
foreign equity securities; purchasing foreign government securities not in
excess of 10% of the value of its total assets; entering into foreign currency
transactions and options and forward contracts on foreign currencies; entering
into repurchase agreements or reverse repurchase agreements; investing up to 10%
of net assets in illiquid securities; and lending portfolio securities to
brokers, dealers, banks, or other recognized institu- tional borrowers of
securities. The debt and equity components of the Series' portfolio may include
such investments.
The maturities of the debt securities in the Series' portfolio will vary based
in large part on the Portfolio Manager's expectations of future changes in
interest rates using the Portfolio Manager's own internal research and debt
market timing techniques. The primary consideration in choosing among bonds is
managing risk related to changes in interest rate levels. A bond's duration
measures its sensitivity to changes in interest rates (interest rate risk). The
longer the duration, the greater the bond's price movement will be as interest
rates change. The Portfolio Manager manages the duration of the Series' port-
folio, or interest rate risk, by altering the Series' mix of short-, medium-,
and long-term bonds, or by buying or selling interest rate futures contracts,
and also by actively using money market and cash instruments. Over time, the
duration will vary depending on the Portfolio Manager's interest rate outlook.
However, on average, the duration of the portfolio should be consistent with an
intermediate duration when all bonds and cash held in the portfolio are looked
at in aggregate. The Portfolio Manager expects that the equity portion of the
Series' portfolio will be widely diversified by both industry and the number of
issuers. The Portfolio Manager expects that the majority of the stocks in the
Series' portfolio will be selected on the basis of a proprietary computer-driven
stock selection model that evaluates and ranks higher dividend yield stocks. The
Portfolio Manager will consider, from a list of approximately 1,500 of the most
liquid stocks, approximately 750 stocks with the highest dividend yields. The
Portfolio Manager will then use, for the selection of stocks, a proprietary
computer-driven stock selection model that evaluates and ranks such higher divi-
dend yield stocks on the basis of various factors, which may include earnings
momentum, earnings growth, price-to-book value, price-to-earnings, price-to-cash
flow, cash flow trend, payout ratio trend and other market measurements. Such
stock selection model may evolve or be replaced by other stock selection tech-
niques intended to achieve the Series' objective.
From time to time the Series may invest in companies that are determined by the
Portfolio Manager to represent a "special situation." A special situation
reflects securities which are expected to be accorded favorable or unfavorable
market recognition within a reasonably estimable period of time, at an
appreciated or depreciated value, respectively, solely by reason of a develop-
ment particularly or uniquely applicable to the issuing company. Developments
that may create special situations include, among others: a buyout; expected
market recognition of asset value; asset reorganization; recapitalization,
tender offer or merger; material litigation; technological breakthrough; and
new management or management policies. However, since the situations may not
develop as anticipated, e.g., a tender offer may be successfully defended
against or a merger may fall through, the Series could incur losses.
The Series may make short sales of securities. The Series may make short sales
to offset a potential decline in a long position or a group of long positions,
or if the Series' Portfolio Manager believes that a decline in the price of a
particular security or group of securities is likely as a result of an unfavor-
able "special situation" or other reasons. The Portfolio Manager expects that,
even during normal or favorable market conditions, the Series may make short
sales in an attempt to maintain portfolio flexibility and facilitate the rapid
implementation of investment strategies if the Portfolio Manager believes that
the price of a particular security or group of securities is likely to decline.
The Series may not exceed a total of 25% of net assets in short sales, but this
amount is decreased by the amount the Series has borrowed. Short sales of un-
listed securities may not exceed 10% of net assets. The Series will not make
short sales of more than 2% of net assets in any one issuer or more than 2% of
the outstanding class of shares of any one issuer. For additional information,
see "Description of Securities and Investment Techniques-Short Sales."
The Series may from time to time increase its ownership of securities above the
amounts otherwise possible by borrowing from banks on an unsecured basis and in-
vesting the borrowed funds. The Series may borrow, from banks only, up to 10%
of its total net assets, but may borrow up to 25% for temporary purposes (such
21
<PAGE>
as redemptions). In connection with permissible borrowings the Series may
transfer as collateral securities owned by the Series.
FULLY MANAGED SERIES
The Fully Managed Series' investment objective is to earn, over the long-term,
a high total investment return, consistent with the preservation of capital and
prudent investment risk. It seeks to achieve this objective by investing
primarily in common stocks. The Series may also invest in fixed income secur-
ities and money market instruments to preserve its principal value during un-
certain or declining market conditions. The Series' strategy is based on the
premise that, from time to time, certain asset classes are more attractive long-
term investments than others. Total investment return consists of current
income, including dividends, interest and discount accruals, and capital
appreciation. Current income will be an important component of the Series'
effort to maximize total return. The Portfolio Manager for the Series is T.
Rowe Price Associates, Inc.
The Portfolio Manager expects that equity securities generally will constitute
25% to 85% of the Series' overall portfolio, and that the equity portfolio will
be widely diversified by number of issuers. The Portfolio Manager expects that
investment opportunities generally will be sought among securities of large-
capitalization, established companies, although securities of smaller, less well
known companies may also be selected. The Series may invest up to 25% of its
total assets in preferred stock.
In selecting investments for the Series, the Portfolio Manager uses a
"valuation" discipline to identify stocks whose prospects for price apprecia-
tion, over time, are believed to exceed the risk of loss of market value.
Through this process, a security's current market value is analyzed relative to
each of the following: the company's assets, such as natural resources and real
estate; the company's replacement cost of plant and equipment; the company's
consumer or commercial franchises, such as well recognized trademarks or estab-
lished brand names; and the company's earnings or growth potential. The Port-
folio Manager also seeks to identify securities that have been over-discounted
due to adverse operating results, deteriorating economic or industry conditions,
or unfavorable publicity. By investing after the adverse conditions are reflect-
ed in the price of the company's securities, the risks associated with such out-
of-favor investments may be limited. The utilization of this contrarian approach
may result in investment selections which are counter to those of most
investors.
It is anticipated that debt securities, including convertible bonds, may often
constitute between 25% and 50% of the Series' overall portfolio. Debt securities
purchased by the Series may be of any maturity. It is anticipated that the
weighted average maturity of the debt portfolio generally will be between four
and ten years, but may be shorter or longer. The Portfolio Manager may invest up
to 5% of the Series' assets, measured at the time of investment, in debt
securities that are rated below investment grade or, if not rated, of equivalent
quality. See "High Yield Bonds" in this Prospectus.
The balance of the Series' portfolio will generally be invested in the following
money market instruments which have remaining maturities not exceeding one year:
(i) obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (ii) negotiable certificates of deposit, bankers' accept-
ances and fixed time deposits and other obligations of domestic banks (includ-
ing foreign branches) that have more than $1 billion in total assets at the
time of investment and are members of the Federal Reserve System or are examined
by the Comptroller of the Currency or whose deposits are insured by the Federal
Deposit Insurance Corporation; (iii) commercial paper rated at the date of pur-
chase in the two highest rating categories; and (iv) repurchase agreements. The
Series also may invest in short-term U.S. dollar-denominated obligations of
foreign banks (including U.S. branches) at the time of purchase, if such banks
have more than $1 billion in total assets.
To maximize potential return, the Portfolio Manager may utilize the following
investment methods: writing "covered" listed put and call equity options, in-
cluding options on stock indexes, and purchasing such options; purchasing and
selling, for hedging purposes, stock index, interest rate, and other futures
contracts, and purchasing options on such futures; purchasing warrants and pre-
ferred and convertible preferred stocks; entering into repurchase agreements and
reverse repurchase agreements; lending portfolio securities to brokers, dealers,
banks, or other recognized institutional borrowers of securities; purchasing
restricted securities; purchasing securities of foreign issuers, with up to 20%
of total net assets invested in foreign
22
<PAGE>
equities; entering into forward currency contracts and currency exchange trans-
actions for hedging purposes; and borrowing from banks to purchase securities.
The Series will not engage in short sales of securities other than short sales
"against the box." The Series may invest up to 10% of its net assets in
illiquid securities. See "Description of Securities and Investment Techniques"
for further discussion of these investment methods.
LIMITED MATURITY BOND SERIES
The Limited Maturity Bond Series' primary investment objective is to seek the
highest current income consistent with low risk to principal and liquidity. As a
secondary objective, the Series also seeks to enhance its total return through
capital appreciation when market factors, such as falling interest rates and
rising bond prices, indicate that capital appreciation may be available without
significant risk to principal. The Portfolio Manager for the Series is ING
Investment Management, LLC.
The Series pursues its objectives primarily by investing in a diversified port-
folio of limited maturity debt securities. These are short-to-intermediate-term
debt securities with actual remaining maturities of seven years or less, and
other debt securities with special features (e.g., puts, variable or floating
coupon rates, maturity extension arrangements, mortgage pass-throughs, etc.)
producing price characteristics similar to those of short-to-intermediate-term
debt securities. Generally, the Series' portfolio securities are selected from
as many as ten sectors of the fixed income market, each representing a different
type of fixed income investment. The ten sectors are as follows:
(i) U.S. Treasury obligations;
(ii) U.S. Government agency and instrumentality securities;
(iii) repurchase agreements with respect to U.S. Treasury obligations and
U.S. Government agency and instrumentality securities;
(iv) asset-backed securities, including mortgage-backed securities issued or
guaranteed by U.S. Government agencies or collateralized by U.S.
Treasury obligations or U.S. Government agency securities, mortgages
pooled by high quality financial institutions, and other asset-backed
securities representing pools of receivables unrelated to mortgage
loans;
(v) banking industry obligations, including certificates of deposit, time
deposits, and bankers' acceptances issued by commercial banks;
(vi) savings industry obligations, including certificates of deposit and
time deposits issued by savings and loan associations;
(vii) corporate debt securities;
(viii) corporate commercial paper, consisting primarily of unsecured notes
with maturities of nine months or less issued to finance short-term
credit needs;
(ix) variable or floating rate securities, the coupon rates of which vary
with a designated money market index; and
(x) foreign securities denominated in U.S. dollars.
For additional information as to the characteristics and risks of investments in
several of these sectors, see the "Description of Securities and Investment
Techniques" in this Prospectus.
The Portfolio Manager conducts a continuing review of sector yields and other
information. These data are analyzed in light of market conditions and trends
in order to determine which investment sectors offer the best values on a total
return basis. Where the yield of a sector exceeds that of comparable U.S.
Treasury obligations, the excess yield or "premium" is analyzed to determine
whether and to what extent it reflects additional risk in that sector. During
periods that yield differentials available in the non-governmental sectors do
not appear to justify the additional risks involved, the Series will invest more
heavily in U.S. Treasury obligations and U.S. Government agency and instrument-
ality securities.
23
<PAGE>
Ordinarily, the Series' portfolio will include securities from five or more of
the investment sectors. The Series will not invest more than 25% of its total
assets in a single industry. And the Series will not invest more than 10% of
its total assets in foreign government securities.
After the sectors for investment have been chosen, individual securities are
selected from within these sectors on the basis of yield, creditworthiness, and
liquidity. The Series will invest in corporate debt securities and variable or
floating rate securities only if such securities are rated Baa or better by
Moody's or BBB or better by Standard & Poor's, or, if not rated by Moody's or
Standard & Poor's, if the Portfolio Manager determines that they are of
equivalent quality. The Series will invest in corporate commercial paper only
if rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by Standard & Poor's, or,
if not rated by Moody's or Standard & Poor's, if the Portfolio Manager deter-
mines that the commercial paper is of equivalent quality. For additional infor-
mation, see "Appendix 1: Description of Bond Ratings" in the Statement of
Additional Information.
The Series seeks to reduce risk, increase income, and preserve or enhance total
return by actively managing the maturity of its portfolio in light of market
conditions and trends. When, in the opinion of the Portfolio Manager, market
indicators point to higher interest rates and lower bond prices, average
maturity generally will be shortened. When falling interest rates and rising
bond prices are indicated, a longer average portfolio maturity generally can
be expected.
During periods of rising or falling interest rates, the Series may also seek to
hedge all or a part of its portfolio against related changes in securities
prices by buying or selling interest rate futures contracts and options thereon.
Such a strategy involves using the contracts as a maturity management device
that reduces risk and preserves total return while the Series is restructuring
its portfolio in response to the changing interest rate environment. For infor-
mation on such contracts, see "Description of Securities and Investment Tech-
niques."
The dollar-weighted average maturity of the Series' portfolio will not exceed
five years, and, in periods of rapidly rising interest rates, may be shortened
to one year or less. For these purposes, (i) the maturity of mortgage-backed
securities is determined on an "expected life" basis, (ii) variable or floating
rate securities are deemed to mature at the next interest rate adjustment date,
and (iii) debt securities with put features are deemed to mature at the next put
exercise date. Positions in interest rate futures contracts (long or short) will
be reflected in average portfolio maturity on the basis of the maturities of the
securities underlying the futures contracts. The Series may invest in futures
contracts, purchase and sell interest rate futures contracts, and purchase and
write options on such futures contracts.
The Series may invest in private placements of debt securities. These invest-
ments may be considered to be restricted securities. The Series may invest up
to 10% of its net assets in these and other illiquid securities. The Series may
also purchase securities (including mortgage-backed securities such as GNMA,
FNMA, and FHLMC Certificates) on a when-issued basis. A description of these
techniques and their attendant risks is contained in the section of this Pros-
pectus entitled "Description of Securities and Investment Techniques."
The Series may write covered call options and purchase put options, and purchase
call and write put options to close out options previously written by the
Series. The Series may engage in options transactions to reduce the effect of
price fluctuations of securities owned by the Series (and involved in the
options) on the Series' net asset value per share. This Series will purchase put
options involving portfolio securities only when the Portfolio Manager believes
that a temporary defensive position is desirable in light of market conditions,
but does not desire to sell the portfolio security. The Series will engage only
in short sales "against the box."
The Series may borrow up to 10% of the value of its net assets, and for
temporary purposes may increase this amount to 25%. The Series may transfer as
collateral securities owned by the Series in connection with permissible
borrowings.
HARD ASSETS SERIES
The Hard Assets Series, formerly the Natural Resources Series, seeks long-term
capital appreciation. The Series seeks this objective by investing primarily in
"Hard Asset Securities," that is equity and debt securities of companies engaged
in the exploration, development, production, management, and distribution
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of hard assets such as gold and other precious metals, strategic metals,
minerals, oil, natural gas, coal and real estate investment trusts. The Series
may also invest in equity and debt securities of companies which themselves in-
vest in companies engaged in these activities. Although current income may be
realized, it is not an investment objective; it is anticipated that the Series
will realize only a nominal amount of current income. This Series is non-diver-
sified. See "Diversification" for risks associated with investing in a non-
diversified Series. The Portfolio Manager for the Series is Van Eck Associates
Corporation.
The Portfolio Manager believes securities of some natural resources companies,
sometimes referred to as "hard asset" companies, offer an opportunity to protect
wealth against eroding monetary values. The Portfolio Manager believes that
recent history indicates that the policies of many governments, particularly
persistent budget deficits and high rates of money supply growth, have, at
times, had long-term inflationary consequences. Generally, during periods of
accelerating inflation, the prices of many natural resources equity securities
sometimes have risen faster than the rate of inflation; and the Portfolio
Manager believes that they will continue to do so in the future. During such
periods, interest rates and yields on industrial shares have risen, causing the
prices of fixed income and industrial equity securities to decline. The Port-
folio Manager anticipates that inflation and the price of certain natural re-
sources will continue on a long-term upward trend with alternating cycles as
credit is over expanded and subsequently tightened. Since the market action of
shares of companies engaged in certain natural resources activities may move
against or independently of the market trend of industrial shares, the addition
of such shares to an overall portfolio may increase the return and reduce the
fluctuations of such portfolio. There can be no assurance that an increased rate
of return or reduced fluctuation of a portfolio will be achieved. Thus, an
investment in the Series' shares should be considered part of an overall invest-
ment program rather than a complete investment program.
The Series may invest in securities of foreign issuers, including securities of
South African issuers in which up to 35% of its assets may be invested. The
relative amount of the Series' investment in foreign issuers will change from
time to time, and the Series is subject to certain guidelines for diversifica-
tion of foreign security investments. Investments by the Series in securities of
foreign issuers may involve particular investment risks. See "Description of
Securities and Investment Techniques" in this Prospectus. Political and social
conditions in South Africa, due to former segregation policies of the South
African government and unsettled political conditions prevailing in South
Africa and neighboring countries, may pose certain risks to the Series' invest-
ments. If aggravated by local or international developments, such risks could
have an adverse effect on investments in South Africa, including the Series'
investments and, under certain conditions, on the liquidity of the Series' port-
folio and its ability to meet shareholder redemption requests.
The Series will normally invest at least 65% of its total assets in Hard Asset
Securities. Hard Asset Securities include equity securities of "Hard Asset
Companies" and securities, including structured notes, whose value is linked to
the price of a Hard Asset commodity or a commodity index. See "Description of
Securities and Investment Techniques-Indexed Securities and Structured Notes."
The term "Hard Asset Companies" includes companies that are directly or in-
directly (whether through supplier relationships, servicing agreements or other-
wise) engaged to a significant extent in the exploration, development, produc-
tion or distribution of one or more of the following (together "Hard Assets"):
(a) precious metals, (b) ferrous and non-ferrous metals, (c) gas, petroleum,
petrochemicals or other hydrocarbons, (d) forest products, (e) real estate
including real estate investment trusts, and (f) other basic non-agricultural
commodities. Under normal market conditions, the Series will invest at least
5% of its assets in each of the first five sectors listed previously. The Series
has a fundamental policy of concentrating in such industries and up to 50% of
the Series' assets may be invested in any one of the above sectors. Since the
Series may so concentrate, it may be subject to greater risks and market fluc-
tuations than other investment companies with more diversified portfolios. See
"Hard Asset Securities."
Although the Series will not invest in real estate directly, it may invest up to
50% of its assets in equity securities of real estate investment trusts
("REITs") and other real estate industry companies or companies with substantial
real estate investments. As a result, the Series may be subject to certain
risks associated with direct ownership of real estate and with the real estate
industry in general. For a description of these risks, see "Description of
Securities and Investment Techniques-Real Estate Securities."
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The Series reserves the right to invest up to 10% of its net assets, taken at
market value at the time of investment, in gold bullion and coins and other
precious metal (silver and platinum) bullion. The Series may invest over 25% of
its assets in securities of companies predominantly engaged in gold operations,
although the Series will not invest in any such security or in gold bullion and
coins if, after such acquisition, more than 50% of the Series' assets (taken at
market value at the time of such investment) would be invested in securities of
companies predominantly engaged in gold operations and gold bullion and coins.
The Series may also invest directly in other commodities including petroleum and
strategic metals. The Series may invest up to 35% of the value of its total
assets in: (a) common stock of companies not engaged in natural resources
activities, (b) investment-grade corporate debt securities, (c) obligations
issued or guaranteed by U.S. or foreign governments, (d) money market instru-
ments, and (e) repurchase agreements.
During periods of less favorable economic and/or market conditions, the Series
may make substantial investments for temporary defensive purposes in obligations
of the U.S. Government, certificates of deposit, bankers acceptances, investment
grade commercial paper, asset-backed securities, mortgage-backed securities and
repurchase agreements.
The Series may engage in short sales, and may lend portfolio securities. The
Series may not exceed a total of 25% of net assets in short sales, but this
amount is decreased by the amount the Series has borrowed. Short sales of
unlisted securities may not exceed 10% of net assets. The Series will not make
short sales of more than 2% of net assets in any one issuer or more than 2% of
the outstanding class of shares of any one issuer. The Series may purchase
securities on margin. The Series may borrow up to 10% of the value of its net
assets and for temporary purposes may increase this amount to 25%. The Series
may also invest up to 5% of its assets at the time of purchase in warrants, and
may purchase or sell put or call options on securities and foreign currencies.
The Series may purchase and sell interest rate, gold, and other futures con-
tracts. The Series may also purchase and sell stock index futures contracts and
other futures contracts based upon other financial instruments, and purchase
options on those contracts. These techniques are described in "Description of
Securities and Investment Techniques."
The Portfolio Manager believes the Series may offer a hedge against inflation,
particularly commodity price driven inflation. However, there is no assurance
that rising commodity (or other hard asset) prices will result in higher earn-
ings or share prices for the Hard Asset Companies in the Series. Hard Asset
Companies' equities are affected by many factors, including movements in the
overall stock market. Inflation may cause a decline in the overall stock
market, including the stocks of Hard Asset Companies.
The Series seeks investment opportunities in the world's major stock, bond and
commodity markets. The Series may invest in securities issued anywhere in the
world, including the United States. There is no limitation or restriction on
the amount of assets to be invested in any one country. There is no limitation
on the amount the Series can invest in emerging markets. The Series may pur-
hase securities in any foreign country, developed or underdeveloped. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments. Global investing
involves economic and political considerations not typically applicable to the
U.S. markets. See "Description of Securities and Investment Techniques."
The equity securities in which the Series may invest include common stocks;
preferred stocks (either convertible or non-convertible); rights; warrants;
direct equity interests in trusts; partnerships; joint ventures and other
incorprated entities or enterprises; "when-issued" securities; "partly paid"
securities (securities paid for over a period of time), restricted securities,
and special classes of shares available only to foreign persons in those markets
that restrict ownership of certain classes of equity to nationals or residents
of that country. These securities may be listed on the U.S. or foreign secur-
ities exchanges or traded over-the-counter. Direct investments are generally
considered illiquid and will be aggregated with other illiquid investments for
purposes of the 10% limitation on illiquid investments. The Series may invest
in certain derivatives. Derivatives are instruments whose value is "derived"
from an underlying asset. Derivatives in which the Series may invest include
futures contracts, forward contracts, options, swaps and structured notes and
other similar securities as may become available in the market. These instru-
ments offer certain opportunities and are subject to additional risks that
are described in the "Description of Securities and
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<PAGE>
Investment Techniques." In addition, the Series may invest in futures and
forward contracts and options on precious metals and other Hard Assets. See
"Investment in Gold and Other Precious Metals."
Since the Series may invest substantially all of its assets in securities of
companies engaged in natural resources/hard asset activities and may concentrate
in securities of companies engaged in gold operations, the Series may be subject
to greater risks and market fluctuations than other investment companies with
more diversified portfolios. These risks are described further in "Description
of Securities and Investment Techniques."
Investors should be aware that some of the instruments in which the Series may
invest, such as structured or indexed notes, swaps and foreign securities, may
be subject to periods of extreme volatility and illiquidity and may be difficult
to value. Despite these risks, some of which are noted above, these instruments
may offer unique investment opportunities. These techniques are described in
"Description of Securities and Investment Techniques."
REAL ESTATE SERIES
The primary investment objective of the Real Estate Series is capital apprecia-
tion. Current income is a secondary objective. The Series seeks these objectives
primarily through investment in publicly traded equity securities of companies
in the real estate industry that are listed on national exchanges or the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). Securities are selected for long-term investment. It is generally
not the policy of the Series to purchase securities merely for short-term gain,
although there may be a limited number of short-term transactions. The Portfolio
Manager for the Series is EII Realty Securities, Inc.
The Series will invest not less than 65% of its total assets in common and
preferred stocks and convertible preferred securities of companies which have
at least 50% of the value of their assets in, or which derive at least 50% of
their revenues from, the ownership, construction, management, or sale of
residential, commercial, or industrial real estate, which include listed equity
REITs which own properties, and listed mortgage REITs which make short-term
construction and development mortgage loans or which invest in long-term
mortgages or mortgage pools. The Series may invest more than 25% of its total
assets in any of the foregoing sectors of the real estate industry. The Series'
assets may, however, be invested in money market instruments and U.S. Government
securities if, in the opinion of the Portfolio Manager, market conditions
warrant a temporary defensive investment strategy.
The Series may invest up to 35% of its total assets in equity, debt, or conver-
tible securities of issuers whose products and services are related to the real
estate industry, such as manufacturers and distributors of building supplies,
and up to 25% of its total assets in financial institutions which issue or
service mortgages, such as savings and loans or mortgage bankers. The Series
also may invest in the securities of companies unrelated to the real estate
industry but which have significant real estate holdings believed to be under-
valued relative to the price of the companies' securities.
The Series may invest in mortgage- and asset-backed securities, repurchase
agreements, restricted securities up to 10% of its assets in illiquid
securities, may purchase and write put and call options on securities it covered
or secured, and may purchase or sell options to effect closing transactions, and
on stock indexes, and may borrow up to 10% of its net assets, and for temporary
purposes may borrow up to 25% of its assets for such items as large redemptions.
The Series will engage only in short sales "against the box."
In addition to the common and preferred stocks described above, the Series may
invest up to 35% of its total assets in securities believed by the Portfolio
Manager to be undervalued and have capital appreciation potential, including up
to 5% of total assets in warrants and other rights to purchase securities,
bonds, convertible securities, and publicly traded limited partnerships listed
on national securities exchanges or NASDAQ. The Series may invest up to 5% of
its total assets in bonds, convertible securities, and limited partnerships
traded on the Toronto or London Stock Exchanges. The Series may also invest up
to 20% of its assets, measured at the time of investment, in high yield conver-
tible bonds that are rated below investment grade by one of the primary rating
agencies (or if not rated, deemed to be of equivalent quality by the Portfolio
Manager). See " Description of Securities and Investment Techniques-High Yield
Bonds."
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There are risks inherent in the Series' investment policies. These risks are
discussed in "Description of Securities and Investment Techniques."
ALL-GROWTH SERIES
The All-Growth Series' investment objective is capital appreciation. The Port-
folio Manager for the Series is Pilgrim Baxter & Associates, Ltd.
Under normal market conditions, the Series will invest at least 65% of its total
assets in common stocks of mid-range capitalization companies that, in the Port-
folio Manager's opinion, have an outlook for strong growth in earnings and
potential for capital appreciation. At the time of purchase, such companies
will have market capitalizations in the range of $400 million to $4 billion.
The Portfolio Manager also will consider the diversity of industries in choosing
investments for the Series. See "Description of Securities and Investment
Techniques-Foreign Securities."
Normally, the Series will be invested substantially in equity securities traded
in the United States or Canada on registered exchanges or in the over-the-
counter market. Additionally, the Series may invest in ADRs and foreign
securities. The equity securities in which the Series may invest are common
stocks, warrants and rights to purchase common stocks, and debt securities
(including mortgage- and asset-backed securities) and preferred stock conver-
tible into common stocks. The Series may invest in convertible debt securities
rated investment grade by a nationally recognized statistical rating organiza-
tion ("NRSRO") (i.e., within one of the four highest rating categories). See
"Description of Securities and Investment Techniques."
While it has no present intention to do so, the Series reserves the right to
invest up to 10% of its net assets in restricted securities and securities of
foreign issuers traded outside the United States and Canada and, for hedging
purposes only, to purchase and sell options on stocks and stock indexes. The
Series also may invest up to 15% of its net assets in illiquid securities, but
will not invest more than 5% of its net assets in restricted securities that the
Portfolio Manager determines are illiquid based on guidelines approved by the
Board of Trustees of the Trust. The Series may invest in repurchase agreements.
The Series may make short sales of securities but may not exceed a total of 25%
of net assets in short sales. Short sales of unlisted securities may not exceed
10% of net assets. The Series will not make short sales of more than 2% of net
assets in any one issuer or more than 2% of the outstanding class of shares of
any one issuer. The Series may from time to time increase its ownership of
securities above the amounts otherwise possible by borrowing from banks on an
unsecured basis and investing the borrowed funds. The Series will borrow only
up to 10% (for temporary purposes 25%) of its total net assets. In connection
with permissible borrowings the Series may transfer as collateral securities
owned by the Series. For discussion of the risks involved in these investment
techniques see "Description of Securities and Investment Techniques."
Securities will be sold when the Portfolio Manager believes that anticipated
appreciation is no longer probable, when alternative investments offer superior
appreciation prospects, or when the risk of a decline in the market price is too
great. Because of its policy with respect to sales of investments, the Series
may from time to time realize short-term gains and losses. the Series will
likely have somewhat greater volatility than the stock market in general, as
measured by the Standard & Poor's 500 Composite Stock Price Index ("S&P 500
Index"). Because the investment techniques employed by the Portfolio Manager
are responsive to near-term earnings trends of the companies whose securities
are owned by the Series, portfolio turnover can be expected to be fairly high.
CAPITAL APPRECIATION SERIES
The investment objective of the Series is to generate long-term capital growth.
In seeking this objective, the Series will invest primarily in common stock and
preferred stock that will be allocated between two categories of stocks des-
cribed below and referred to as "components." The components in which the Series
will invest are the growth component and the value component. The Portfolio
Manager for the Series is Chancellor LGT Asset Management, Inc.
The Portfolio Manager will allocate the Series' assets between the two compon-
ents in an effort to maximize the potential for achieving the Series' overall
objective. The Portfolio Manager may allocate the assets between the components
in its discretion in any proportion that it deems appropriate. The Portfolio
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Manager is free to allocate the Series' assets such that, at any point in time,
there may be little or no assets allocated to one of the components. The Port-
folio Manager may select a particular security for inclusion in both components,
provided that it meets the criteria for each component. The Portfolio Manager
will select securities for each component based upon the criteria for each
component as described below:
The Growth Component. The securities eligible for this component are those that
the Portfolio Manager believes have the following characteristics: they have
stability and quality of earnings and positive earnings momentum; have dominant
competitive positions; and demonstrate above-average growth rates as compared to
published S&P 500 Index earnings projections.
The Value Component. Securities eligible for this component are those that the
Portfolio Manager regards as fundamentally undervalued, i.e., securities selling
at a discount to asset value and securities with a relatively low price/earnings
ratio. The securities eligible for this component may include real estate stock
such as securities of publicly owned companies that, in the Portfolio Manager's
judgment, offer an optimum combination of current dividend yield, expected
dividend growth, and discount to current real estate value. Real estate stocks
may also include those issued by companies in industries related to real estate,
including companies that own, develop or provide services to income-producing
real estate, and commercial and community developers, and may include real
estate investment trusts and "land rich" companies, which are companies that are
not in the real estate industry but that have significant real estate related
assets and whose stock price may be affected by the real estate assets they
hold.
If the Portfolio Manager believes that the expected market return for equity
securities over a twelve-month period is less than a premium over U.S. Treasury
bills that equity securities have historically provided, the Series may, as a
temporary defensive measure, invest up to 40% of its assets in money market
instruments and short-term investment grade debt securities until market
conditions improve. Investment grade securities are generally those rated at
least Baa by Moody's or BBB by Standard & Poor's, or unrated securities that the
Portfolio Manager determines are of equivalent quality. The Series from time to
time may invest in money market instruments to the extent appropriate, pending
investment in the types of securities in which the Series normally invests or in
anticipation of redemptions. Money market instruments in which the Series may
invest include U.S. Government securities, and certificates of deposit, bankers'
acceptances, time deposits, commercial paper and other U.S. dollar-denominated
obligations of domestic and foreign corporations, and repurchase agreements.
To maximize potential return, the Portfolio Manager may use the following
investment methods:
The Series may purchase and write put and call options on securities and stock
indexes. The Series may also write "covered" listed put and call options with
respect to 25% or less of its net assets, may purchase protective puts up to 25%
of its net assets and may purchase calls and puts other than protective that are
up to 5% of its assets. The Series may purchase and sell interest rate, gold and
other futures contracts. The Series may also purchase and sell stock index
futures contracts and other futures contracts based upon other financial instru-
ments and purchases options on those contracts. The Series may enter into
repurchase agreements; purchase illiquid securities up to 10% of net assets and
borrow up to 10% of its assets from banks to purchase securities. The Series may
also invest up to 20% of its total assets in Depositary Receipts. See "Descrip-
tion of Securities and Investment Techniques" for further discussion of these
investment methods.
The Series may engage in short sales and short sales "against the box." The
Series may not exceed a total of 25% of net assets in short sales, but this
amount is decreased by any amount the Series has borrowed. Short sales of un-
listed securities may not exceed 10% of net assets and for temporary purposes
25% of net assets. The Series will not make short sales of more than 2% of net
assets in any one issuer or more than 2% of the outstanding class of shares of
any one issuer. For additional information, see "Description of Securities and
Investment Techniques-Short Sales."
RISING DIVIDENDS SERIES
The investment objective of the Rising Dividends Series is capital appreciation.
Dividend income is a secondary objective. The Portfolio Manager for the Series
is Kayne Anderson Investment Management, LLC.
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In seeking these objectives, the Series normally invests at least 80% of its net
assets in equity securities of companies determined to be of high quality by the
Portfolio Manager that meet the following four criteria:
(i) Consistent dividend increases-The company should have increased its
dividends in seven of the last ten years.
(ii) Substantial dividend increases-The company should have at least
doubled its dividends in the last ten years.
(iii) Reinvested profits-The company should have reinvested at least 35%
of its profits annually.
(iv) Under-leveraged balance sheet-The company should have less than 35%
of its total capitalization in long-term debt.
In selecting equity securities, the Portfolio Manager screens databases to
create a universe of companies that meet the preceding criteria. The companies
that have the required attributes are then analyzed from a fundamental perspec-
tive. This research involves study of industry competitive conditions, discus-
sions with company management, spreadsheet analysis and valuation projections.
A proprietary computer model is employed to regularly compare expected rates of
return for each equity security in the universe. The final decision to invest in
an equity is based on the Portfolio Manager's appraisal of the company's fund-
amental strengths and relative attractiveness from an expected return stand-
point. The individual security selection is overlaid with a sector allocation
discipline to avoid over-concentration in any single sector.
It is anticipated that the Series' portfolio will generally contain a minimum of
30-40 issues. It is the policy of the Series that no equity security will be
acquired if, after its acquisition, more than 15% of the Series' total assets
would be invested in any one industry or more than 5% would be invested in any
one issuer. The Portfolio Manager does not intend to invest any of the Series'
assets in securities that, at the time of investment, it believes to be
illiquid, but may hold up to 15% of its assets in these securities. The Port-
folio Manager periodically monitors the Series' equity securities to assure they
meet the four criteria. A security will generally be sold when it reaches its
target price, when negative changes occur in either the company or its industry,
or when any one or more of the four criteria are no longer satisfied. A 15%
price decline in a stock, relative to the market, triggers a re-appraisal. The
reappraisal may result in a sale, but each buy/sell decision is made on the
merits and fundamentals of that particular situation. There may from time to
time be other equity securities in the Portfolio which meet most, but not all,
of the criteria, but which the Portfolio Manager deems a suitable investment.
Equity securities are deemed to include common stocks, securities convertible
into common stocks, or rights or warrants to subscribe for or purchase common
stocks.
The Portfolio Manager may enter into forward currency contracts and currency ex-
change transactions for hedging purposes. During those times when equity
securities that meet the Portfolio Manager's investment criteria cannot be
found, for temporary defensive purposes or pending longer-term investment, the
Series may invest any amount of its assets in short-term fixed income securities
or in cash or cash equivalents. The Series may invest in mortgage- and asset-
backed securities, enter into repurchase agreements, invest in foreign equity
securities, including Depositary Receipts, make short sales "against the box,"
and may borrow up to 10% of its net assets, and for temporary purposes may bor-
row up to 25% of its assets for such items as large redemptions.
EMERGING MARKETS SERIES
The investment objective of the Emerging Markets Series is long-term capital
appreciation. The Series seeks this objective by investing primarily in equity
securities of companies that are considered to be in emerging market countries.
Income is not an objective, and any production of current income is considered
incidental to the objective of growth of capital. The Series will be diversified
by issuer, and normally will be invested in companies located in at least six
different emerging market countries. The investment philosophy of the Series is
to attempt to capitalize upon emerging capital markets in developing nations and
other nations in which the Portfolio Manager believes that economic and politi-
cal factors are likely to produce above average growth rates. The Portfolio
Manager for the Series is Putnam Investment Management, Inc.
At least 65% of the Series' assets normally will be invested in the equity
securities of issuers in countries that are identified as emerging market
countries in the Morgan Stanley Capital International Emerging
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Markets Free Index or the International Finance Corporation Emerging Market
Index, or a country that the Portfolio Manager otherwise believes is an emerging
market country because it has a developing economy or because its markets have
begun a process of change and are growing in size and/or sophistication.
The Portfolio Manager will allocate the Series' assets for investment in emerg-
ing market countries in its discretion, taking into account economic and polit-
ical factors that may include, among others, relative market valuation, earnings
momentum, supply and demand, the prospects for relative growth among the regions
and the countries therein, expected levels of inflation, governmental policies
influencing business conditions, the outlook for currency relationships, and the
range of alternative opportunities available to international investors. The
Portfolio Manager may determine to change its allocation at any time.
For purposes of allocating the Series' investments, a company will be considered
located in the country in which the company is domiciled, in which it is
primarily traded, from which it derives a significant portion of its revenues,
in which it has 50% more of its assets, or in which a significant portion of its
goods or services are produced. Equity securities that may be acquired include
common stock and other securities with equity characteristics, including pre-
ferred stock, rights and warrants, convertible securities, which may consist of
debt securities or preferred stock that may be converted into common stock or
that carry the right to purchase common stock, and shares of investment
companies.
In selecting securities in emerging market countries, the Portfolio Manager
seeks undervalued investment opportunities for growth. The Portfolio Manager
uses a disciplined, value-oriented investment philosophy that generally stresses
the inherent value of companies under examination, usually based upon the medium
term outlook for such companies. Securities may be considered for the company's
fundamental financial characteristics, its earnings potential, or the potential
for economic development of the country or region in which the company is
located.
To the extent that the Series' assets are not invested in emerging market equity
securities (including securities convertible into equity securities), the
remainder of the Series' assets, which normally will not exceed 35% of net
assets, may be invested in equity securities of issuers in developed economies;
debt securities issued or guaranteed by corporate or governmental issuers in an
emerging market country, including Brady Bonds, or an industrialized country,
including the United States; in bank deposits or bank obligations, including
certificates of deposit, time deposits, and bankers' acceptances; mortgage-
backed securities of banks in emerging market or industrialized countries, in-
cluding the United States; instruments issued by international development
agencies; and in high-quality money market instruments, including commercial
paper and other short-term corporate debt obligations of issuers in industrial-
ized and emerging market countries. The Portfolio Manager may invest up to 10%
of the Series' assets, measured at the time of investment, in debt securities
that are rated below investment grade or, if not rated, of equivalent quality.
See "High Yield Bonds" in this Prospectus and "Debt Securities" in the Statement
of Additional Information. The Series may borrow up to 10% of the value of its
net assets, and may increase its borrowing to 25% of its assets for temporary
purposes.
The Emerging Markets Series may invest in debt obligations ("sovereign debt") of
governmental issuers in emerging market countries and industrialized countries.
The sovereign debt issued or guaranteed by certain emerging market governmental
entities and corporate issuers in which the Series may invest potentially in-
volves a high degree of risk and may be deemed the equivalent in terms of
quality to high risk, low rated securities (i.e., high yield bonds) and subject
to many of the same risks as such securities. Similarly, the Series may have
difficulty disposing of certain of these debt obligations because there may be a
thin trading market for such securities. In the event a governmental issuer de-
faults on its obligations, the Series may have limited legal recourse against
the issuer or guarantor, if any. Remedies must, in some cases, be pursued in the
courts of the defaulting party itself, and the ability of the holder of foreign
government debt securities to obtain recourse may be subject to the political
climate in the relevant country. The issuers of the government debt securities
in which the Series may invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which has led to de-
faults on certain obligations and the restructuring of certain indebtedness. See
"Description of Securities and Investment Techniques-High Yield Bonds" in this
Prospectus and "Debt Securities-Sovereign Debt" in the Statement of Additional
Information.
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For temporary defensive purposes, the Series may decrease its investment in
emerging market country equity securities, and may invest to a significant
degree in debt securities and bank and money market instruments as described
above. In addition, the Series may invest significantly in such securities after
receipt of new monies.
Most of the foreign securities in which the Series invests will be denominated
in foreign currencies. The Series may engage in foreign currency transactions in
anticipation of or to protect itself against fluctuations in currency exchange
rates in relation to the U.S. dollar. Such foreign currency transactions may in-
clude forward foreign currency contracts, currency exchange transactions on a
spot (i.e., cash) basis, put and call options on foreign currencies, and foreign
exchange futures contracts. For a description on these techniques, see "Descrip-
tion of Securities and Investment Techniques-Foreign Currency Transactions" in
this Prospectus.
The Emerging Markets Series may use various investment strategies and techniques
to meet its investment objective, including purchasing options on securities and
writing (selling) secured put and covered call options on securities, securities
indexes, foreign securities and foreign currencies. The Series may purchase and
sell interest rate, stock indexes and other financial instrument futures con-
tracts, and may purchase and write options on such futures contracts. The
Series may engage in options transactions not only on U.S. domestic markets but
also exchanges and other markets outside the United States. When deemed
appropriate by the Portfolio Manager, the Series may enter into reverse repur-
chase agreements and may invest cash balances in repurchase agreements and money
market instruments in an amount necessary to maintain liquidity, in an amount to
meet expenses or for day-to-day operating purposes. The Series may invest in
shares of other investment companies when the Portfolio Manager believes such
investment is an appropriate method of investing in one or more emerging capital
markets. The Series may invest in up to 15% of its assets in illiquid
securities. The Series may invest in warrants and restricted securities. The
Series may make short sales "against the box." These investment techniques are
described under the heading "Description of Securities and Investment Tech-
niques" in this Prospectus and in the Statement of Additional Information.
Investment in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. For a
description of these risks, see "Description of Securities and Investment Tech-
niques-Foreign Securities" in this Prospectus. Investment in emerging markets
countries presents risks in a greater degree than, and in addition to, those
presented by investment in foreign issuers in general. A number of emerging
market countries restrict, to varying degrees, foreign investment in stocks. Re-
patriation of investment income, capital, and proceeds of sales by foreign in-
vestors may require governmental registration and/or approval in some emerging
market countries. A number of the currencies of developing countries have
experienced significant declines against the U.S. dollar in recent years, and
devaluation may occur subsequent to investments in those currencies by the
Series. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain emerging market countries.
Many of the emerging securities markets are relatively small, have low trading
volumes, suffer periods of relative illiquidity, and are characterized by
significant price volatility. There is a risk in emerging market countries that
a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure, national-
ization, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country) or creation of government monopolies,
any of which may have a detrimental effect on the Series' investment. In
addition, in many countries there is less publicly available information about
issuers than is available in the United States. Foreign companies are not
generally subject to uniform accounting, auditing, and financial reporting stan-
dards, and auditing practices and requirements may not be comparable to those
applicable to U.S. companies. Further, the Series may encounter difficulties or
be unable to pursue legal remedies or obtain judgments in foreign courts.
VALUE EQUITY SERIES
The investment objective of the Value Equity Series is capital appreciation.
Dividend income is a secondary objective. At least 65% of the Series' assets
normally will be invested in equity securities. In seeking these objectives,
the Series invests primarily in equity securities of U.S. and foreign issuers
which, when
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purchased, meet quantitative standards believed by the Portfolio Manager to
indicate above average financial soundness and high intrinsic value relative
to price. The Portfolio Manager for the Series is Eagle Asset Management, Inc.
The Portfolio Manager employs a three-step process to purchase securities
identified as possible value opportunities:
(i) He screens the universe of equity securities for five key variables:
low price-to-book, price-to-sales, and price-to-earnings ratios; and
attractive relative dividend yield and relative price-to-earnings
ratios.
(ii) He performs in-depth fundamental research on individual companies
including their industry outlook and trends, strategy, management
strength, and financial stability.
(iii) He employs a discounted free cash flow model to identify securities
which are trading at a significant discount to their estimated
intrinsic value.
In selecting equity securities, the Portfolio Manger identifies stocks trading
at a significant discount to their underlying intrinsic value and which fall
into one of three basic categories:
"Pure" Value Opportunities: Stocks which appear attractive relative to the
broader market.
"Relative" Value Opportunities: Stocks which trade at a discount to the val-
uation parameters that the market has historically applied to them or their peer
group.
"Event-driven" Value Opportunities: Stocks with which a realized or anticipated
event may trigger recognition of the underlying value.
Companies selected for investment will, under normal circumstances, typically
meet at least one of the above criteria at the time of investment.
The Series may also invest in debt securities, and intends to limit those
investments to U.S. Government and agency obligations. The portion of total
assets invested in common stocks and debt securities will vary based on the
availability of common stocks meeting the selection criteria and the Portfolio
Manager's judgment of the investment merit of common stocks relative to debt
securities. The Series may also invest cash balances in certificates of deposit,
bankers' acceptances, high quality commercial paper, U.S. Treasury bills, re-
purchase agreements, and other money market instruments. During adverse market
conditions, as a temporary investment posture, the Series may invest signifi-
cantly in the debt securities and money market instruments described above.
The Series may invest without limit in equity securities of foreign issuers, in-
cluding ADRs. However, it is expected that under ordinary circumstances, the
Series will not invest more than 25% of its assets in foreign issuers, measured
at the time of investment. For a description of the risks associated with in-
vestment in foreign issuers, see "Description of Securities and Investment
Techniques-Foreign Securities" in this Prospectus.
It is the policy of the Series that no equity security will be acquired, if,
after its acquisition, more than 25% of the Series' total assets would be in-
vested in any one industry or more than 5% would be invested in any one issuer.
The Portfolio Manager periodically monitors the Series' equity securities to
assure they meet the selection criteria. A security may be sold from the port-
folio when (i) its price approaches its intrinsic value; (ii) a temporary,
dramatic, short-term price appreciation occurs; (iii) its fundamentals deter-
iorate; or (iv) its relative attractiveness diminishes. From time to time, the
Series may invest in equity securities that do not meet the selection criteria
described above, but which the Portfolio Manager deems a suitable investment.
For purposes of the Series' investment policies, equity securities are deemed to
include common stocks, securities convertible into common stocks, options on
equity securities, and rights or warrants to subscribe for or purchase common
stocks. The Series may also invest in Standard & Poor's Depositary Receipts
("SPDR's"), which are publicly traded interests in a unit investment trust that
invests in substantially all of the common stocks in the S&P 500 Index. SPDR's
are not subject to the Series' policy that no more than 5% of the Series' total
assets be invested in any one issuer. The Series may make short sales "against
the box."
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The Series may also invest in restricted or illiquid securities; however, the
Portfolio Manager can not invest more than 15% of the Series' assets in secur-
ities that, at the time of investment, it believes to be illiquid. In pursuing
its investment objective or for hedging purposes, the Series may, but is not
required to, utilize the following investment techniques: writing "covered"
listed put and call options with respect to 25% of its net assets, may purchase
protective puts up to 25% of its net assets and may purchase calls and puts
other than protective puts up to 5% of its assets; entering into stock index,
interest rate, foreign currency and other financial futures contracts, and
purchasing options on such futures contracts; entering into forward currency
contracts, currency exchange transactions; purchasing mortgage-backed securities
and asset-backed securities; and borrowing from banks up to 10% of its net
assets to purchase securities and up to 25% of its net assets for temporary
purposes. See "Description of Securities and Investment Techniques" for a dis-
cussion of the risks associated with these investment techniques.
STRATEGIC EQUITY SERIES
The investment objective of the Strategic Equity Series is to achieve capital
appreciation. The Series seeks to achieve this objective primarily through in-
vestment in equity securities. The amount of the Series' assets allocated to
equities shall vary from time to time to seek positive investment performance
from advancing equity markets and to reduce exposure to equities when the Port-
folio Manager believes that their risk/reward characteristics are less attrac-
tive. The Series' investments in equities include both (i) stocks that the Port-
folio Manager selects for their "growth" characteristics (which may include
positive earnings momentum and above average earnings growth rates), and
(ii) stocks that the Portfolio Manager selects for their "income" characteris-
tics (which may include above average dividend yields and favorable dividend
growth). To the extent not invested in equity securities, the Series' assets
generally will be invested in money market instruments or held as cash. The
Series may also invest in debt securities for defensive purposes. The Portfolio
Manager for the Series is Zweig Advisors Inc.
The extent of the Series' investment in equity securities will be based prim-
arily on various equity market timing techniques developed by Dr. Martin Zweig
and his staff. The equity market timing techniques incorporate general market
indicators, including interest rate and monetary analysis, market sentiment in-
dicators, price and trading volume statistics, and measures of valuation, as
well as other market indicators and statistics which the Portfolio Manager be-
lieves tend to point to significant trends in the overall performance and the
risk of the stock market. For example, if the Portfolio Manager believes that
the stock market investment environment is uncertain or unfavorable and just-
ifies a defensive position, then the Series may decrease its investments in
equity securities and increase its investments in money market instruments.
During periods when the Portfolio Manager believes an overall defensive position
is advisable, greater than 50% (and under certain circumstances perhaps all) of
the Series' total assets may be invested in money market instruments (including
mortgage- and asset-backed securities) and cash. The Portfolio Manager expects
that the Series will be fully invested in equity securities only when the Port-
folio Manager believes that there is very low risk in the stock market. There is
no assurance that these equity market timing techniques will eliminate the risks
of equity investments, correctly predict market trends, or enable the Series to
achieve its investment objective.
The Portfolio Manager expects that the equity portion of the Series' portfolio
will generally be divided equally between "growth" stocks and "income" stocks.
Although the Portfolio Manager expects to invest assets proportionately in
growth stocks and income stocks in order to maintain an approximately equal
weighting between growth stocks and income stocks, the relative weighting of
growth stocks and income stocks will fluctuate from time to time because of,
among other things, changes in the market value of the growth stocks and income
stocks. The Portfolio Manager may change the relative weightings of the growth
stocks and income stocks from time to time if the Portfolio Manager determines
that such changes are appropriate in view of the then existing market condi-
tions. The equity portion of the Series' portfolio will be widely diversified by
the number of issues. The Portfolio Manager expects that the majority of the
stocks in the Series' portfolio will be selected on the basis of proprietary
computer-driven stock selection models that evaluate and rank approximately
1,500 of the most liquid stocks on the basis of various factors, which may in-
clude earnings momentum, earnings growth, price-to-book value, price-to-earn-
ings, price-to-cash flow, cash flow trend, price momentum, earnings estimate
revisions, payout ratio trend and other market measurements. Such stock selec-
tion models may evolve or be replaced by other stock selection techniques in-
tended to achieve the Series' objective. The Series may invest up to 15% of its
assets in illiquid securities.
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The Series may use various investment strategies and techniques when the Port-
folio Manager determines that such use is appropriate in an effort to meet the
Series' investment objective including: buying "covered" listed put equity op-
tions and writing "covered" listed call equity options, including options on
stock indexes; short sales of securities; purchasing and selling stock index and
other financial instrument futures contracts, and purchasing options on such
futures contracts; purchasing and selling interest rate, gold and other futures
contracts; investing no more than 10% of its assets in securities of foreign
issuers; entering into foreign currency transactions and options of foreign
currencies; entering into repurchase agreements or reverse repurchase agree-
ments; and lending portfolio securities to brokers, dealers, banks, or other
recognized institutional borrowers of securities. The Series may not exceed a
total of 25% of net assets in short sales, but this amount is decreased by any
amount the Series has borrowed. Short sales of unlisted securities may not ex-
ceed 10% of net assets. The Series will not make short sales of more than 2% of
net assets in any one issuer or more than 2% of the outstanding class of shares
of any one issuer. The Series may from time to time increase its ownership of
securities by borrowing from banks on an unsecured basis and investing the bor-
rowed funds. The Series may borrow up to 10% of its net assets to purchase
securities and up to 25% of its net assets for temporary purposes. In connect-
ion with permissible borrowings the Series may transfer as collateral securities
owned by the Series.
SMALL CAP SERIES
The investment objective of the Series is long-term capital appreciation. The
Series invests at least 65% of its total assets in equity securities of com-
panies that, at the time of purchase of the securities, have total market cap-
italization within the range of companies included in the Russell 2000 Growth
Index ("Russell Index") or the S&P Small-Cap 600 Index ("S&P 600 Index"), up-
dated quarterly. Both indexes are broad indexes of small capitalization stocks.
As of December 31, 1997, the range of market capitalization companies in the
Russell Index was $20 million to $2.97 billion; the range of the market
capitalization the companies in the S&P 600 Index at that date was $21 million
to $2.93 billion. The combined range as of that date was $20 million to $2.97
billion. The Series may invest up to 35% of its total assets in equity
securities of companies that, at the time of purchase, have total market cap-
italization outside this combined range, and in excess of that amount (up to
100% of its assets) during temporary defensive periods. The Portfolio Manager
for the Series is Fred Alger Management, Inc.
The Series seeks to achieve its objective by investing in equity securities,
such as common or preferred stocks, or securities convertible into or exchange-
able for equity securities, including warrants and rights. The Series will
invest primarily in companies whose securities are traded on domestic stock ex-
changes or in the over-the-counter market. These companies may still be in the
developmental stage, may be older companies that appear to be entering a new
stage of growth owing to factors such as management changes or development of
new technology, products or markets, or may be companies providing products or
services with a high unit volume growth rate. In order to afford the Series the
flexibility to take advantage of new opportunities for investments in accordance
with its investment objective, it may hold up to 15% of its net assets in money
market instruments and repurchase agreements and in excess of that amount (up to
100% of its assets), after receipt of new monies, or during temporary defensive
periods. This amount may be higher than that maintained by other funds with
similar investment objectives.
Investing in smaller, newer issuers generally involves greater risk than invest-
ing in larger, more established issuers. Companies in which the Series is likely
to invest may have limited product lines, markets or financial resources and may
lack management depth. The securities of such companies may have limited market-
ability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Accordingly, an investment in the Series may not be appropriate for all
investors.
The Series may use the following various investment strategies and techniques
when the Portfolio Manager determines that such use is appropriate in an effort
to meet the Series' investment objective: short sales of securities; investing
in securities of foreign issuers (including Depositary Receipts), including not
more than 10% of its total assets in foreign government securities denominated
in U.S. dollars; engaging in futures contracts, including purchasing and sell-
ing stock index futures contracts and interest rate futures contracts; purchas-
ing and selling options on securities; purchasing options on stock index
futures contracts, interest rate futures contracts, and foreign currency
futures contracts; entering into foreign currency transactions
<PAGE>
and options on foreign currencies; entering into repurchase and reverse repur-
chase agreements; purchase mortgage- and asset-backed securities; and lending
portfolio securities to brokers, dealers, bankers, and other recognized insti-
tutional borrowers of securities. The Series may not exceed a total of 25% of
net assets in short sales, but this amount is decreased by any amount the
Series has borrowed. The Series may from time to time increase its ownership of
securities above the amounts otherwise possible by borrowing from banks on an
unsecured basis and investing the borrowed funds. The Series may borrow up to
10% of its net assets to purchase securities and up to 25% of its net assets
for temporary purposes. In connection with permissible borrowings the Series
may transfer as collateral securities owned by the Series. The Series may
invest up to 15% of its net assets in illiquid securities.
MANAGED GLOBAL SERIES
The investment objective of the Managed Global Series is to seek capital
appreciation. Current income is only an incidental consideration in selecting
investments for the Series. This Series is non-diversified. See "Diversifica-
tion" for risks associated with investing in a non-diversified Series. The Port-
folio Manager for the Series is Putnam Investment Management, Inc.
In seeking capital appreciation, the Series employs a global investment strategy
of investing primarily in common stocks traded in securities markets throughout
the world. The Series may at times invest up to 100% of its assets in securi-
ties principally traded in securities markets outside the United States, and
will under normal market conditions, invest at least 65% of its assets in at
least three different countries, one of which may be the United States. See
"Description of Securities and Investment Techniques-Foreign Securities." In un-
usual market circumstances where the Portfolio Manager believes that foreign in-
vesting may involve undue risks, 100% of the Series' assets may be invested in
the United States. The Series may hold a portion of its assets in cash or money
market instruments.
In considering equity securities, the Series will not limit its investments to
any particular type of company. It may invest in companies, large or small,
whose earnings are believed to be in a relatively strong growth trend, or in
companies in which significant further growth is not anticipated but whose
securities are thought to be undervalued. It may invest in small and relative-
ly less well known companies. Investing in securities of smaller, less well
known companies may present greater opportunities for capital appreciation, but
may also involve greater risks. The Series may not acquire the securities of
any issuer if, as a result of such investment, more than 10% of the Series'
assets would be invested in the securities of any issuer, except that this
restriction does not apply to U.S. Government securities or foreign government
securities, and the Series may not invest in a security if, as a result of such
investment, it would hold more than 10% of the outstanding voting securities of
any one issuer.
At times the Portfolio Manager may judge that conditions in the international
securities markets make pursuing the Series' basic investment strategy incon-
sistent with the best interests of shareholders. The Portfolio Manager may
temporarily use alternative strategies, primarily designed to reduce fluctua-
tions in the value of the Series' assets. In implementing these "defensive"
strategies the Series may invest in some of the following securities.
The Series may invest solely in equity securities traded primarily in U.S.
markets. Also the Series may add preferred stocks to the portfolio. The Series
may purchase mortgage- and asset-backed securities.
The Series may invest in the following debt instruments (includes debt
instruments convertible into equity): (i) fixed-income instruments issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities ("U.S.
Government securities"); (ii) obligations issued or guaranteed by a foreign
government or any of its political subdivisions, authorities, agencies, or in-
strumentalities, or by supranational entities ("foreign government securities");
and (iii) debt securities of domestic or foreign issuers. Debt securities pur-
chased by the Series may be of any maturity. It is at the discretion of the
Portfolio Manager.
The Series may invest in money market instruments. These include the following:
(i) short-term U.S. Government securities; (ii) short-term foreign government
securities; (iii) certificates of deposit, time deposits, bankers' acceptances,
and short-term obligations of banks and other depository institutions, both U.S.
and foreign, that have total assets of at least $10 billion (U.S.); and (iv)
commercial paper and other short-term corporate obligations.
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The Managed Global Series may use various investment strategies and techniques
to meet its investment objective, including purchasing options on securities and
writing (selling) secured put and covered call options on securities and securi-
ties indexes. The Managed Global Series will only purchase and write options
that are standardized and traded on a U.S. or foreign exchange or board of
trade, or for which an established over-the-counter market exists. The Series
may purchase and sell futures contracts, and may purchase and write options on
such futures contracts, including stock index futures contracts. The Series may
enter into foreign currency contracts and currency exchange contracts on a spot
basis. When deemed appropriate by the Portfolio Manager, the Series may enter
into reverse repurchase agreements and may invest cash balances in repurchase
agreements and money market instruments in an amount necessary to maintain
liquidity, in an amount to meet expenses or for day-to-day operating purposes.
The Series may invest in shares of other investment companies when the Portfolio
Manager believes such investment is an appropriate method of investing in one or
more emerging capital markets. The Series may invest in restricted securities
and warrants. The Series may not invest more than 15% of its net assets in
illiquid securities. The Series may not exceed a total of 25% of net assets in
short sales, but this amount is decreased by any amount the Series has borrowed.
The Series may borrow up to 10% of its net assets to purchase securities and up
to 25% of its net assets for temporary purposes. In connection with permissible
borrowings the Series may transfer as collateral securities owned by the Series.
For more information about the Series' investments including the risks of such
investing see, "Description of Securities and Investment Techniques." The Port-
folio Manager may invest in the above or any other securities that it considers
consistent with the defensive strategies of the Series. It is impossible to
predict when or for how long the Series will use such alternative strategies.
The Series is the successor for accounting purposes to the Managed Global
Account of Separate Account D of Golden American. For additional information,
see "Other Information-The History of the Managed Global Series."
GROWTH OPPORTUNITIES SERIES
The investment objective of the Growth Opportunities Series is capital apprecia-
tion. The Series invests at least 65% of its total assets in equity securities
of domestic companies. Although such companies may be of any size, the Series
targets companies having total market capitalizations of $1 billion or more.
The Portfolio Manager for the Series is Montgomery Asset Management, LLC.
The Series emphasizes investments in common stock, but also invests in other
types of equity securities and equity derivative securities. Current income from
dividends, interest and other sources is only incidental. The Series also may
invest up to 35% of its total assets in highly rated debt securities. The Port-
folio Manager does not expect the Series to be consistently fully invested in
equity securities. During periods that the Portfolio Manager deems appropriate,
the Series may take a more defensive position and be significantly invested in
cash and cash equivalents.
The Series seeks growth at a reasonable value, identifying companies with sound
fundamental value and potential. The Series selects its investments based on a
combination of quantitative screening techniques and fundamental analysis. The
Series initially identifies a universe of investment candidates by screening
companies based on changes in rates of growth and valuation ratios such as price
to sales, price to earnings and price to cash flows. Through this process, the
Series seeks to identify rapidly growing companies with reasonable valuations
and accelerating growth rates, or having low valuations and initial signs of
growth. The Series then subjects these companies to a rigorous fundamental
analysis, focusing on balance sheets and income statements; company visits and
discussions with management; contact with industry specialists and industry
analysts; and review of the competitive environments
The Series may enter into repurchase agreements and reverse repurchase agree-
ments, invest in U.S. Government securities, up to 10% of its total net assets
in investment companies, leverage transactions, lend portfolio securities up to
30% of Series total net assets, when-issued and forward commitment securities,
purchase and write put and call options on securities, currencies and stock
indexes, write "covered" call and put options. The Series will not enter into
any options on securities, securities indexes or currencies or related options
(including options on futures) if the sum of the initial margin deposits and
premiums paid for any such option or options would exceed 5% of its total
assets, and it will not enter into
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options with respect to more than 25% of its total assets. The Series may borrow
up to one-third of its total net assets, but will not purchase any securities
while borrowings exceed 10%. The Series may invest in interest rate futures
contracts or related options only if the sum of initial margin deposits on
futures contracts, related options (including options on securities, securities
indexes and currencies) and premiums paid for any such related options would
exceed 5% of its total assets. The Series does not purchase futures contracts
or related options if, as a result, more than one-third of its total assets
would be so invested. The Series may invest in forward currency contracts, but
may not invest more than one-third of its assets in such contracts. The Series
may invest in futures, swaps, including equity swaps, and options on futures.
The Series may invest up to 15% of its total net assets in illiquid securities.
See "Description of Securities and Investment Techniques."
DEVELOPING WORLD SERIES
The investment objective of the Developing World Series is capital appreciation.
The Series invests at least 65% of its total assets in equity securities of
emerging market companies. Under normal conditions, the Series maintains
investments in at least six "emerging market countries" at all times and invests
no more than 35% of its total assets in any one such country. Emerging market
countries are those countries having economies and markets generally considered
by the World Bank or the United Nations to be emerging or developing. The
Portfolio Manager for the Series is Montgomery Asset Management, LLC.
The Portfolio Manager currently regards the following to be emerging market
countries: Latin America (Argentina, Brazil, Chile, Colombia, Costa Rica,
Jamaica, Mexico, Peru, Trinidad and Tobago, Uruguay, Venezuela); Asia
(Bangladesh, China, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam); southern and
eastern Europe (Czech Republic, Greece, Hungary, Poland, Portugal, Russia,
Turkey); the Middle East (Israel, Jordan); and Africa (Egypt, Ghana, Ivory
Coast, Kenya, Morocco, Nigeria, South Africa, Tunisia, Zimbabwe). In the future,
the Series may invest in other emerging market countries.
The Series uses a proprietary, quantitative asset allocation model created by
the Portfolio Manager. This model employs mean-variance optimization, a process
used in developed markets based on modern portfolio theory and statistics.
Mean-variance optimization helps determine the percent of assets to invest in
each country to maximize expected returns for a given risk level. The Series'
aims are to invest in those countries that are expected to have the highest
risk/reward trade-off when incorporated into a total portfolio context. This
"top-down" country selection is combined with "bottom-up" fundamental industry
analysis and stock selection based on original research and publicly available
information and company visits.
The Series invests primarily in common stock but also may invest in other types
of equity and equity derivative securities. It may invest up to 35% of its total
assets in debt securities, including up to 5% in debt securities rated below
investment grade. See "Description of Securities and Investment Techniques" and
the Statement of Additional Information.
The Series may invest in certain debt securities issued by the governments of
emerging market countries that are, or may be eligible for, conversion into
investments in emerging market companies under debt conversion programs
sponsored by such governments. If such securities are convertible to equity
investments, the Series deems them to be equity derivative securities.
The Series may enter into repurchase agreements, purchase U.S. Government
securities, invest up to 10% of its total net assets in investment companies,
leverage transactions, lend portfolio securities up to 30% of Series total net
assets, invest in when-issued and forward commitment securities, purchase and
write put and call options on securities, currencies and stock indexes, and
write "covered" call and put options. The Series will not enter into any op-
tions' transactions on securities, securities indexes or currencies or related
options (including options on futures) if the sum of the initial margin deposits
and premiums paid for any such option or options would exceed 5% of its total
assets, and it will not enter into options' transactions with respect to more
than 25% of its total assets. The Series may borrow up to one third of its
total net assets, but will not purchase any securities while borrowings exceed
10%. The Series may invest in interest rate futures contracts or related op-
tions only if the sum of initial margin deposits on futures contracts, related
options (including options on securities, securities indexes and currencies) and
premiums paid for any such related options would not exceed 5% of its total
assets. The Series does not purchase futures
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contracts or related options if, as a result, more than one-third of its total
assets would be so invested. The Series may invest in forward currency con-
tracts, but may not invest more than one-third of its assets in such contracts.
The Series may invest in futures, swaps, including equity swaps, and options on
futures. The Series may invest up to 15% of its total net assets in illiquid
securities. See "Description of Securities and Investment Techniques."
MID-CAP GROWTH SERIES
The investment objective of the Mid-Cap Growth Series is to obtain long-term
growth of capital. The Series seeks to achieve its objective by investing
primarily in equity securities of companies with medium market capitalization
which the Portfolio Manager believes have above-average growth potential under
normal circumstances. The Portfolio Manager for the Series is Massachusetts
Financial Services Company.
Medium market capitalization companies whose market capitalization falls within
the range of the Standard and Poor's MidCap 400 Index (the "S&P MidCap 400
Index") at the time of the Series' investment. The S&P MidCap 400 Index is a
widely recognized, unmanaged index of mid-cap common stock prices. Companies
whose capitalization falls outside this range after purchase continue to be
considered medium-capitalization companies for purposes of the Series'
investment policy. The Series may, but is not required to, purchase securities
of companies included in the S&P MidCap 400 Index. This index is only used by
the Series for purposes of defining the market capitalization range of companies
in which the Series will invest; it is not intended to be used a benchmark
against which the Series compares its investment performance. As of December
31, 1997, the S&P MidCap 400 Index included companies with capitalizations of
between $213 million and $13.7 billion.
The Series may invest a significant portion of its assets in over-the-counter
("OTC") securities. OTC securities are any securities that are not listed on
a major exchange but are, as their name implies, traded over the counter.
Investing in securities traded on the OTC securities market can involve greater
risk than is customarily associated with investing in securities traded on the
New York or American Stock Exchanges since OTC securities are generally
securities of companies which are smaller or newer than those listed on the New
York or American Stock Exchange. For example, these companies often have limited
product lines, markets, or financial resources, may be dependent for management
on one or a few key persons, and can be more susceptible to losses. Also, their
securities may be thinly traded (and therefore have to be sold at a discount
from current prices or sold in small lots over an extended period of time), may
be followed by fewer investment research analysts and may be subject to wider
price swings and thus may create a greater risk of loss than securities of
larger capitalization or established companies. Shares of the Series, therefore,
are subject to greater fluctuation in value than shares of a conservative equity
fund or of a growth fund which invests entirely in proven growth stocks.
Therefore, the Series is intended for long-term investors who understand and can
accept the risks entailed in seeking long-term growth of capital. The Series is
not meant to provide a vehicle for those who wish to play short-term swings in
the stock market. Accordingly, an investment in shares of the Series should not
be considered a complete investment program. Each prospective purchaser should
take into account his investment objectives as well as his other investments
when considering the purchase of shares of the Series.
Debt securities of issuers in which the Series may invest include all types of
long- or short-term debt obligations, such as bonds, debentures, notes and
commercial paper. Fixed income securities in which the Series may invest include
securities in the lower rating categories of recognized rating agencies (and
comparable unrated securities). Fixed income securities in which the Series may
invest also include zero-coupon bonds, deferred interest bonds and bonds on
which the interest is payable in kind. Such investments involve certain risks.
See "Description of Securities and Investment Techniques-High Yield Bonds" and
the Statement of Additional Information for a discussion of the risks involved
in investing in lower-rated securities.
When the Portfolio Manager believes that investing for temporary defensive pur-
poses is appropriate, such as during periods of unusual market conditions, part
or all of the Series' assets may be temporarily invested in cash (including
foreign currency) or cash equivalent short-term obligations including, but not
limited to, certificates of deposit, commercial paper, short-term notes,
obligations issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities, and repurchase agreements.
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The Series may invest 20% or more of its net assets in foreign securities (not
including American Depositary Receipts ("ADRs"), however, under normal market
conditions, the Series expects to invest less than 35% of its net assets in
foreign securities. The Series may invest up to 10% of its net assets in
emerging markets or countries with limited or developing capital markets.
Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers. (See
"Description of Securities and Investment Techniques-Foreign Securities" and the
Statement of Additional Information for a discussion of the risks involved in
foreign investing.)
The Series may invest in ADRs which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Although ADRs
are issued by a U.S. depository, they are subject to many of the risks of
foreign securities such as changes in exchange rates and more limited infor-
mation about foreign issuers.
The Series may also purchase illiquid or restricted securities (such as private
placements). The Series' may not invest more than 15% of its net assets in
illiquid securities.
The Series is classified as a "non-diversified" investment company as described
above under "Diversification." See "Diversification" for risks associated with
investing in a non-diversified Series.
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Portfolio
Manager is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Series changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of Series turnover is not a limiting factor
when a change in the Series is otherwise appropriate. Because the Series is
expected to have a Series turnover rate of over 100%, transaction costs incurred
by the Series and the realized capital gains and losses of the Series may be
greater than that of a Series with a lesser turnover rate.
The Series may also enter into repurchase agreements, lend securities, purchase
securities on a "when-issued" or on a "forward delivery" basis (which means that
the securities will be delivered to the Series at a future date usually beyond
customary settlement time), invest in indexed securities (whose value is linked
to foreign currencies, commodities, indexes, or other financial indicators),
enter into mortgage "dollar roll" transactions with selected banks and broker-
dealers, purchase restricted securities, corporate asset-backed securities,
options on securities, options on stock indexes, options on foreign currencies,
futures contracts, options on futures contracts and forward foreign currency
exchange contracts.
All of the Series investments and transactions described in this section are
described in greater detail in the Description of Securities and Investment
Techniques section of this Prospectus and in the Statement of Additional
Information.
RESEARCH SERIES
The investment objective of the Research Series is to provide long-term growth
of capital and future income. The portfolio securities of the Research Series
are selected by a committee of investment research analysts. This committee
includes investment analysts employed not only by the Portfolio Manager but also
by a wholly owned international subsidiary of the Portfolio Manager. The Series'
assets are allocated among industries by the analysts acting together as a
group. Individual analysts are then responsible for selecting what they view as
the securities best suited to meet the Series' investment objective within their
assigned industry responsibility. The Portfolio Manager for the Series is
Massachusetts Financial Services Company.
The Series' policy is to invest a substantial proportion of its assets in the
common stocks or securities convertible into common stocks of companies believed
to possess better than average prospects for long-term growth. A smaller propor-
tion of the assets may be invested in bonds, short-term obligations, preferred
stocks or common stocks whose principal characteristic is income production
rather than growth. Such securities may also offer opportunities for growth of
capital as well as income. In the case of both growth stocks and income issues,
emphasis is placed on the selection of progressive, well-managed companies. The
Series' debt investments, if any, may consist of investment grade securities
(e.g., rated Baa or better by Moody's Investor Services, Inc. ("Moody's") or BBB
or better by Standard & Poor's Ratings Group ("Standard & Poor's")) and, with
respect to no more than 10% of its net assets, securities in the lower rated
categories (e.g., rated BA or
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lower by Moody's or BB or lower by Standard & Poor's or Fitch IBCA, Inc.
("Fitch")), or securities which the Portfolio Manager believes to be of similar
quality to these lower rated securities (commonly known as "junk bonds"). For a
description of bond ratings, see the Statement of Additional Information. It is
not the Series' policy to rely exclusively on ratings issued by established
credit rating agencies but rather to supplement such ratings with the Portfolio
Manager's own independent and ongoing review of credit quality. The Series'
achievement of its investment objective may be more dependent on the Portfolio
Manager's own credit analysis than in the case of a Series investing in primari-
ly higher quality bonds. From time to time, the Series' management will exercise
its judgment with respect to the proportions invested in growth stocks, income-
producing securities or cash (including foreign currency) and cash equivalents
depending on its view of their relative attractiveness.
The Series may enter into repurchase agreements, make loans of its fixed income
securities, invest in ADRs, invest up to 20% of its net assets in foreign
securities (not including ADRs), invest in emerging markets or countries with
limited or developing capital markets and purchase "Rule 144A securities."
Investing in these type of securities involves certain risks. See "Description
of Securities and Investment Techniques" and the Statement of Additional Inform-
ation for a discussion of the risks involved with investing in the above listed
securities transactions.
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Portfolio
Manager is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Series changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of Series turnover is not a limiting factor
when a change in the Series is otherwise appropriate.
TOTAL RETURN SERIES
The primary investment objective of the Total Return Series is to obtain above-
average income (compared to a Series entirely invested in equity securities)
consistent with the prudent employment of capital. While current income is the
primary objective, the Series believes that there should also be a reasonable
opportunity for growth of capital and income, since many securities offering a
better than average yield may also possess growth potential. Thus, in selecting
securities for its Series, the Series considers each of these objectives. Under
normal market conditions, at least 25% of the Series' assets will be invested in
fixed income securities and at least 40% and no more than 75% of the Series'
assets will be invested in equity securities. The Portfolio Manager for the
Series is Massachusetts Financial Services Company.
The Series' policy is to invest in a broad list of securities, including short-
term obligations. The list may be diversified not only by companies and
industries, but also by type of security. Fixed income securities and equity
securities (which include: common stocks and preferred stocks; securities such
as bonds, warrants or rights that are convertible into stock; and depositary
receipts for those securities) may be held by the Series. Some fixed income
securities may also have a call on common stock by means of a conversion
privilege or attached warrants. The Series may vary the percentage of assets
invested in any one type of security in accordance with the Portfolio Manager's
interpretation of economic and money market conditions, fiscal and monetary
policy and underlying security values. The Series' debt, investments may consist
of both investment grade securities (rated Baa or better by Moody's or BBB or
better by Standard & Poor's, Fitch or Duff & Phelps Credit Rating Co. ("Duff")
and securities that are unrated or are in the lower rating categories (rated BA
or lower by Moody's or BB or lower by Standard & Poor's, Fitch or Duff)
(commonly known as "junk bonds") including up to 20% of its assets in non-
convertible fixed income securities that are in these lower rating categories
and comparable unrated securities. Generally, most of the Series' long-term debt
investments will consist of "investment grade" securities. See the Statement of
Additional Information for a description of these ratings. It is not the Series'
policy to rely exclusively on ratings issued by established credit rating
agencies but rather to supplement such ratings with the Portfolio Manager's own
independent and ongoing review of credit quality.
The Series may also invest in U.S. Government securities, including: (i) U.S.
Treasury obligations, which differ only in their interest rates, maturities and
times of issuance; 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 greater than ten years), all of which are backed by the
full faith and credit of the U.S.
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Government; and (ii) obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, some of which are backed by the full faith and
credit of the U.S. Treasury, e.g., direct pass-through certificates of GNMA;
some of which are supported by the right of the issuer to borrow from the U.S.
Government, e.g., obligations of Federal Home Loan Banks; and some of which are
backed only by the credit of the issuer itself, e.g., obligations of the Student
Loan Marketing Association.
The Series may invest in mortgage pass-through securities. Mortgage pass-through
securities are securities representing interests in "pools" of mortgage loans.
Monthly payments of interest and principal by the individual borrowers on mort-
gages are passed through to the holders of the securities (net of fees paid to
the issuer or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. Payment of principal and interest on some mortgage
pass-through securities (but not the market value of the securities themselves)
may be guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by GNMA); or guaranteed by U.S. Government-
sponsored corporations (such as FNMA or FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by non-govern-
mental issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers). Fixed income securities that the Series may invest in also include
zero-coupon bonds, deferred interest bonds and bonds on which the interest is
payable in kind ("PIK bonds"). See "Description of Securities and Investment
Techniques" for a further discussion of these securities.
The Series may invest in ADRs which are certificates issued by a U.S. depository
(usually a bank), that represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Although ADRs are
issued by a U.S. depository, they are subject to many of the risks of foreign
securities such as changes in exchange rates and more limited information about
foreign issuers.
The Series may invest up to 20% (and generally expects to invest between 5% and
20%) of its net assets in foreign securities (including investments in emerging
markets or countries with limited or developing capital markets) (not including
ADRs). Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers. (See
"Description of Securities and Investment Techniques-Foreign Investments" and
the Statement of Additional Information for a discussion of the risks involved
in foreign investing.)
In order to protect the value of the Series' investments from interest rate
fluctuations, the Series may enter into various hedging transactions, such as
interest rate swaps, and the purchase or sale of interest rate caps, floors and
collars. (See the Statement of Additional Information for information relating
to these transactions including related risks.)
The Series may purchase "Rule 144A securities"; enter into repurchase
agreements; lend portfolio securities; purchase securities on a "when-issued" or
on a "delayed delivery" basis; invest in indexed securities linked to foreign
currencies, indexes, or other financial indicators; enter into mortgage "dollar
roll" transactions; invest a portion of its assets in loan participations and
other direct indebtedness; purchase restricted securities, corporate asset-
backed securities, options on securities, options on stock indexes, options on
foreign currencies, futures contracts, options on futures contracts and forward
foreign currency exchange contracts. See "Description of Securities and Invest-
ment Techniques" for more information regarding these transactions and the risks
associated with them.
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Portfolio
Manager is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Series changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of Series turnover is not a limiting factor
when a change in the Series is otherwise appropriate. Because the Series is
expected to have a Series turnover rate of over 100%, transactions costs incur-
red by the Series and the realized capital gains and losses of the Series may be
greater than that of a Series with a lesser turnover rate.
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GROWTH & INCOME SERIES
The investment objective of the Growth & Income Series is long-term total
return. The Series will pursue this objective primarily by investing in equity
and debt securities, focusing on small- and mid-cap companies that offer the
potential for capital appreciation, current income, or both. The Portfolio
Manager for the Series is Robertson, Stephens & Company Investment Management,
L.P.
The Series will normally invest the majority of its assets in common and pre-
ferred stocks, convertible securities, bonds, and notes. Although the Series
will focus on companies with market capitalizations of up to $3 billion, the
Series intends to remain flexible and may invest in securities of larger com-
panies. The Series may also engage in short sales of securities it expects to
decline in price. The Series may invest a substantial portion of its assets
in securities issued by small, small-cap and mid-cap companies. Such companies
may offer greater opportunities for capital appreciation than larger companies,
but investments in such companies may involve certain special risks. See Des-
cription of Securities and Investment Techniques-Small Companies" for a dis-
cussion of such risks.
The Series may invest in securities principally traded in foreign markets and
may buy or sell foreign currencies and options and futures contracts on foreign
currencies for hedging purposes in connection with its foreign investments. The
Series also may at times invest a substantial portion of its assets in securi-
ties of issuers in developing countries. The Series may at times invest a sub-
stantial portion of its assets in securities traded in the over- the-counter
markets in such countries and not on any exchange, which may affect the
liquidity of the investment and expose the Series to the credit risk of its
counterparties in trading those investments. International investing in
general may involve greater risks than U.S. investments. These risks may be
intensified in the case of investments in emerging markets or countries with
limited or developing capital markets.
The Series may invest without limit in debt securities and other fixed-income
securities. The Series may invest in lower-quality, high yielding debt securi-
ties. Lower-rated debt securities (commonly called "junk bonds") are considered
to be of poor standing and predominantly speculative. The Series may at times
invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. The Series
will not necessarily dispose of a security when its debt rating is reduced below
its rating at the time of purchase, although the Portfolio Manager will monitor
the investment to determine whether continued investment in the security will
assist in meeting the Series' investment objective Such investments involve cer-
tain risks. See "Description of Securities and Investment Techniques."
To hedge against changes in net asset value or to attempt to realize a greater
current return, the Series may use the following investment strategies and
techniques. The Series may buy and sell put and call options; index futures
contracts and options on index futures and on indexes; warrants on foreign
securities indexes; purchase and sell options in the over-the-counter markets
only when appropriate exchange-traded transactions are unavailable and when, in
the opinion of the Portfolio Manager, the pricing mechanism and liquidity of the
over-the-counter markets are satisfactory and the participants are responsible
parties likely to meet their obligations. The Series will not purchase futures
or options on futures or sell futures if, as a result, the sum of the initial
margin deposits on the Series' existing futures positions and premiums paid for
outstanding options on futures contracts would exceed 5% of the Series' assets.
(For options that are "in-the-money" at the time of purchase, the amount by
which the option is "in-the-money" is excluded from this calculation.) The
Series may lend portfolio securities to broker-dealers and may enter into
repurchase agreements.
At times the Series may invest more than 25% of its assets in securities of
issuers in one or more market sectors such as, for example, the technology
sector. A market sector may be made up of companies in a number of related
industries. The Series would only concentrate its investments in a particular
market sector if the Series' Portfolio Manager were to believe the investment
return available from concentration in that sector justifies any additional risk
associated with concentration in that sector. When the Series concentrates its
investments in a market sector, financial, economic, business, and other
developments affecting issuers in that sector will have a greater effect on the
Series than if it had not concentrated its assets in that sector.
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At times, the Series' Portfolio Manager may judge that market conditions make
pursuing the Series' basic investment strategy inconsistent with the best
interests of its shareholders. At such times, the Series' Portfolio Manager may
temporarily use alternative strategies, primarily designed to reduce fluc-
tuations in the values of the Series' assets. In implementing these "defensive"
strategies, the Series may invest in U.S. Government securities, other high-
quality debt instruments, and other securities the Series' Portfolio Manager
believes to be consistent with the Series' best interests.
VALUE + GROWTH SERIES
The investment objective of the Value + Growth Series is capital appreciation.
The Series invests primarily in growth companies with favorable relationships
between price/earnings ratios and growth rates, in sectors offering the poten-
tial for above-average returns. The Portfolio Manager for the Series is
Robertson, Stephens & Company Investment Management, L.P.
In selecting investments for the Series, the primary emphasis of the Portfolio
Manager, is typically on evaluating a company's management, growth prospects,
business operations, revenues, earnings, cash flows, and balance sheet in
relationship to its share price. The Portfolio Manager may select stocks which
it believes are undervalued relative to the current stock price. Undervaluation
of a stock can result from a variety of factors, such as a lack of investor
recognition of (i) the value of a business franchise and continuing growth
potential, (ii) a new, improved or upgraded product, service or business
operation, (iii) a positive change in either the economic or business
condition for a company, (iv) expanding or changing markets that provide a
company with either new earnings direction or acceleration, or (v) a catalyst,
such as an impending or potential asset sale or change in management, that could
draw increased investor attention to a company. The Portfolio Manager also may
use similar factors to identify stocks which it believes to be overvalued and
may engage in short sales of such securities.
The Series may invest a substantial portion of its assets in securities issued
by small companies. Such companies may offer greater opportunities for capital
appreciation than larger companies, but investments in such companies may
involve certain special risks. See "Description of Securities and Investment
Techniques-Small Companies" for a discussion of such risks.
The Series may invest in securities principally traded in foreign markets and
may buy or sell foreign currencies and options and futures contracts on foreign
currencies for hedging purposes in connection with its foreign investments. The
Series also may at times invest a substantial portion of its assets in securi-
ties of issuers in developing countries and securities traded in the over-the-
counter markets in such countries and not on any exchange, which may affect the
liquidity of the investment and expose the Series to the credit risk of its
counterparties in trading those investments. International investing in general
may involve greater risks than U.S. investments. These risks may be intensified
in the case of investments in emerging markets or countries with limited or
developing capital markets. (See "Description of Securities and Investment
Techniques").
The Series may invest in debt securities from time to time if the Portfolio
Manager believes that it might help achieve the Series' objective. The Series
may invest in debt securities to the extent consistent with its investment
policies, although the Portfolio Manager expects that under normal circum-
stances, the Series would not likely invest a substantial portion of its assets
in debt securities. The Series will invest only in securities rated investment
grade (generally securities rated Baa or better by Moody's or BBB or better by
Standard & Poor's) or considered by the Portfolio Manager to be of comparable
quality. Descriptions of the securities ratings assigned by Moody's and
Standard & Poor's are contained in the Appendix of the Statement of Additional
Information. The Series may at times invest in so-called "zero-coupon" bonds
and "payment-in-kind" bonds. See "Descriptions of Securities and Investment
Techniques-Zero-Coupon Bond." The Series will not necessarily dispose of a
security when its debt rating is reduced below its rating at the time of pur-
chase, although the Portfolio Manager will monitor the investment to determine
whether continued investment in the security will assist in meeting the Series'
investment objective.
To hedge against changes in net asset value or to attempt to increase its
investment return the Series may buy and sell: put and call options; futures
contracts; options on futures contracts; index futures contracts and options on
index futures and on indexes; warrants foreign securities indexes; purchase no
more than 25% of the value of its net assets long-term exchange-traded options
called Long-Term Equity Anticipation
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Securities ("LEAPs") and Buy-Write Option Unitary Derivatives ("BOUNDs"); and
options in the over-the-counter markets but only when appropriate exchange-
traded transactions are unavailable and when, in the opinion of the Portfolio
Manager, the pricing mechanism and liquidity of over-the-counter markets are
satisfactory and the participants are responsible parties likely to meet their
obligations. The Series will not purchase futures or options on futures or sell
futures if, a result, the sum of the initial margin deposits on the Series'
existing futures position and premiums paid for outstanding options on futures
contracts would exceed 5% of the Series' assets. (For options that are "in-the-
money" at the time of purchase, the amount by which the options is "in-the-money
is excluded from this calculation.)
At times the Series may invest more than 25% of its assets in securities of
issuers in one or more market sectors such as, for example, the technology
sector. A market sector may be made up of companies in a number of related
industries. The Series would only concentrate its investments in a particular
market sector if the Series' Portfolio Manager were to believe the investment
return available from concentration in that sector justifies any additional risk
associated with concentration in that sector. When the Series concentrates its
investments in a market sector, financial, economic, business, and other
developments affecting issuers in that sector will have a greater effect on the
Series than if it had not concentrated its assets in that sector.
The Series may lend portfolio securities to broker-dealers and may enter into
repurchase agreements. These transactions must be fully collateralized at all
times, but involve some risk to the Series if the other party should default on
its obligations and the Series is delayed or prevented from recovering the
collateral.
At times, the Portfolio Manager may judge that market conditions make pursuing
the Series' basic investment strategy inconsistent with the best interests of
its shareholders. At such times, the Portfolio Manager may temporarily use
alternative strategies, primarily designed to reduce fluctuations in the values
of the Series' assets. In implementing these "defensive" strategies, the Series
may invest in U.S. Government securities, other high-quality debt instruments,
and other securities the Portfolio Manager believes to be consistent with the
Series' best interests.
The length of time a Series has held a particular security is not generally a
consideration in investment decisions. The investment policies of a Series may
lead to frequent changes in the Series' investments, particularly in periods of
volatile market movements. Such portfolio turnover generally involves some
expense to a Series, including brokerage commissions or dealer markups and other
transaction costs on the sale of securities and reinvestment in other securi-
ties. Such sales may result in realization of taxable capital gains.
GLOBAL FIXED INCOME SERIES
The investment objective of the Global Fixed Income Series is to provide high
total return. The Series will seek to achieve its objective by investing at
least 65% in both domestic and foreign debt securities and related foreign
currency transactions. The total return will be sought through a combination of
current income, capital gains and gains in currency positions. The Portfolio
Manager for the Series is Baring International Investment Limited.
Under normal market conditions, the Series will invest primarily in: (i) obliga-
tions issued or guaranteed by foreign national governments, their agencies,
instrumentalities, or political subdivisions (including any entity which is
majority owned by such government, agency, instrumentality, or political sub-
division); (ii) U.S. Government securities; and (iii) debt securities issued or
guaranteed by supranational organizations, considered to be "government securi-
ties." The Series may also invest in non-government foreign and domestic debt
securities, including corporate debt securities, bank obligations, mortgage-
backed or asset-backed securities, and repurchase agreements.
As a global portfolio, the Series may invest in securities issued in any cur-
rency and may hold foreign currencies. Under normal conditions, the Series'
Portfolio Manager expects that the Series generally will be invested in at least
six different countries, including the U.S., although the Series may at times
invest all of its assets in a single country. It is currently anticipated that
the Series' assets will be invested principally within, or in the currencies of,
Australia, Canada, Japan, New Zealand, the United States, Scandinavia, and West-
ern Europe and in securities denominated in the currencies of those countries or
denominated in multinational currency units, such as the European Currency Unit
("ECU"), which is a "basket" consisting
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of specified amounts of the currencies of certain states of the European
Community. The specific amounts of currencies comprising the ECU may be adjusted
by the Council of Ministers of the European Community to reflect changes in the
relative values of the underlying currencies. Securities of issuers within a
given country may be denominated in the currency of another country. In addi-
tion, when the Series' Portfolio Manager believes that U.S. securities offer
superior opportunities for achieving the Series' investment objective, or for
temporary defensive purposes, the Series may invest substantially all of its
assets in securities of U.S. issuers or securities denominated in U.S. dollars.
The Series may also acquire securities and currency in less developed countries
as well as in developing countries. International investing in general may in-
volve greater risks than U.S. investments. These risks may be intensified in the
case of investments in emerging markets or countries with limited or developing
capital markets.
The Series is also authorized to invest in debt securities 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 (i.e., the World Bank, the European Investment Bank and the Asian
Development Bank). The Series is further authorized to invest in "semi-govern-
mental securities," which are debt securities 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.
The Series may invest in debt securities of any type of issuer, including
foreign and domestic corporations, the 100 largest foreign commercial banks in
terms of total assets, and other business organizations, domestic and foreign
governments and their political subdivisions, including the U.S. Government, its
agencies, and authorities or instrumentalities. The Series may invest in debt
securities with varying maturities. Under current market conditions, it is ex-
pected that the dollar-weighted average maturity of the Series' debt investments
will not exceed 10 years. Generally, the average maturity of the Series' debt
portfolio will be shorter when interest rates worldwide or in a particular coun-
try are expected to rise, and longer when interest rates are expected to fall.
To protect against credit risk, the Portfolio invests primarily in high-grade
debt securities. At least 65% of the Series' investments will consist of secur-
ities rated within the three highest rating categories of Standard & Poor's
(AAA, AA, A) or Moody's (AAA, AA or A) or if unrated, will be considered by the
Portfolio Manager to be of equivalent quality. The Series may engage in certain
transactions, which include dollar roll transactions, reverse repurchase agree-
ments, interest rate transactions, options on securities and indexes, futures
and options on futures, options on foreign currencies, foreign exchange trans-
actions and over the counter options. (See "Description of Securities and
Investment Techniques.")
The Series is classified as a "non-diversified" investment company as described
above under "Diversification." See "Diversification" for risks associated with
investing in a non-diversified Series.
The Series' net asset value per share fluctuates, depending on (i) current
worldwide market interest rates, (ii) the value of the currencies in which the
Portfolio's securities are denominated when compared to the U.S. dollar, (iii)
the success of the Portfolio Manager's currency hedging techniques, and (iv) the
creditworthiness of the issuers in which the Series is invested. In pursuing the
Series' investment objective, however, the Portfolio Manager actively manages
the Series in an effort to minimize the effect of such factors on the Series'
net asset value per share. The Portfolio Manager allocates the Series' invest-
ments among those markets, issuers and currencies which it believes offer the
most attractive combination of high income and principal stability. In evaluat-
ing investments for the Series, the Portfolio Manager analyzes relative yields
and the appreciation potential of securities in particular markets; world inter-
est rates and monetary trends; economic, political and financial market condi-
tions in different countries; credit quality; and the relationship of individual
foreign currencies to the U.S. dollar. The Portfolio Manager also relies on
internally and externally generated financial, economic, and credit research to
evaluate alternative investment opportunities.
The Series may adjust its portfolio as it deems advisable in view of prevailing
or anticipated market conditions to accomplish the Series' investment objective.
For example, the Portfolio may sell portfolio securities in anticipation of a
movement in interest rates. Frequency of portfolio turnover will not be a limit-
ing factor if the Portfolio considers it advantageous to purchase or sell secur-
ities. The Portfolio Manager anticipates that the Series portfolio turnover rate
generally will not exceed 300%. A higher rate of portfolio
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turnover may result in correspondingly higher portfolio transaction costs which
would have to be borne directly by the Trust and ultimately by the shareholders.
LIQUID ASSET SERIES
The investment objective of the Liquid Asset Series is to achieve a high level
of current income consistent with the preservation of capital and liquidity. The
Portfolio Manager for the Series is ING Investment Management, LLC.
In managing the Series, the Portfolio Manager employs a number of professional
money management techniques, including varying the composition of investments
and the average maturity of the portfolio based upon the Portfolio Manager's
assessment of the relative values of the various money market securities and
future interest rate patterns. These assessments will change in response to
changing economic and money market conditions and to shifts in fiscal and mone-
tary policy. The Portfolio Manager also seeks to improve yield by taking advan-
tage of yield disparities that regularly occur in the money markets. For
example, market conditions frequently result in similar securities trading at
different prices. Also, there are frequently differences in the yield between
the various types of money market securities. The Series seeks to enhance yield
by purchasing and selling securities based upon these yield disparities.
The Series invests in one or more of the following:
(i) U.S. Government Securities. Obligations of the U.S. Government and its
agencies and instrumentalities maturing in 13 months or less from the
date of acquisition or purchased pursuant to repurchase agreements
that provide for repurchase by the seller within 13 months from the
date of acquisition;
(ii) Bank Obligations. Obligations of commercial banks (including foreign
branches), savings and loan associations, and foreign banks with
maturities not exceeding 13 months. Such obligations include nego-
tiable certificates of deposit, variable rate certificates of deposit,
bankers' acceptances, fixed time deposits, and commercial paper. Bank
money market instruments in which the Series may invest must be issued
by depository institutions with total assets of at least $1 billion,
except that up to 10% of total assets may be invested in certificates
of deposit of smaller institutions if such certificates of deposit
are federally insured. Fixed time deposits, unlike negotiable cer-
tificates of deposit, generally do not have a market and may be sub-
ject to penalties for early withdrawal of funds;
(iii) Commercial Paper. Short-term unsecured promissory notes with matur-
ities not exceeding nine months issued in bearer form by bank holding
companies, corporations, and finance companies; and
(iv) Short-Term Corporate Debt Securities. Corporate debt securities (other
than commercial paper) maturing in 13 months or less.
The Series may invest only in U.S. dollar denominated money market instruments
that present minimal credit risk and, with respect to at least 95% of its total
assets, measured at the time of investment, that are of the highest quality. The
Portfolio Manager shall determine whether a security presents minimal credit
risk under procedures adopted by the Trust's Board of Trustees. A money market
instrument will be considered to be of highest quality under standards adopted
by the Board of Trustees and consistent with applicable Securities and Exchange
Commission ("SEC") rules relating to money market funds. With respect to no more
than 5% of its total assets, measured at the time of investment, the Series may
also invest in money market instruments that are rated in the second highest
rating category for short-term debt obligations. A money market instrument will
be considered to be in the second-highest rating category under the standards
described above.
The Series may not invest more than 5% of its total assets, measured at the time
of investment, in securities of any one issuer, except that this limitation
shall not apply to U.S. Government securities and repurchase agreements thereon.
The Series may not invest more than the greater of 1% of its total assets or
$1,000,000, measured at the time of investment, in securities of any one issuer
that are rated in the second-highest
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rating category, except that this limitation shall not apply to U.S. Government
securities. In the event that an instru- ment acquired by the Series is down-
graded or otherwise ceases to be of the quality that is eligible for the
Series, the Portfolio Manager, under procedures approved by the Board of Trus-
tees (or the Board of Trustees itself if the Portfolio Manager becomes aware an
unrated security is downgraded below high quality (within the first or second
highest rating category) and the Portfolio Manager does not dispose of the
security or such security does not mature within five business days), shall
promptly reassess whether such security presents minimal credit risk and
determine whether to retain the instrument.
From time to time, in the ordinary course of business, the Series may purchase
securities on a when-issued or delayed delivery basis. The Series shall engage
only in short sales "against the box." The Series may also enter into repur-
chase agreements; the Series may purchase mortgage-backed securities, invest up
to 10% in illiquid securities and may borrow up to 10% of its net assets to
purchase securities and up to 25% of its net assets for temporary purposes. In
connection with permissible borrowings the Series may transfer as collateral
securities owned by the Series. See "Description of Securities and Investment
Techniques" for descriptions of these techniques.
The Series seeks to maintain a net asset value of $1.00 per share for purposes
of purchases and redemptions; however, there can be no assurance that the net
asset value will not vary. The Series will be affected by general changes in
interest rates resulting in increases or decreases in the value of the obliga-
tions held by the Series.
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MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of the
Board of Trustees. The Trustees are J. Michael Earley, R. Barbara Gitenstein,
Robert A. Grayson, Elizabeth J. Newell, Stanley B. Seidler and Roger B. Vincent.
The Executive Officers of the Trust are Barnett Chernow, Myles R. Tashman and
Mary Bea Wilkinson. Additional information about the Trustees and officers of
the Trust may be found in the Statement of Additional Information under the
heading "Management of the Trust."
THE MANAGER
Directed Services, Inc. ("DSI" or the "Manager") serves as the Manager to the
Trust pursuant to a Management Agreement with the Trust. DSI is a New York cor-
poration and is a wholly owned subsidiary of ING. DSI is registered with the
SEC as an investment adviser and a broker-dealer. The Trust currently offers
shares of its operating Series to, among others, separate accounts of Golden
American to serve as the investment medium for Variable Contracts issued by
Golden American. DSI is the principal underwriter and distributor of the
Variable Contracts issued by Golden American. Golden American is a stock life
insurance company organized under the laws of the State of Delaware. Prior to
December 30, 1993, Golden American was a Minnesota corporation. Golden American
is a wholly owned subsidiary of ING. One of the Portfolio Managers, ING
Investment Management, LLC is an affiliate of DSI and Golden American. Prior to
October 24, 1997, DSI was a wholly owned subsidiary of Equitable of Iowa
Companies and an affiliate of one of the Portfolio Managers, Equitable Inves-
tment Services, Inc.
DSI performs the activities described above in this Prospectus and below under
the caption "Distributor." Under the Management Agreement, DSI has overall re-
sponsibility, subject to the supervision of the Board of Trustees, for engaging
Portfolio Managers and for monitoring and evaluating the management of the
assets of each Series by the Portfolio Managers. The Manager is also responsible
for monitoring and evaluating the Portfolio Managers on a periodic basis, and
will consider their performance records with respect to the investment objec-
tives and policies of each Series. The Manager may, if appropriate, recommend
that the Trustees consider a change in the Portfolio Manager, although the
Manager does not expect to recommend frequent changes in Portfolio Managers as a
matter of operating procedure for the Series.
As Manager, DSI is responsible, subject to the supervision of the Board of Trus-
tees, for providing administrative and other services necessary for the ordinary
operation of the Series in addition to advisory services. The Manager provides
the overall business management and administrative services necessary for the
Series' operation and provides or procures the services and information neces-
sary to the proper conduct
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of the business of the Series. The Manager is responsible for providing or pro-
curing, at the Manager's expense, the services reasonably necessary for the
ordinary operation of the Series, including custodial, administrative, transfer
agency, portfolio accounting, dividend disbursing, auditing, and ordinary legal
services. The Manager also acts as liaison among the various service providers
to the Series, including the custodian, portfolio accounting agent, Portfolio
Managers, and the insurance company or companies to which the Series offer their
shares. The Manager is also responsible for ensuring that the Series operate in
compliance with applicable legal requirements and for monitoring the Portfolio
Managers for compliance with requirements under applicable law and with the
investment policies and restrictions of the Series. DSI does not bear the ex-
pense of brokerage fees and other transactional expenses for securities or other
assets (which are generally considered part of the cost for the assets), taxes
(if any) paid by a Series, interest on borrowing, fees and expenses of the
independent trustees, and extra- ordinary expenses, such as litigation or
indemnification expenses.
Pursuant to the Management Agreement, the Manager is authorized to exercise full
investment discretion and make all determinations with respect to the investment
of a Series' assets and the purchase and sale of portfolio securities for one or
more Series in the event that at any time no Portfolio Manager is engaged to
manage the assets of a Series. The Management Agreement may be terminated with-
out penalty by the vote of the Board of Trustees or the shareholders of the
Series, or by the Manager, upon 60 days' written notice by the Board or the
Manager, and will terminate automatically if assigned as that term is described
in the Investment Company Act of 1940.
The Trust pays the Manager for its services under the Management Agreements a
fee, payable monthly, based on the average daily net assets of the Series at the
following annual rates of the average daily net assets of the Series:
Series Fee (based on combined assets of the
indicated groups of Series)
- ------------------------------- ---------------------------------------------
Multiple Allocation, Fully 1.00% on the first $750 million in combined
Managed, Hard Assets, Real assets of these Series;
Estate, All-Growth, Capital 0.95% on the next $1.250 billion;
Appreciation, Rising Dividends, 0.90% on the next $1.5 billion; and
Value Equity, Strategic Equity, 0.85% on the amount in excess of $3.5 billion
and Small Cap
Mid-Cap Growth, Total Return, 1.00% of first $250 million in combined
and Research assets of these Series;
0.95% of next $400 million;
0.90% of next $450million; and
0.85% of amount in excess of $1.1 billion
Growth & Income, Value + 1.10% of first $250 million;
Growth, and Growth 1.05% of next $400 million;
Opportunities 1.00% of next $450 million; and
0.95% of amount in excess of $1.1 billion
Managed Global 1.25% on the first $500 million; and
1.05% on the amount in excess of $500 million
Global Fixed Income 1.60%
Emerging Markets and 1.75%
Developing World
Limited Maturity Bond 0.60% on the first $200 million in combined
and Liquid Asset assets of these Series;
0.55% on the next $300 million; and
0.50% on the amount in excess of $500 million
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As compensation for its services during the most recent fiscal year, the Trust,
pursuant to the Management Agreement, paid the Manager fees which represented
the following percentage of each Series' average daily net assets: Multiple
Allocation Series - 0.99%; Fully Managed Series - 0.99%; Limited Maturity Bond
Series - 0.60%; Hard Assets Series - 0.99%; Real Estate Series - 0.99%; All-
Growth Series - 0.99%; Capital Appreciation Series - 0.99%; Rising Dividends
Series - 0.99%; Value Equity Series - 0.99%; Strategic Equity Series - 0.99%;
Emerging Markets Series - 1.67%; Liquid Asset Series - 0.60%; Managed Global -
1.25% and Small Cap Series - 0.99%. The Growth Opportunities, Developing World,
Mid-Cap Growth, Total Return, Research, Growth & Income, Value + Growth and
Global Fixed Income Series had not commenced operations as of the end of
December 31, 1997. For more information on the Management Agreement, see the
Statement of Additional Information.
The Trust is distinct in that the expense structure of most Series is simpler
and more predictable than most mutual funds. For all Series many of the ordinary
expenses for each Series, including custodial, administrative, transfer agency,
portfolio accounting, auditing, and ordinary legal expenses are paid by the
Manager; whereas, most mutual funds for these expenses directly from their own
assets.
THE PORTFOLIO MANAGERS
The Trust and the Manager have entered into Portfolio Management Agreements with
each of the Portfolio Managers. Under these Agreements, the Portfolio Manager of
each Series has full investment discretion and makes all determinations with
respect to the investment of a Series' assets and the purchase and sale of port-
folio securities and other investments. The Portfolio Management Agreements may
be terminated without penalty by the vote of the Board of Trustees or the share-
holders of a Series, by the Portfolio Manager, or by the Manager, on 60 days'
written notice by any party to a Portfolio Management Agreement and will ter-
minate automatically if assigned as that term is described in the Investment
Company Act of 1940. A description of each Portfolio Manager follows.
ZWEIG ADVISORS INC.
The Portfolio Manager to the Multiple Allocation Series and the Strategic Equity
Series is Zweig Advisors Inc., located at 900 Third Avenue, New York, NY 10022.
The Portfolio Manager was organized on May 7, 1986 and currently serves as
investment adviser to The Zweig Fund, Inc., a closed-end, diversified management
investment company.
The asset allocation strategy for the Multiple Allocation Series is determined
by Dr. Martin E. Zweig, the day-to-day stock selection is made by Mr. Jeffrey
Lazar, and the day-to-day bond selection is made by Mr. Carlton Neel. The asset
allocation strategy for the Strategic Equity Series is determined by Dr. Martin
E. Zweig and the portfolio decisions for the Series are made by Mr. David
Katzen.
Dr. Zweig, the President of the Portfolio Manager, has been engaged in the
business of providing investment advisory and portfolio management services for
over 25 years. He is the President and/or Chairman of investment advisory firms
which, as of December 31, 1997, managed in excess of $7 billion in assets. Dr.
Zweig owns approximately 60% of the outstanding shares of the Portfolio Manager.
Mr. Lazar is a Vice President of the Portfolio Manager and has been controller
of the Portfolio Manager since 1986. Mr. Lazar has also been Vice President of
The Zweig Fund, Inc. since 1987 and Vice President of The Zweig Total Return
Fund, Inc. since its inception in 1988.
Mr. Katzen is a Vice President of the Portfolio Manager and has held senior
positions with affiliates of the Portfolio Manager for more than five years. Mr.
Katzen is a Senior Vice President of The Zweig Series Trust mutual fund and has
been the Portfolio Manager of its Zweig Strategy Fund and Zweig Appreciation
Fund since their inceptions.
Mr. Neel joined the Portfolio Manager in June 1995. Mr. Neel is a First Vice
President of The Zweig Series Trust mutual fund and has been the Portfolio
Manager for its Zweig Managed Assets and Government Securities Series since July
1995. Prior to joining the Portfolio Manager, Mr. Neel was a Vice President with
J.P. Morgan & Co., Inc.
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Pursuant to the Portfolio Management Agreement, the Manager (and not the Trust)
pays Zweig Advisors Inc. a monthly fee equal to an annual rate of 0.50% of the
average daily net assets of the Multiple Allocation Series and 0.50% of the
average daily net assets of the Strategic Equity Series.
T. ROWE PRICE ASSOCIATES, INC.
The Portfolio Manager to the Fully Managed Series is T. Rowe Price Associates,
Inc. ("T. Rowe Price"), located at 100 East Pratt St., Baltimore, MD 21202. T.
Rowe Price was founded in 1937 by the late Thomas Rowe Price, Jr. As of December
31, 1997, the firm and its affiliates managed over $126 billion in assets.
With respect to its investment management of the Fully Managed Series, the Port-
folio Manager has an Investment Advisory Committee composed of the following
members: Richard P. Howard, Chairman; Arthur B. Cecil, III; Charles A. Morris;
Charles M. Ober and Brian C Rogers. The Committee Chairman has day-to-day re-
sponsibility for managing the Fully Managed Series and works with the Committee
in developing and executing the Fully Managed Series' investment program. Mr.
Howard has been Chairman of the Committee since 1989. He joined T. Rowe Price in
1982 and has been managing investments since 1989.
From the Fully Managed Series' commencement of operations through December 31,
1994, Weiss, Peck & Greer Advisers, Inc. served as Portfolio Manager.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays T. Rowe Price a monthly fee equal to an annual rate of 0.50% of the average
daily net assets of the Fully Managed Series.
PUTNAM INVESTMENT MANAGEMENT, INC.
The Portfolio Manager to the Emerging Markets Series and Managed Global Series
is Putnam Investment Management, Inc. ("Putnam"), located at One Post Office
Square, Boston, Massachusetts 02109 has been managing mutual funds since 1937.
Putnam is wholly owned by Putnam Investments, Inc., is in turn wholly owned by
Marsh & McLennan Companies, Inc., a publicly traded company. As of December 31,
1997, Putnam and its affiliates managed approximately $235 billion of assets.
Both the Managed Global Series and the Emerging Markets Series are managed by
committees of Portfolio Managers at Putnam.
Pursuant to the Portfolio Management Agreement, the Manager (and not the Trust)
pays Putnam a monthly fee equal to an annual rate of 1.00% of the first $150
million, 0.95% of the next $150 million and 0.85% of over $300 million of
average daily net assets of the Emerging Markets Series; and 0.70% of the first
$300 million and 0.60% over $300 million of average daily net assets of the
Managed Global Series.
Putnam assumed portfolio management of the Emerging Markets Series and Managed
Global Series on March 3, 1997. From the Emerging Markets Series' commencement
of operations on October 4, 1993 to March 3, 1997, Bankers Trust Company served
as the Emerging Markets Series' Portfolio Manager. Warburg, Pincus Counsellors,
Inc. served as Portfolio Manager of the Managed Global Series or its predeces-
sor, the Managed Global Account of Separate Account D of Golden American Life
Insurance Company, from July 1, 1994 until March 3, 1997. Prior to that, a
different firm served as Portfolio Manager.
VAN ECK ASSOCIATES CORPORATION
The Portfolio Manager to the Hard Assets Series is Van Eck Associates Corpora-
tion ("Van Eck"), located at 99 Park Avenue, New York, New York 10016. Van Eck
acts as investment adviser to ten other mutual funds and portfolios of pension
plans with similar investment objectives to the Hard Assets Series. In addi-
tion, the Portfolio Manager acts as an adviser to nine other mutual funds with
investment objectives different from the Hard Assets Series. John C. van Eck
and members of his family own 100% of the stock of Van Eck.
Henry J. Bingham, Executive Managing Director of van Eck in conjunction with
Derek van Eck and other members of Van Eck's Hard Assets group, is primarily
responsible for the day-to-day management of the Hard Assets Series. Mr.
Bingham has served in that capacity since the Series' commencement of opera-
tions. Over the past five years, Mr. Bingham has served as an officer and Port-
folio Manager for mutual funds for which Van Eck Associates Corporation serves
as investment adviser or sub-investment adviser.
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Mr. Derek van Eck is Director of Global Investments and Executive Vice President
of Van Eck since 1993 and an officer of other mutual funds advised by Van Eck
since 1988. During 1991-93, Mr. van Eck completed MBA course requirements. He
has been serving in his current capacity with the Series since July 1995.
Total aggregate assets under management of Van Eck Associates Corporation as of
December 31, 1997 were approximately $1.4 billion.
Pursuant to the Portfolio Management Agreement, the Manager (and not the Trust)
pays Van Eck Associates Corporation a monthly fee equal to an annual rate of
0.50% of the average daily net assets of the Hard Assets Series.
PILGRIM BAXTER & ASSOCIATES, LTD.
The Portfolio Manager to the All-Growth Series is Pilgrim Baxter & Associates,
Ltd. ("Pilgrim Baxter"), located at 825 Duportail Road, Wayne, Pennsylvania
19087. Pilgrim Baxter, a Delaware corporation, was founded in 1982 and is a
wholly owned subsidiary of United Asset Management Corporation, a publicly
traded company. Pilgrim Baxter is a professional investment management firm
which provides advisory services to pension and profit sharing plans, charitable
institutions, corporations, trust and estates, and other investment companies.
As of December 31, 1997, Pilgrim Baxter managed approximately $14.7 billion of
assets, including approximately $9.7 billion of investment company assets.
As of January 29, 1998, Jeffrey A. Wrona, CFA, assumed the responsibility for
management of the All-Growth Series. Mr. Wrona has been an investment profes-
sional with Pilgrim Baxter since 1997. Prior to coming to Pilgrim Baxter, Mr.
Wrona worked as a Senior Portfolio Manager at Munder Capital Management for
seven years.
Pursuant to the Portfolio Management Agreements, the Manager (and not the Trust)
pays Pilgrim Baxter a monthly fee equal to an annual rate of 0.55% of the aver-
age daily net assets of the All-Growth Series.
Pilgrim Baxter assumed portfolio management of the All-Growth Series on February
3, 1997. Warburg Pincus Investment Management, Inc., formerly named Warburg,
Pincus Counsellors, Inc., served as Portfolio Manager to the Series from July 1,
1994 until February 3, 1997. Prior to that date, a different firm served as
Portfolio Manager to the Series.
CHANCELLOR LGT ASSET MANAGEMENT, INC.
The Portfolio Manager to the Capital Appreciation Series is Chancellor LGT Asset
Management, Inc. ("Chancellor LGT"), located at 1166 Avenue of the Americas, New
York, New York 10036.
The Portfolio Manager is a wholly owned subsidiary of Liechtenstein Global
Trust, AG ("LGT"). Prior to October 31, 1996, the Series was managed by
Chancellor LGT's affiliate, Chancellor Trust Company ("Chancellor").
LGT and its worldwide affiliates provide global asset management and private
banking products, and as of December 31, 1997 were entrusted with approximately
$82 billion in institutional and individual client assets. LGT is controlled by
the Prince of Liechtenstein Foundation, which serves as the parent organization
for various business enterprises of the Princely Family of Liechtenstein.
On January 30, 1998, AMVESCAP PLC, a global investment management firm
("AMVESCAP"), entered into an agreement with LGT to acquire LGT's Asset Manage-
ment Division, which includes Chancellor LGT. The transaction is expected to
close during the second quarter of 1998. AMVESCAP is focused solely on institu-
tional and retail investment management, and has a strong track record of
acquiring companies and allowing their investment capabilities to operate in
parallel. This transaction will likely result in the termination of the Port-
folio Management Agreement among the Trust, DSI and Chancellor LGT. It is
expected that the Trust's Board of Trustees will consider before that time a
new Portfolio Management Agreement with Chancellor LGT. Any such agreement,
which would be substantially identical to the current agreement, would be
subject to approval by shareholders of the Trust.
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The individual responsible for the management of the Capital Appreciation Series
is Ted Ujazdowski. Mr. Ujazdowski has served as Managing Director of Chancellor
LGT since 1989. Pursuant to the Portfolio Management Agreement, the Manager (and
not the Trust) pays Chancellor LGT a monthly fee equal to an annual rate of
0.50% of the average daily net assets of the Capital Appreciation Series.
KAYNE ANDERSON INVESTMENT MANAGEMENT, LLC
The Portfolio Manager to the Rising Dividends Series is Kayne Anderson Invest-
ment Management, LLC ("Kayne Anderson"), located at 1800 Avenue of the Stars,
Suite 200, Los Angeles, California, 90067. The Portfolio Manager is a registered
investment adviser under the Investment Advisors Act of 1940, as amended. It
was organized on June 29, 1994 as a California limited partnership and changed
its form of organization to a California limited liability company during 1997.
Kayne Anderson (in its original form) has been in the business of furnishing
investment advice to institutional and private clients since 1984, when founded
by Richard A. Kayne and John E. Anderson. Messrs. Kayne, Anderson and Allan M.
Rudnick own in the aggregate over 80% of Kayne Anderson. As of June 30, 1997,
Kayne Anderson managed portfolios which, in the aggregate, amounted to approx-
imately $2.7 billion.
Mr. Rudnick is the Senior Portfolio Manager responsible for the management of
the Rising Dividends Series since its inception. Prior to August, 1989, Mr.
Rudnick was President of Pilgrim Asset Management and Chief Investment Officer
of the Pilgrim Group of Mutual Funds.
Prior to January 1, 1995, Kayne, Anderson Investment Management, Inc. served as
Portfolio Manager to the Rising Dividends Series. From January 1, 1995 to
September 30, 1997, the Portfolio Manager was Kayne Anderson Investment Manage-
ment, L.P. ("KAIMLP"). On September 30, 1997, KAIMLP was merged into Kayne
Anderson. KAIMLP had become the Portfolio Manager pursuant to a substitution
agreement. No change in the personnel managing the Rising Dividends Series
resulted from such substitution.
Pursuant to the Portfolio Management Agreement, the Manager (and not the Trust)
pays Kayne Anderson a monthly fee equal to an annual rate of 0.50% of the
average daily net assets of the Rising Dividends Series.
EAGLE ASSET MANAGEMENT, INC.
The Portfolio Manager to the Value Equity Series is Eagle Asset Management, Inc.
("Eagle"), located at 880 Carillon Parkway, St. Petersburg, Florida 33716. The
Portfolio Manager is a registered investment adviser organized on February 8,
1984 as a Florida corporation. Eagle currently has approximately $3.5 billion
in client assets under management.
The individual responsible for the day-to-day operation of the Series' invest-
ments since September 1, 1996, is Michael J. Chren. Until assuming responsibil-
ities for the Series, Mr. Chren was Co-Portfolio Manager of Eagle's Equity
Income Division since January, 1996 and was a research analyst for Eagle since
1994. Prior to joining Eagle in 1993, Mr. Chren served as an investment analyst
since 1986: with Bear, Stearns, with Raymond James & Associates, Inc. from 1991
to 1992, and with Junction Advisors, Inc. from 1989 to 1990.
Eagle is in the business of managing institutional clients and individual
accounts on a discretionary basis. Eagle is a wholly owned subsidiary of Raymond
James Financial, Inc., a publicly traded company whose shares are listed on the
New York Stock Exchange. Thomas A. James is the principal shareholder of Raymond
James Financial, Inc.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays Eagle a monthly fee equal to an annual rate of 0.50% of the average daily
net assets of the Value Equity Series.
EII REALTY SECURITIES, INC.
The Portfolio Manager to the Real Estate Series is EII Realty Securities, Inc.,
located at 667 Madison Avenue, 16th Floor, New York, NY 10021.
The Portfolio Manager is a professional investment adviser which, with its
affiliates, has provided services to employee benefit plans, corporations, and
high net worth individuals, both foreign and domestic, since 1983. As of
December 31, 1997, the Portfolio Manager and/or its affiliates had investment
management
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authority with respect to approximately $1.8 billion of real estate securities
assets. The Portfolio Manager is a wholly owned subsidiary of European Investors
Incorporated.
Richard J. Adler, Managing Director, and Cydney C. Donnell, Managing Director of
the Portfolio Manager, are the individuals primarily responsible for the day-to-
day operation of the Series. For the past ten years, they have been Portfolio
Managers or real estate securities analysts for the Portfolio Manager and its
affiliates.
From the Trust's commencement of operations through December 20, 1991, Cohen &
Steers Capital Management, Inc. served as Portfolio Manager for the Real Estate
Series. Chancellor Trust Company and its affiliate, Chancellor Capital Manage-
ment, Inc., assumed management of the Series from December 21, 1991 to December
31, 1994.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays the Portfolio Manager a monthly fee equal to an annual rate of 0.50% of the
average daily net assets of the Real Estate Series.
FRED ALGER MANAGEMENT, INC.
The Portfolio Manager to the Small Cap Series is Fred Alger Management, Inc.,
located at 75 Maiden Lane, New York, NY 10038. The Portfolio Manager has been in
the business of providing investment advisory services since 1964 and, as of
January 31, 1998, had approximately $7.8 billion under management, $4.5 billion
in mutual fund accounts and $3.3 billion in other advisory accounts. The Port-
folio Manager is owned by Fred Alger & Company, Incorporated ("Alger Inc."),
which in turn is owned by Alger Associates, Inc., a financial services holding
company. Fred M. Alger III and his brother, David D. Alger, are the majority
shareholders of Alger Associates, Inc. and may be deemed to control that company
and its subsidiaries.
David D. Alger, President of the Portfolio Manager, is primarily responsible for
the day-to-day management of the Series. He has been employed by the Portfolio
Manager as Executive Vice President and Director of Research since 1971 and as
President since 1995 and he serves as Portfolio Manager for other mutual funds
and investment accounts managed by the Portfolio Manager. Also participating in
the management of the Series are Ronald Tartaro and Seilai Khoo. Mr. Tartaro has
been employed by the Portfolio Manager since 1990 and he serves as a senior
research analyst. Prior to 1990, he was a member of the technical staff at AT&T
Bell Laboratories. Ms. Khoo has been employed by the Portfolio Manager since
1989 and she serves as a senior research analyst.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays the Portfolio Manager a monthly fee equal to an annual rate of 0.50% of the
average daily net assets of the Small Cap Series.
ING INVESTMENT MANAGEMENT, LLC
The Portfolio Manager to the Limited Maturity Bond Series and the Liquid Asset
Series is ING Investment Management, LLC ("IIM LLC"), located at 5780 Powers
Ferry Road, N.W., Suite 300, Atlanta, Georgia 30327-4349. The Portfolio Manager
is a limited liability corporation, incorporated in Delaware, which is engaged
in the business of providing investment advice to affiliated insurance companies
possessing portfolios which, as of December 31, 1997, were valued at $12
billion. The Portfolio Manager is a wholly owned subsidiary of ING and is
affiliated with DSI. The Portfolio Manager is also a sub-adviser to the Equi-
Select Series Trust, a registered investment company that serves as the invest-
ment vehicle underlying certain variable annuity contracts issued by Equitable
Life Insurance Company of Iowa and Golden American.
Robert F. Bowman has served as the senior Portfolio Manager responsible for the
day-to-day management of the Limited Maturity Bond Series since August, 1996.
Mr. Bowman has been employed by the Portfolio Manager since January 2, 1998.
Prior to that, he served as the Series' Portfolio Manager while working for
Equitable Investment Services, Inc. ("EISI"). He joined EISI as Executive Vice
President in 1986, and has over 18 years of direct investment experience.
Under the Portfolio Management Agreement, the Manager (and not the Trust) pays
IIM LLC a fee, payable monthly, based on the average daily net assets of the
Limited Maturity Bond Series at the following annual
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rates of the average daily net assets of the Series: 0.30% of the first $25
million; 0.25% of the next $50 million; 0.20% of the next $75 million; and 0.15%
of the amount over $150 million, subject to a minimum annual fee of $35,000
(payable at the end of each calendar year). The Manager (and not the Trust) pays
ING Investment Management, LLC, a fee, payable monthly, based on the average
daily net assets of the Liquid Asset Series at the following annual rates of the
average daily net assets of the Series: 0.20% of the first $25 million; 0.15% of
the next $50 million; and 0.10% of the amount over $75 million, subject to a
minimum annual fee of $35,000 (payable at the end of each calendar year).
IIM LLC or its affiliate EISI have served as Portfolio Manager to the Limited
Maturity Bond and the Liquid Asset Series since August 13, 1996. IIM LLC
assumed portfolio management responsibilities for the Limited Maturity Bond and
Liquid Assets Series on January 2, 1998. EISI served as Portfolio Manager from
August 14, 1996 through January 1, 1998. Bankers Trust Company served as Port-
folio Manager from May 1, 1992 through August 13, 1996. Prior to that date, a
different firm served as Portfolio Manager to both Series.
MONTGOMERY ASSET MANAGEMENT, LLC
The Portfolio Manager of the Growth Opportunities Series and Developing World
Series is Montgomery Asset Management, LLC ("Montgomery"), located at 101
California Street, San Francisco, CA 94111. Montgomery, a Delaware limited
liability company, is a subsidiary of Commerzbank AG. Montgomery was formed in
February 1997 as an investment adviser registered as such with the SEC under the
Investment Advisers Act of 1940, as amended. On July 31, 1997, Montgomery Asset
Management L.P., formed in 1990, completed the sale of substantially all of its
assets to Montgomery. Montgomery advises private accounts as well as mutual
funds. As of December 31, 1997, Montgomery had $9.5 billion in assets under
management. Commerzbank, one of the largest commercially held banks in Germany,
has total assets of approximately $173 billion. Commerzbank and its affiliates
had more than $289 billion in assets under management as of December 31, 1997.
Commerzbank's asset management operations involve more than 1,000 employees in
13 countries worldwide.
The individuals responsible for the management of the Growth Opportunities
Series are Roger W. Honour, Kathryn M. Peters and Andrew Pratt.
Roger W. Honour, Senior Portfolio Manager and Principal, joined Montgomery in
June 1993. From 1992 through May 1993, Mr. Honour spent one year as Vice Pres-
ident and Portfolio Manager at Twentieth Century Investors in Kansas City,
Missouri. From 1990 to 1992, he served as Vice President and Portfolio Manager
at Alliance Capital Management. From 1978 to 1990, Mr. Honour was a vice pres-
ident with Merrill Lynch Capital Markets.
Kathryn M. Peters, Portfolio Manager and Principal, joined Montgomery in 1995.
From 1993 to 1995, Ms. Peters was an associate in the investment banking
division of Donaldson, Lufkin & Jenrette in New York. Prior to that, she analyz-
ed mezzanine investments for Barclays de Zoete Wedd in New York. From1988 to
1990, Ms. Peters worked in the leveraged buy-out group of Marine Midland Bank.
Andrew Pratt, CFA, Portfolio Manager and Principal, joined Montgomery in 1993,
coming from Hewlett-Packard Company, where he was an equity analyst, managed a
portfolio of small capitalization technology companies, and researched private
placement and venture capital investments from 1988 to 1993. From 1983 through
1988, he worked in the Capital Markets Group at Fidelity Investments in Boston,
Massachusetts.
The individuals responsible for the management of the Developing World Series
are Josephine S. Jimenez, Bryan L. Sudweeks, Frank Chiang and Angeline Ee.
Josephine S. Jimenez, CFA, Senior Portfolio Manager and Principal, joined Mont-
gomery in the firm in 1991. From 1988 through 1991, Ms. Jimenez worked at Emerg-
ing Markets Investors Corporation/Emerging Markets Management in Washington,
D.C. as Senior Analyst and Portfolio Manager.
Bryan L. Sudweeks, Ph.D., CFA, Senior Portfolio Manager and Principal. Joined
Montgomery in 1991. Prior to 1991, he was Senior Analyst and Portfolio Manager
at Emerging Markets Investors Corporation/Emerging Markets Management in
Washington, D.C. Previously, he was a Professor of
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International Finance and Investments at George Washington University and served
as Adjunct Professor of International Investments from 1988 until May 1991.
Frank Chiang is Portfolio Manager and Principal at Montgomery. From 1993 until
joining Montgomery in 1996, Mr. Chiang was Managing Director and Portfolio
Manager at TCW Asia Ltd. in Hong Kong.
Angeline Ee is Portfolio Manager and Principal at Montgomery. From 1990 until
joining Montgomery in July 1994, Ms. Ee was an Investment Manager with AIG
Investment Corp. in Hong Kong. From 1989 until 1990, Ms. Ee was a co-manager of
a portfolio of Asian equities and bonds at Chase Manhattan Bank in Singapore.
Pursuant to the Portfolio Management Agreement, the Manager (not the Trust) pays
to Montgomery a monthly fee equal to an annual rate of 0.50% of average daily
net assets of Growth Opportunities Series and 0.90% of average daily net assets
of Developing World Series.
MASSACHUSETTS FINANCIAL SERVICES COMPANY
The Portfolio Manager to the Mid-Cap Growth Series, Research Series and Total
Return Series is Massachusetts Financial Services Company ("MFS"), located at
500 Boylston Street, Boston, Massachusetts 02116. MFS is America's oldest
mutual fund organization. MFS and its predecessor organizations have a history
of money management dating from 1924 and the founding of the first mutual fund
in the United States, Massachusetts Investors Trust. Net assets under the
management of the MFS organization were approximately $70.2 billion on behalf of
approximately $2.7 million investor accounts as of December 31, 1997. As of such
date, the MFS organization managed approximately $45.7 billion of assets in
equity securities and $24.5 billion of assets in fixed income securities. MFS is
a subsidiary of Sun Life Assurance Company of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
Sun Life, a mutual life insurance company, is one of the largest international
life insurance companies and has been operating in the U.S. since 1895, estab-
lishing a headquarters office in the U.S. in 1973. The executive officers of MFS
report to the Chairman of Sun Life.
Kevin R. Parke is the portfolio manager for the Research Series. Mr. Parke over-
sees the selection of portfolio securities made by various equity research
analysts employed by MFS. Mr. Parke is a Senior Vice President-Investments of
MFS and has been employed as a portfolio manager by MFS since 1985.
David M. Calabro heads a team of portfolio managers of MFS for the Total Return
Series. Mr. Calabro is a Vice President-Investments of MFS and manages the
equity portion of the Series along with Judith N. Lamb, a Vice President-Invest-
ments of MFS, Lisa B. Nurme, a Vice President-Investments of MFS and Maura
Shaughnessy, a Vice President-Investments of MFS. Geoffrey L. Kurinsky, a Senior
Vice President-Investment manages the fixed income portion of the Series and has
been employed as a portfolio manager by MFS since 1987. Mr. Calabro has been
employed as a portfolio manager by MFS since 1992. Ms. Lamb has been employed as
a portfolio manager by MFS since 1992. Ms. Nurme has been employed as a port-
folio manager by MFS since 1987. Ms. Shaughnessy has been employed as a port-
folio manager by MFS since 1991.
John W. Ballen and Mark Regan are the portfolio managers for the Mid-Cap Growth
Series. Mr. Ballen is a Senior Vice President-Investments and the Chief Equity
Officer of MFS and has been employed by MFS since 1984. Mr. Regan is a Vice
President-Investments at MFS and has been employed as a portfolio manager by MFS
since 1989.
MFS and the individuals named previously have served in similar capacities for
similar series of the Equi-Select Series Trust, the predecessor series of the
Mid-Cap Growth, Research and Total Return Series. Pursuant to the Portfolio
Management Agreement, the Manager (not the Trust) pays to MFS a monthly fee
equal to an annual rate of 0.40 % of first $300 million and 0.25% of average net
assets over and above $300 million for each of the Mid-Cap Growth, Research and
Total Return Series.
ROBERTSON, STEPHENS & COMPANY INVESTMENT MANAGEMENT, L.P.
The Portfolio Manager to the Growth & Income and Value + Growth Series is
Robertson, Stephens & Company Investment Management, L.P. ("RSIM, L.P."),
located at 555 California Street, San Francisco, CA 94104. RSIM, L.P., a
California limited partnership, was formed in 1993 and is registered as an
investment
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adviser with the Securities and Exchange Commission. The general partner of
RSIM, L.P. is Robertson, Stephens Investment Company. RSIM, L.P. is affiliated
with BancAmerica Robertson Stephens, a major investment banking firm specializ-
ing in emerging growth companies that has developed substantial investment
research, underwriting, and venture capital expertise. RSIM, L.P. and its
affiliates have in excess of $4.5 billion under management in public and private
investment funds. BankAmerica Corporation may be deemed to be a control person
of RSIM, L.P.
Ronald E. Elijah joined RSIM, L.P. in 1992 and is the portfolio manager for the
Value + Growth Series. From August 1985 to January, 1990, Mr. Elijah was a
securities analyst for Robertson, Stephens & Company, LLC (now BancAmerica
Robertson Stephens). From January 1990 to January 1992, Mr. Elijah was an
analyst and portfolio manager for Water Street Capital, which managed short
selling investment funds.
John L. Wallace is the portfolio manager for the Growth & Income Series. Prior
to joining RSIM, L.P., Mr. Wallace was Vice President of Oppenheimer Management
Corp., where he was portfolio manager of the Oppenheimer Main Street Income and
Growth Fund.
Robertson, Stephens and the individuals named previously have served in similar
capacities for similar series of the Equi-Select Series Trust, the predecessor
series of the Growth & Income and Value + Growth Series. Pursuant to the Port-
folio Management Agreement, the Manager (not the Trust) pays to Robertson,
Stephens a monthly fee equal to an annual rate of 0.55% of the first $200 mil-
lion and 0.45% of over $200 million of average daily net assets of the Growth &
Income Series; and 0.55% of first $500 million and 0.45% of over $500 million of
average daily net assets of the Value + Growth Series.
BARING INTERNATIONAL INVESTMENT LIMITED
The Portfolio Manager to the Global Fixed Income series is Baring International
Investment Limited ("BIIL"), located at 155 Bishopsgate, London. BIIL is regis-
tered under the Investment Advisor's Act of 1940 and provides investment manage-
ment services. BIIL is a wholly owned subsidiary of Baring Asset Management
Holdings Limited ("BAMHL"). BAMHL, a company registered is England and Wales,
is the parent of the world-wide group of investment management companies that
operate under the collective name Baring Asset Management ("BAM"). BAMHL is a
wholly owned indirect subsidiary of ING a publicly traded company based in the
Netherlands with worldwide insurance and banking subsidiaries.
BAM provides global investment management services and maintains major invest-
ment offices in Boston, London, Hong Kong and Tokyo, and together with its pre-
decessor corporation was founded in 1762. BAM provides advisory services to
institutional investors, offshore investment companies, insurance companies and
private clients. As of December 31, 1997, BAM managed approximately $36.1 bil-
lion of assets.
The Global Fixed Income Portfolio will be managed by Paul Thursby. Mr. Thursby
has been an investment professional with BIIL since 1991 and has 18 years of
investment. He is a specialist in the Japanese domestic bond market and lived
in Japan for two years while working for Prudential Bache. He has recently been
recognized by Micropal for his outstanding management of fixed income funds. He
is a senior member of the Fixed Income and Currency Team and sits on the Fixed
Income Strategy Group. His specialization is the construction of diversified
portfolios on behalf of U.S., U.K. and Japanese clients.
Pursuant to the Portfolio Management Agreement, the Manager (not the Trust)
shall pay to BIIL 0.45% of first $200 million, 0.30% of next $500 million, 0.25%
of next $1 billion, 0.10% of $2 billion of average daily net asset of the Global
Fixed Income Portfolio.
TOTAL EXPENSES FOR THE SERIES OF THE TRUST
The expenses of the ordinary operations of each Series are borne by the Manager
pursuant to Management Agreement. In addition to the management fee, the Trust
bears the expenses of taxes (if any) paid by a Series, the fees and expenses of
its independent trustees, any extraordinary expenses, such as any litigation or
indemnification expenses, as well as other expenses as described under "The
Manager." Any such Trust expenses directly attributable to a Series are charged
to that Series; other expenses are allocated among all the Series. For the
Trust's fiscal year ended December 31, 1996, total Series expenses as a percent-
age of net assets were as follows: Multiple Allocation Series- 0.99%; Fully
Managed Series -0.99%; Limited Maturity Bond Series - 0.61%; Hard Assets Series
- -0.99%; Real Estate Series -0.99%; All-Growth
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Series- 0.99%; Capital Appreciation Series - 0.99%; Rising Dividends Series
- -0.99%; Value Equity Series -0.99%; Strategic Equity Series -0.99%; Emerging
Markets Series -1.80%; Managed Global - 1.36%; Small Cap - 0.99% and Liquid
Asset Series - 0.61%. The other Series had not commenced operations as of
December 31, 1997.
DISTRIBUTOR
Directed Services, Inc. acts as distributor ("Distributor") of shares of the
Series, in addition to serving as Manager for the Trust. The Distributor's
address is 1001 Jefferson Street, Wilmington, Delaware 19801. The Distributor is
a registered broker-dealer and a member of the National Association of
Securities Dealers and acts as Distributor without remuneration from the Trust.
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Series is Bankers Trust Company. First Data Investors
Services Group of First Data Corporation provides certain administrative and
portfolio accounting services for all Series.
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes certain types of securities and investment
techniques used by one or more Series and enumerates potential risks associated
with these investments. The actual securities in which a series may invest are
described in "Investment Objectives and Policies."
For more detailed information on these investment techniques, as well as
information on some types of securities in which some or all of the Series may
invest, including information on U.S. Government securities, debt securities
generally, variable and floating rate securities, reverse repurchase agreements,
lending portfolio securities, warrants, other investment companies, and short
sales, including short sales against the box, see the Statement of Additional
Information.
MORTGAGE-BACKED SECURITIES
MORTGAGE PASS-THROUGH SECURITIES
Many mortgage-backed securities are mortgage pass-through securities, which are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are made periodically, in effect
"passing through" periodic payments made by the individual borrowers on the
residential mortgage loans which underlie the securities (net of fees paid to
the issuer or guarantor of the securities and possibly others). Such instruments
differ from typical bonds because principal is repaid monthly over the term of
the loan rather than returned in a lump sum at maturity. Timely payment of
principal and interest on some mortgage pass-through securities may be
guaranteed by the full faith and credit of the U.S. Government, as in the case
of securities guaranteed by the Government National Mortgage Association, or
"GNMA," or guaranteed by agencies or instrumentalities of the U.S. Government,
as in the case of securities guaranteed by the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
which are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations and not by the full faith and credit of
the U.S. Government. For more information on GNMA certificates and FNMA and
FHLMC mortgage-backed obligations, see "Mortgage-Backed Securities" in the
Statement of Additional Information.
OTHER MORTGAGE-BACKED SECURITIES
Some Series may purchase mortgage-backed securities issued by financial
institutions such as commercial banks, savings and loan associations, mortgage
banks, and securities broker-dealers (or affiliates of such institutions
established to issue these securities) in the form of either collateralized
mortgage obligations ("CMOs") or mortgage-backed bonds. CMOs are obligations
fully collateralized directly or indirectly by a pool of mortgages on which
payments of principal and interest are dedicated to payment of principal and
interest on the CMOs. Payments are passed through to the holders, although not
necessarily on a pro rata basis, on the same schedule as they are received.
Mortgage-backed bonds are general obligations of the issuer fully collateralized
directly or indirectly by a pool of mortgages. The mortgages serve as collateral
for the issuer's payment obligations on the bonds but interest and principal
payments on the mortgages are not passed through either directly (as with GNMA
certificates and FNMA and FHLMC pass-through securities)
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or on a modified basis (as with CMOs). Accordingly, a change in the rate of pre-
payments on the pool of mortgages could change the effective maturity of a CMO
but not that of a mortgage-backed bond (although, like many bonds, mortgage-
backed bonds can provide that they are callable by the issuer prior to matur-
ity). Although the mortgage-related securities securing these obligations may be
subject to a government guarantee or third-party support, the obligation itself
is not so guaranteed. Therefore, if the collateral securing the obligation is
insufficient to make payment on the obligation, a holder could sustain a loss.
RISKS OF MORTGAGE-BACKED SECURITIES
Although mortgage loans constituting a pool of mortgages, such as those
underlying GNMA certificates, may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization and may
be prepaid prior to maturity. In the case of mortgage pass-through securities
such as GNMA certificates or FNMA and FHLMC mortgage-backed obligations, or
modified pass-through securities such as collateralized mortgage obligations
issued by various financial institutions, early repayment of principal arising
from prepayments of principal on the underlying mortgage loans due to the sale
of the underlying property, the refinancing of the loan, or foreclosure may
expose a Series to a lower rate of return upon reinvestment of the principal.
Prepayment rates vary widely and may be affected by changes in market interest
rates. In periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of the mortgage-backed
security.
Conversely, when interest rates are rising, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the mortgage-backed
security. Accordingly, it is not possible to accurately predict the average life
of a particular pool. Reinvestment of prepayments may occur at higher or lower
rates than the original yield on the certificates. Therefore, the actual
maturity and realized yield on pass-through or modified pass-through mortgage-
backed securities will vary based upon the prepayment experience of the
underlying pool of mortgages.
With respect to GNMA certificates, although GNMA guarantees timely payment even
if homeowners delay or default, tracking the "pass-through" payments may, at
times, be difficult. Expected payments may be delayed due to the delays in
registering the newly traded paper securities. The custodian's policies for
crediting missed payments while errant receipts are tracked down may vary. Other
mortgage-backed securities such as those of FHLMC and FNMA trade in book-entry
form and are not subject to this risk of delays in timely payment of income.
OTHER ASSET-BACKED SECURITIES
Some Series may purchase other asset-backed securities (unrelated to mortgage
loans) such as "CARSSM" ("Certificates for Automobile Receivables") and Credit
Card Receivable Securities and any other asset-backed securities that may be
developed in the future. See the Statement of Additional Information for a
description of these instruments.
HIGH YIELD BONDS
Generally, high yield/high risk debt securities are those rated lower than Baa
or BBB, or, if not rated by Moody's or Standard & Poor's, of equivalent quality
and which are commonly referred to as "junk bonds." Investment in such
securities generally provides greater income and increased opportunity for
capital appreciation than investments in higher quality debt securities, but
they also typically entail greater potential price volatility and principal and
income risk.
In general, high yield bonds are not considered to be investment grade. They are
regarded as predominately speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in high
yield bond prices. In the case of high yield bonds structured as zero-coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
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The secondary market on which high yield bonds are traded is generally less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Series could sell a
high yield bond, and could adversely affect the daily net asset value of the
Series' shares. At times of less liquidity, it may be more difficult to value
the high yield bonds because such valuation may require more research, and
elements of judgment may play a greater role in the valuation because there is
less reliable, objective data available.
REPURCHASE AGREEMENTS
Repurchase agreements permit an investor to maintain liquidity and earn income
over periods of time as short as overnight. Repurchase agreements may be
characterized as loans collateralized by the underlying securities. In these
transactions, a Series purchases securities such as U.S. Treasury obligations
or U.S. Government securities (the "underlying securities") from a broker or
bank, which agrees to repurchase the underlying securities on a certain date or
on demand and at a fixed price calculated to produce a previously agreed-upon
return to the Series. If the broker or bank were to default on its repurchase
obligation and the underlying securities were sold for a lesser amount, the
Series would realize a loss, and may incur disposition costs in connection with
liquidating the collateral. In the event bankruptcy proceedings are commenced
with respect to the seller, realization of the collateral by a Series may be
delayed or limited, and a loss may be incurred if the collateral securing the
repurchase agreement declines in value during the bankruptcy proceedings.
A Series may engage in repurchase transactions in accordance with guidelines
approved by the Board of Trustees of the Trust, which include monitoring the
creditworthiness of the parties with which the Series engages in repurchase
transactions, obtaining collateral at least equal in value to the repurchase
obligation, and marking the collateral to market on a daily basis. See the
Statement of Additional Information "Description of Securities and Investment
Techniques" for further information regarding repurchase agreements.
ILLIQUID SECURITIES
Illiquid securities include repurchase agreements maturing in more than seven
days, unregistered or restricted securities and any security which a Portfolio
Manager is unable to sell within seven days or less. Each Series may invest in
illiquid securities up to its illiquidity limit.
RESTRICTED SECURITIES
Restricted securities owned by a Series that are determined to be illiquid are
subject to that Series' illiquidity limitation. Restricted securities may be
sold only in privately negotiated transactions, in a public offering with
respect to which a registration statement is in effect under the Securities Act
of 1933, or in a transaction that is exempt from such registration. Where
registration is required, a Series may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Series may be permitted to sell a security
under an effective registration statement. If, during such a period adverse
market conditions were to develop, the Series might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities may be
priced at fair value as determined in good faith by the Series' Portfolio
Manager.
SHORT SALES
A short sale is a transaction in which a Series sells a security it does not own
in anticipation of a decline in market price. When a Series makes a short sale,
the proceeds it receives are retained by the broker until the Series replaces
the borrowed security. In order to deliver the security to the buyer, the Series
must arrange through a broker to borrow the security and, in so doing, the
Series becomes obligated to replace the security borrowed at its market price at
the time of replacement, whatever that price may be. The Series may have to pay
a premium to borrow the security. The Series must also pay any dividends or
interest payable on the security until the Series replaces the security.
The Series' obligation to replace the security borrowed in connection with the
short sale will be secured by collateral deposited with the broker, consisting
of cash or securities acceptable to the broker. In addition, with respect to any
short sale, other than short sales against the box, the Series will be required
to deposit collateral consisting of cash, cash items, or U.S. Government
securities in a segregated account with its custodian in an amount such that the
value of the sum of both collateral deposits is at all times equal to at
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least 100% of the current market value of the securities sold short. The
deposits do not necessarily limit the Series' potential loss on a short sale,
which may exceed the entire amount of the collateral.
A Series is not required to liquidate an existing short sale position solely
because a change in market values has caused one or more of these percentage
limitations to be exceeded. For more information on short sales, see the
Statement of Additional Information.
FOREIGN SECURITIES
Series may invest in equity securities of foreign issuers, including American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts") which are
described below. Some Series may invest in foreign branches of commercial banks
and foreign banks. See the "Banking Industry and Savings Industry Obligations"
discussion in the Statement of Additional Information for further description of
these securities.
Each Series is subject to the following guidelines for diversification of
foreign security investments. If a Series has less than 20% of its assets in
foreign issuers, then all of such investment may be in issuers located in one
country. If a Series has at least 20% but less than 40% of its assets in
foreign issuers, then such investment must be allocated to issuers located in at
least two different countries. Similarly, if a Series has at least 40% but less
than 60% of its assets in foreign issuers, such investment must be allocated to
at least three different countries. Foreign investments must be allocated to at
least four different countries if at least 60% of a Series' assets is in foreign
issuers, and to at least five different countries if at least 80% is in foreign
issuers. if at least. For purposes of allocating a Series' investments, a
company will be considered located in the country in which it is domiciled, in
which it is primarily traded, from which it derives a significant portion of its
revenues, or in which a significant portion of its goods or services are
produced.
Except for the Hard Assets Series, each Series may have no more than 25% of its
net assets invested in securities of issuers located in any one emerging market
country and no more than 50% of its assets invested in securities of any one
country, except that a Series may have additional investments of its net assets
invested in securities of issuers located in any one of the following countries:
Australia, Canada, France, Japan, the United Kingdom, or Germany. In addition,
the Hard Assets Series may invest up to 35% of its net assets in securities of
issuers located in South Africa. A Series' investments in U.S. issuers are not
subject to the foreign country diversification guidelines.
Investments in foreign securities offer potential benefits not available solely
in securities of domestic issuers by offering the opportunity to invest in
foreign issuers that appear to offer growth potential, or in foreign countries
with economic policies or business cycles different from those of the United
States, or to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Series may invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, other foreign taxation, political or social instability, or diplomatic
developments that could adversely affect investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the United States. A Series
might have greater difficulty taking appropriate legal action with respect to
foreign investments in non-U.S. courts than with respect to domestic issuers in
U.S. courts.
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In addition, transactions in foreign securities may involve greater time from
the trade date until settlement than domestic securities transactions and
involve the risk of possible losses through the holding of securities by
custodians and securities depositories in foreign countries.
"Sovereign Debt" consists of debt obligations of governmental issuers in
emerging market countries and industrialized countries. The sovereign debt
issued or guaranteed by certain emerging market governmental entities and
corporate issuers in which the Series may invest potentially involves a high
degree of risk and may be deemed the equivalent in terms of quality to high
risk, low rated securities (i.e., high yield bonds) and subject to many of the
same risks as such securities. Similarly, the Series may have difficulty
disposing of certain of these debt obligations because there may be a thin
trading market for such securities. In the event a governmental issuer defaults
on its obligations, the Series may have limited legal recourse against the
issuer or guarantor, if any. Remedies must, in some cases, be pursued in the
courts of the defaulting party itself, and the ability of the holder of foreign
government debt securities to obtain recourse may be subject to the political
climate in the relevant country. The issuers of the government debt securities
in which the Series may invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which has led to
defaults on certain obligations and the restructuring of certain indebtedness.
See "Description of Securities and Investment Techniques-High Yield Bonds" in
this Prospectus and "Debt Securities-Sovereign Debt" in the Statement of
Additional Information.
Dividend and interest income from foreign securities may generally be subject to
withholding taxes by the country in which the issuer is located and may not be
recoverable by a Series or its investors.
ADRs are Depositary Receipts typically issued by a U.S. bank or trust company
which evidence ownership of underlying securities issued by a foreign
corporation. 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
U.S. 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. Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the United
States and, therefore, there may be less information available regarding such
issuers and there may not be a correlation between such information and the
market value of the Depositary Receipts. Depositary Receipts also involve the
risks of other investments in foreign securities.
INDEXED SECURITIES AND STRUCTURED NOTES
Indexed securities are securities whose value is linked to one or more
currencies, interest rates, commodities, or financial or commodity indexes.
An indexed security enables the investor to purchase a note whose coupons and/or
principal redemption are linked to the performance of an underlying asset.
Indexed securities may be positively or negatively indexed (i.e., their value
may increase or decrease if the underlying instrument appreciates). Indexed
securities may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself,
and present many of the same risks as investing in futures and options. Indexed
securities are also subject to credit risks associated with the issuer of the
security with respect to both principal and interest. Only securities linked to
one or more non-agricultural commodities or commodity indexes will be considered
a Hard Asset security.
Indexed securities may be publicly traded or may be two-party contracts (such
two-party agreements are referred to here collectively as structured notes).
When a Series purchases a structured note, a type of derivative, it will make a
payment of principal to the counterparty. Some structured notes have a
guaranteed repayment of principal while others place a portion (or all) of the
principal at risk. A Series will purchase structured notes only from counter-
parties rated A or better by Standard & Poor's, Moody's or another nationally
recognized statistical rating organization. The Portfolio Manager will monitor
the liquidity of structured notes under the supervision of the Board of
Trustees, and notes determined to be illiquid will be aggregated with other
illiquid securities for purposes of the limitation on illiquid investments.
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INVESTMENT IN GOLD AND OTHER PRECIOUS METALS
Some Series may invest in gold bullion and coins and other precious metals
(silver or platinum) bullion and in futures contracts with respect to such
metals. In order to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended, each Series intends to
manage its metal investments and/or futures contracts on metals so that less
than 10% of the gross income of the Series for tax purposes during any fiscal
year (the current limit on so-called non-qualifying income) is derived from
these and other sources that produce such non-qualifying income.
Metals will not be purchased in any form that is not readily marketable, and
gold coins will be purchased for their intrinsic value only, i.e., coins will
not be purchased for their numismatic value. Any metals purchased by a Series
will be delivered to and stored with a qualified custodian bank. Metal invest-
ments do not generate interest or dividend income.
Metal investments are considered speculative and are affected by various world-
wide economic, financial, and political factors. Prices may fluctuate sharply
over short time periods due to changes in inflation expectations in various
countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and govern-
mental prohibitions or restriction on the private ownership of certain precious
metals or minerals. Furthermore, at the present time, there are four major
producers of gold bullion: the Republic of South Africa, the United States,
Canada, and Australia. Political and economic conditions in these countries will
have a direct effect on the mining and distribution of gold and, consequently,
on its price. Many of these risks also may affect the value of securities of
companies engaged in operations respecting gold and other precious metals.
FUTURES CONTRACTS
Some Series may engage in futures contracts. They may purchase and sell
interest rate, stock index, gold and other futures contracts based upon other
financial instruments. They may also purchase and write options on such con-
tracts. For a general description of these futures contracts and options
thereon, including information on margin requirements, see the Statement of
Additional Information.
These Series may engage in such futures transactions as an adjunct to their
securities activities. The transactions in futures contracts must constitute
bona fide hedging or other strategies under regulations promulgated by the
Commodities Futures Trading Commission (the "CFTC"), under which a Series
engaging in futures transactions would not be a "commodity pool."
At the time a Series purchases a futures contract, an amount of cash and/or
securities equal to the fair market value less initial and variation margin of
the futures contract will be deposited in a segregated account with the Trust's
custodian to collateralize the position and thereby ensure that such futures
contract is covered. In addition, each Series will comply with certain
regulations of the CFTC to qualify for an exclusion from being a "commodity
pool," which require a Series to set aside cash and short-term obligations with
respect to long positions in a futures contract or a futures option. These
requirements are described in the Statement of Additional Information.
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS
There are several risks associated with the use of futures and futures options.
The value of a futures contract may decline. While a Series' transactions in
futures may protect the Series against adverse movements in the general level of
interest rates or other economic conditions, such transactions could also
preclude the Series from the opportunity to benefit from favorable movements in
the level of interest rates or other economic conditions. With respect to
transactions for hedging, there can be no guarantee that there will be
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on both
the hedged securities in a Series and the hedging vehicle so that the Series'
return might have been better if hedging had not been attempted. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures and futures options on securities,
including technical influences in futures trading and futures options, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. A decision as
to whether, when, and how to hedge involves the exercise of
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skill and judgment and even a well conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected interest rate trends.
There can be no assurance that a liquid market will exist at a time when a
Series seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. The daily
limit governs only price movements during a particular trading day and therefore
does not limit potential losses because the limit may work to prevent the
liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses. Lack of a
liquid market for any reason may prevent the Series from liquidating an
unfavorable position and the Series would remain obligated to meet margin
requirements and continue to incur losses until the position is closed.
Most Series will only enter into futures contracts or futures options which are
standardized and traded on a U.S. exchange or board of trade, or, in the case of
futures options, for which an established over-the-counter market exists. A
Series will not enter into a futures contract or purchase a futures option if
immediately thereafter the initial margin deposits for futures contracts held
by the Series plus premiums paid by it for open futures options positions, less
the amount by which any such positions are "in-the-money," would exceed 5% of
the Series' total assets.
Foreign markets may offer advantages such as trading in indexes that are not
currently traded in the United States. Foreign markets, however, may have
greater risk potential than domestic markets. Unlike trading on domestic
commodity exchanges, trading on foreign commodity markets is not regulated by
the CFTC and may be subject to greater risk than trading on domestic exchanges.
For example, some foreign exchanges are principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. Trading in foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the CFTC's regulations, and the rules of the National
Futures Association and any domestic exchange, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by
the National Futures Association or any domestic futures exchange. Amounts
received for foreign futures or foreign options transactions may not be provided
the same protections as funds received in respect of transactions on United
States futures exchanges. A Series could incur losses or lose any profits that
had been realized in trading by adverse changes in the exchange rate of the
currency in which the transaction is denominated. Transactions on foreign
exchanges may include both commodities that are traded on domestic exchanges and
boards of trade and those that are not.
The Trust reserves the right to engage in other types of futures transactions in
the future and to use futures and related options for other than hedging
purposes to the extent permitted by regulatory authorities.
OPTIONS ON SECURITIES
Some Series may engage in transactions on options on securities, may purchase
and write put and call options on securities and on stock indexes at such times
as the Series' Portfolio Manager deems appropriate and consistent with the
Series' investment objective, may purchase and write put and call options on
securities, may write call and put options only if they are covered or secured,
and may purchase or sell options to effect closing transactions, may buy covered
listed put equity options and sell covered listed call equity options, including
options on stock indexes, may purchase protective puts, and may purchase calls
and puts other than protective puts. Some Series may engage in options
transactions not only on U.S. domestic markets but also on exchanges and other
markets outside the United States.
Series able to invest in options may enter into closing transactions in order
to terminate its obligations either as a writer or a purchaser of an option
prior to the expiration of the option. For a general description of purchasing
and writing options on securities and securities indexes, see "Options on
Securities and Securities Indexes" in the Statement of Additional Information.
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RISKS OF OPTIONS TRANSACTIONS
The purchase and writing of options involves certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. If a put or call
option purchased by the Series is not sold when it has remaining value, and if
the market price of the underlying security, in the case of a put, remains
equal to or greater than the exercise price or, in the case of a call, remains
less than or equal to the exercise price, the Series will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security.
There can be no assurance that a liquid market will exist when a Series seeks to
close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Series may be unable to close
out a position. If a Series cannot effect a closing transaction, it will not be
able to sell the underlying security while the previously written option remains
outstanding, even though it might otherwise be advantageous to do so. Possible
reasons for the absence of a liquid secondary market on a national securities
exchange could include: insufficient trading interest, restrictions imposed by
national securities exchanges, trading halts or suspensions with respect to call
options or their underlying securities, inadequacy of the facilities of national
securities exchanges or the Options Clearing Corporation due to a high trading
volume or other event, and a decision by one or more national securities
exchanges to discontinue the trading of call options or to impose restrictions
on types of orders.
Since option premiums paid or received by a Series, as compared to underlying
investments, are small in relation to the market value of such investments,
buying and selling put and call options offer large amounts of leverage. Thus,
the leverage offered by trading in options could result in the Series' net asset
value being more sensitive to changes in the value of the underlying securities.
FOREIGN CURRENCY TRANSACTIONS
A forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. A Series may either accept or make delivery of the currency at the
maturity of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. A Series
will engage in forward currency transactions in anticipation of or to protect
itself against fluctuations in currency exchange rates, as further described
in the Statement of Additional Information.
A Series will not enter into a forward contract with a term of greater than
one year. At the maturity of a forward contract, a Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. If the Series retains the portfolio security and engages in
an offsetting transaction, the Series will incur a gain or a loss to the extent
that there has been movement in forward contract prices. For more information
on closing a forward currency position, including information on associated
risks, see the Statement of Additional Information.
Forward contracts are not traded on regulated commodities exchanges. There can
be no assurance that a liquid market will exist when a Series seeks to close out
a forward currency position, in which case a Series might not be able to effect
a closing purchase transaction at any particular time. In addition, a Series
entering into a forward foreign currency contract incurs the risk of default by
the counter party to the transaction. While forward foreign currency contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
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Although each Series values its assets daily in terms of U.S. dollars, they do
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Series may do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Series at one rate, while offering a lesser rate of exchange should the
Series desire to resell that currency to the dealer.
OPTIONS ON FOREIGN CURRENCIES
A Series may purchase call and put options on foreign currencies as a hedge
against changes in the value of the U.S. dollar (or another currency) in
relation to a foreign currency in which portfolio securities of the Series
may be denominated. For a general description and other information on options
on foreign currencies, see "Options on Foreign Currencies" in the Statement of
Additional Information. Hedging against a change in the value of a foreign
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions reduce or preclude the opportunity for gain if the value
of the hedged currency should change relative to the U.S. dollar. A Series will
not speculate in options on foreign currencies. A Series may invest in options
on foreign currency which are either listed on a domestic securities exchange
or traded on a recognized foreign exchange.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a Series will
purchase only exchange-traded options, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at
any particular time. In the event no liquid secondary market exists, it might
not be possible to effect closing transactions in particular options. If a
Series cannot close out an exchange-traded option which it holds, it would have
to exercise its option in order to realize any profit and would incur
transactional costs on the sale of the underlying assets.
BORROWING
Leveraging by means of borrowing will exaggerate the effect of any increase or
decrease in the value of portfolio securities on a Series' net asset value;
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. The use of borrowing tends to result in a faster than average
movement, up or down, in the net asset value of the Series' shares. A Series
also may be required to maintain minimum average balances in connection with
such borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
Reverse repurchase agreements, short sales of securities, and short sales of
securities against the box will be included as borrowing subject to the
borrowing limitations described above, except those Series that are permitted to
engage in short sales of securities with respect to an additional 15% of the
Series' net assets in excess of the limits otherwise applicable to borrowing.
Securities purchased on a when-issued or delayed delivery basis will not be
subject to the Series' borrowing limitations to the extent that a Series
establishes and maintains liquid assets in a segregated account with the Trust's
custodian equal to the Series' obligations under the when-issued or delayed
delivery arrangement.
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HARD ASSET SECURITIES
The production and marketing of Hard Assets may be affected by actions and
changes in governments. In addition, Hard Asset Companies and securities of hard
asset companies may be cyclical in nature. During periods of economic or
financial instability, the securities of some Hard Asset Companies may be
subject to broad price fluctuations, reflecting volatility of energy and basic
materials prices and possible instability of supply of various Hard Assets. In
addition, some Hard Asset Companies may also be subject to the risks generally
associated with extraction of natural resources, such as the risks of mining and
oil drilling, and the risks of the hazards associated with natural resources,
such as fire, drought, increased regulatory and environmental costs, and others.
Securities of Hard Asset Companies may also experience greater price fluctua-
tions than the relevant Hard Asset. In periods of rising Hard Asset prices,
such securities may rise at a faster rate, and, conversely, in time of falling
Hard Asset prices, such securities may suffer a greater price decline.
REAL ESTATE SECURITIES
Real estate securities include real estate investment trusts ("REITs") and other
companies in the real estate industry or companies with substantial real estate
investments. A Series investing in such real estate securities may be subject
to the risks associated with the direct ownership of real estate because of its
policy of concentration in the securities of companies which own, construct,
manage, or sell residential, commercial, or industrial real estate. These risks
include: declines in the value of real estate, adverse changes in the climate
for 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,
leveraging of interests in real estate, 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, REITs may be affected by any changes
in the value of the underlying property owned by the trusts or by the quality
of any credit extended. REITs are dependent upon management skill, are not
diversified, and are therefore subject to the risk of financing single or a
limited number of projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation, and the possibility of
failing to qualify for special tax treatment under Subchapter M of the Internal
Revenue Code of 1986 and to maintain an exemption under the Investment Company
Act of 1940. Finally, certain REITs may be self-liquidating in that a specific
term of existence is provided for in the trust document and such REITs run the
risk of liquidating at an economically inopportune time.
SWAPS
Swap agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard swap transaction, two parties agree to exchange the returns (or
differential in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
or in a "basket" of securities representing a particular index.
The use of swaps is a highly specialized activity which involved investment
techniques and risks different from those associated with ordinary portfolio
transactions. Whether the Series' use of swap agreements will be successful in
furthering its investment objective will depend on the Portfolio Manager's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Moreover, the Series bears the
risk of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. Swaps are
generally considered illiquid and will be aggregated with other illiquid
positions for purposes of the limitation on illiquid investments.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect the Series' ability to terminate existing
swap agreements or to realize amounts to be received under such agreements.
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ZERO-COUPON BONDS
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option, to make current
interest payments on the bonds either in cash or in additional bonds. The values
of zero-coupon bonds and payment-in-kind bonds are subject to greater
fluctuation in response to changes in market interest rates than bonds which pay
interest currently, and may involve greater credit risk than such bonds.
Zero-coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero-
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide that the issuer thereof may, at its option, pay interest on such
bonds in cash or in the form of additional debt obligations. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Series will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other Series securities to
satisfy the Series' distribution obligations.
SMALL COMPANIES
Certain small- and mid-cap companies may present greater opportunities for
investment return, but may also involve greater risks. They may have limited
product lines, markets, or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and in limited
volume. As a result, the prices of these securities may fluctuate more than
prices of securities of larger, widely traded companies.
The Series are subject to investment restrictions that are described in the
Statement of Additional Information. Those investment restrictions so designated
and the investment objective of each Series are "fundamental policies" of the
Series, which means that they may not be changed without a majority vote of the
shareholders of the affected Series. Except for those restrictions specifically
identified as fundamental and each Series' investment objective, all other
investment policies and practices described in this Prospectus and the Statement
of Additional Information are not fundamental, meaning that the Board of
Trustees may change them without shareholder approval. The vote of a majority of
the outstanding voting securities of a Series means the vote, at an annual or
special meeting, of (a) 67% or more of the voting securities present at such
meeting, if the holders of more than 50% of the outstanding voting securities of
such Series are present or represented by proxy; or (b) more than 50% of the
outstanding voting securities of such Series, whichever is less.
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INVESTMENT RESTRICTIONS
The investment restrictions are stated in full in the Statement of Additional
Information, and a brief description of some of them follows. A Series will not,
with respect to 75% of its assets, invest more than 5% of its assets (taken at
market value at the time of such investment) in securities of any one issuer,
except that this restriction does not apply to U.S. Government securities and
does not apply to the Hard Assets and Managed Global Series. A Series will not,
with respect to 75% of its assets, invest more than 10% (taken at market value
at the time of such investment) of any one issuer's outstanding voting
securities, except that this restriction does not apply to U.S. Government
securities and does not apply to the Hard Assets Series. No Series will
concentrate more than 25% of its assets in any particular industry, except that
this restriction does not apply to (a) U.S. Government securities, (b) with
respect to the Liquid Asset Series, securities or obligations issued by U.S.
banks, (c) with respect to the Real Estate Series, securities of issuers in the
real estate and related industries, and (d) with respect to the Hard Assets
Series, securities of issuers in the group of industries engaged in hard assets
activities, provided that such concentration for the Real Estate
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and the Hard Assets Series is permitted under tax law requirements for regulated
investment companies that are investment vehicles for variable contracts.
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PURCHASE OF SHARES
Shares of the Series may be offered for purchase by separate accounts of
insurance companies to serve as an investment medium for the Variable Contracts
issued by the insurance companies and to certain qualified pension and
retirement plans, as permitted under the federal tax rules relating to the
Series serving as investment mediums for Variable Contracts. Shares of the
Series are sold to insurance company separate accounts funding both variable
annuity contracts and variable life insurance contracts and may be sold to
insurance companies that are not affiliated. The Trust currently does not
foresee any disadvantages to Variable Contract Owners or other investors
arising from offering the Trust's shares to separate accounts of unaffiliated
insurers, separate accounts funding both life insurance policies and annuity
contracts, or certain qualified pension and retirement plans; however, due to
differences in tax treatment or other considerations, it is theoretically
possible that the interests of owners of various contracts or pension and
retirement plans participating in the Trust might at some time be in conflict.
However, the Board of Trustees and insurance companies whose separate accounts
invest in the Trust are required to monitor events in order to identify any
material conflicts between variable annuity contract owners and variable life
policy owners, between separate accounts of unaffiliated insurers, and between
various contract owners and pension and retirement plans. The Board of Trustees
will determine what action, if any, should be taken in the event of such a
conflict. If such a conflict were to occur, one or more insurance company
separate accounts might withdraw their investment in the Trust. This might
force the Trust to sell securities at disadvantageous prices.
Shares of each Series are sold at their respective net asset values (without a
sales charge) next computed after receipt of a purchase order by an insurance
company whose separate account invests in the Trust.
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NET ASSET VALUE
A Series' net asset value is determined by dividing the value of each Series'
net assets by the number of its shares outstanding. That determination is made
once each business day, Monday through Friday, at or about 4:00 p.m., New York
City time, on each day that the New York Stock Exchange is open for trading.
The Board of Trustees has established procedures to value each Series' assets
to determine net asset value. In general, these valuations are based on actual
or estimated market value, with special provisions for assets not having
readily available market quotations and short-term debt securities. The net
asset values per share of each Series will fluctuate in response to changes in
market conditions and other factors, except that the net asset value of the
shares of the Liquid Asset Series will not fluctuate in response to changes in
market conditions for so long as the Series is using the amortized cost method
of valuation.
The Liquid Asset Series' portfolio securities are valued using the amortized
cost method of valuation. This involves valuing a security at cost on the date
of acquisition and thereafter assuming a constant accretion of a discount or
amortization of a premium to maturity. See the Statement of Additional
Information for a description of certain conditions and procedures followed by
the Series in connection with amortized cost valuation.
All other Series are valued as follows:
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last
reported sales price, or, if no sales are reported, the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market makers. In other cases, securities are valued
at their fair value as determined in good faith by the Board of Trustees,
although the actual calculations will be made by persons acting under the
direction of the Board and subject to the Board's review. Money market
instruments are valued at market value, except that instruments maturing in
sixty days or less may be valued using the amortized cost method of
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valuation. The value of a foreign security is determined in its national
currency based upon the price on the foreign exchange as of its close of
business immediately preceding the time of valuation. Securities traded in over-
the-counter markets outside the United States are valued at the last available
price in the over-the-counter market prior to the time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity sixty days or less at their
date of acquisition valued under the amortized cost method), are normally valued
on the basis of quotes obtained from brokers and dealers or pricing services,
which take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. Debt obligations having
a maturity of sixty days or less may be valued at amortized cost unless the
Portfolio Manager believes that amortized cost does not approximate market
value.
When a Series writes a put or call option, the amount of the premium is included
in the Series' assets and an equal amount is included in its liabilities. The
liability thereafter is adjusted to the current market value of the option.
The premium paid for an option purchased by the Series is recorded as an asset
and subsequently adjusted to market value. Futures and options thereon which
are traded on commodities exchanges or boards of trade will be valued at their
closing settlement price on such exchange or board of trade. Foreign securities
quoted in foreign currencies generally are valued at appropriately translated
foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets in European and
Pacific Basin countries is normally completed well before 4:00 p.m., New York
City time. Trading on these exchanges may not take place on all New York
business days and in addition, trading takes place in various foreign markets
on days which are not business days in New York and on which the Trust's net
asset value is not calculated. As a result, the calculation of the net asset
value of a Series investing in foreign securities may not take place
contemporaneously with the determination of the prices of the securities
included in the calculation. Further, under the Trust's procedures, the prices
of foreign securities are determined using information derived from pricing
services and other sources. Prices derived under these procedures will be used
in determining daily net asset value. Information that becomes known to the
Trust or its agents after the time that the net asset value is calculated on
any business day may be assessed in determining net asset value per share after
the time of receipt of the information, but will not be used to retroactively
adjust the price of the security so determined earlier or on a prior day. Events
that may affect the value of these securities that occur between the time their
prices are determined and the time the Series' net asset value is determined may
not be reflected in the calculation of net asset value of the Series unless the
Manager or the Portfolio Manager, acting under authority delegated by the Board
of Trustees, deems that the particular event would materially affect net asset
value. In this event, the securities would be valued at fair market value as
determined in good faith by the Board of Trustees of the Trust, although the
actual calculations will be made by the Manager or the Portfolio Manager acting
under the direction of the Board and subject to the Board's review.
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REDEMPTION OF SHARES
Shares of any Series may be redeemed on any business day. Redemptions are
effected at the per share net asset value next determined after receipt of the
redemption request by an insurance company whose separate account invests in
the Series. Redemption proceeds normally will be paid within seven days
following receipt of instructions in proper form. The right of redemption may
be suspended by the Trust or the payment date postponed beyond seven days when
the New York Stock Exchange is closed (other than customary weekend and holiday
closings) or for any period during which trading thereon is restricted because
an emergency exists, as determined by the SEC, making disposal of portfolio
securities or valuation of net assets not reasonably practicable, and whenever
the SEC has by order permitted such suspension or postponement for the
protection of shareholders. If the Board of Trustees should determine that it
would be detrimental to the best interests of the remaining shareholders of a
Series to make payment wholly or partly in cash, the Series may pay the
redemption price in whole or part by a distribution in kind of securities from
the portfolio of the Series, in lieu of cash, in conformity with applicable
rules of the SEC. If shares are
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redeemed in kind, the redeeming shareholder might incur brokerage costs in
converting the assets into cash.
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EXCHANGES
Shares of any one Series may be exchanged for shares of any of the other Series
described in this Prospectus. Exchanges are treated as a redemption of shares
of one Series and a purchase of shares of one or more of the other Series and
are effected at the respective net asset values per share of each Series on the
date of the exchange. The Trust reserves the right to modify or discontinue its
exchange privilege at any time without notice. Variable Contract Owners do not
deal directly with the Trust with respect to the purchase, redemption, or
exchange of shares of the Series, and should refer to the prospectus for the
applicable Variable Contract for information on allocation of premiums and on
transfers of account value among divisions of the pertinent insurance company
separate account that invest in the Series.
The Trust reserves the right to discontinue offering shares of one or more
Series at any time. In the event that a Series ceases offering its shares,
any investments allocated by an insurance company to such Series will be
invested in the Liquid Asset Series or any successor to such Series.
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PORTFOLIO TRANSACTIONS
BROKERAGE SERVICES
Pursuant to the Portfolio Management Agreements, the Portfolio Manager places
orders for the purchase and sale of portfolio investments for the Series'
accounts with brokers or dealers selected by the Portfolio Manager in its
discretion. In executing transactions, the Portfolio Manager will attempt to
obtain the best execution for a Series, taking into account such factors as
price (including the applicable brokerage commission or dollar spread), size
of order, the nature of the market for the security, the timing of the
transaction, the reputation, the experience and financial stability of the
broker dealer involved, the quality of the service, the difficulty of
execution, execution capabilities, and operational facilities of the firms
involved, and the firm's risk in positioning a block of securities. In
transactions on stock exchanges in the United States, payments of brokerage
commissions are negotiated. In effecting purchases and sales of portfolio
securities in transactions on U.S. stock exchanges for the account of a
Series, the Portfolio Manager may pay higher commission rates than the
lowest available when the Portfolio Manager believes it is reasonable to do
so in light of the value of the brokerage and research services provided by
the broker effecting the transaction. In the case of securities traded on
some foreign stock exchanges, brokerage commissions may be fixed and the
Portfolio Manager may be unable to negotiate commission rates for these
transactions. In the case of securities traded on the over-the-counter markets,
there is generally no stated commission, but the price includes an undisclosed
commission or markup.
Some securities considered for investment by the Series may also be considered
for other clients served by the Portfolio Manager and/or its affiliates. For
information on trade allocation, see "Portfolio Transactions and Brokerage--
Investment Decisions" in the Statement of Additional Information.
A Portfolio Manager may place orders for the purchase and sale of portfolio
securities with itself, acting as broker-dealer, or with a broker-dealer that
is an affiliate of the Portfolio Manager or the Trust where, in the judgment
of the Portfolio Manager, such firm will be able to obtain a price and
execution at least as favorable as other qualified brokers. SEC rules further
require that commission paid to such an affiliated broker-dealer or Portfolio
Manager by a Series on exchange transactions not exceed "usual and customary
brokerage commissions."
PORTFOLIO TURNOVER
For reporting purposes, each Series' portfolio turnover rate is calculated by
dividing the value of the lesser of purchases or sales of portfolio securities
for the fiscal year by the monthly average of the value of portfolio securities
owned by the Series during the fiscal year. In determining such portfolio
turnover, all securities whose maturities at the time of acquisition were one
year or less are excluded. A 100% portfolio turnover
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rate would occur, for example, if all of the securities in the portfolio (other
than short-term securities) were replaced once during the fiscal year. The
portfolio turnover rate for each of the Series will vary from year to year, and
depending on market conditions, turnover could be greater in periods of unusual
market movement and volatility. A higher turnover rate would result in heavier
brokerage commissions or other transactional expenses which must be borne,
directly or indirectly, by a Series and ultimately by the Series' shareholders.
Such transactions may result in realization of taxable gains. The portfolio
turnover rates for each Series are presented in the data shown in "Financial
Highlights" in this Prospectus.
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DIVIDENDS AND DISTRIBUTIONS
Net investment income of the Liquid Asset Series is declared as a dividend daily
and paid monthly. For all other Series, net investment income will be paid
annually, except that the Limited Maturity Bond Series may declare a dividend
monthly or quarterly. Any net realized long-term capital gains (the excess of
net long-term capital gains over net short-term capital losses) for any Series
will be declared and paid at least once annually. Net realized short-term
capital gains may be declared and paid more frequently.
Any distributions made by any Series will be automatically reinvested in
additional shares of that Series, unless an election is made by a shareholder
to receive distributions in cash. Dividends or distributions by a Series other
than the Liquid Asset Series (which attempts to maintain a constant $1.00 per
share net asset value) will reduce the per share net asset value by the per
share amount so paid.
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FEDERAL INCOME TAX STATUS
Each Series intends to qualify each year and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, a Series generally expects not to be subject
to federal income tax if it meets certain source of income, diversification of
assets, income distribution, and other requirements, to the extent it
distributes its investment company taxable income and its net capital gains.
Distributions of investment company taxable income and net realized capital
gains are automatically reinvested in additional shares of the Series, unless
an election is made by a shareholder to receive distributions in cash. Tax
consequences to the Variable Contract Owners are described in the prospectuses
for the pertinent separate accounts.
Certain requirements relating to the qualification of a Series as a regulated
investment company under the Code may limit the extent to which a Series will
be able to engage in transactions in options, futures contracts, or forward
contracts.
To comply with regulations under Section 817(h) of the Code, each Series
generally will be required to diversify its investments, so that on the last
day of each quarter of a calendar year, no more than 55% of the value of its
assets is represented by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented by any three
investments, and no more than 90% is represented by any four investments.
For this purpose, securities of a single issuer are treated as one investment
and each U.S. Government agency or instrumentality is treated as a separate
issuer. Any security issued, guaranteed, or insured (to the extent so
guaranteed or insured) by the United States or an agency or instrumentality of
the United States is treated as a security issued by the U.S. Government or its
agency or instrumentality, whichever is applicable. These regulations will
limit the ability of a Series to invest more than 55% of its assets in direct
obligations of the U.S. Treasury or in obligations which are deemed to be
issued by a particular agency or instrumentality of the U.S. Government. If a
Series fails to meet the diversification requirements under Code Section
817(h), income with respect to Variable Contracts invested in the Series at
any time during the calendar quarter in which the failure occurred could
become currently taxable to the owners of such Variable Contracts and income
for prior periods with respect to such Contracts also would be taxable, most
likely in the year of the failure to achieve the required diversification.
Other adverse tax consequences also could ensue. If a Series failed to qualify
as a regulated investment company, the results would be substantially the same
as a failure to meet the diversification requirements under Code Section 817(h).
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In connection with the issuance of the regulations governing diversification
under Section 817(h) of the Code, the Treasury Department announced that it
would issue future regulations or rulings addressing the circumstances in
which a Variable Contract Owner's control of the investments of a separate
account may cause the contract owner, rather than the insurance company, to
be treated as the owner of the assets held by the separate account. If the
Variable Contract Owner is considered the owner of the securities underlying
the separate account, income and gains produced by those securities would be
included currently in the Variable Contract Owner's gross income. It is not
known what standards will be incorporated in future regulations or other
pronouncements.
In the event that unfavorable rules or regulations are adopted, there can be
no assurance that the Series will be able to operate as currently described
in the Prospectus, or that a Series will not have to change its investment
objectives, investment policies, or investment restrictions. While a Series'
investment objective is fundamental and may be changed only by a vote of a
majority of its outstanding shares, the Trustees have reserved the right to
modify the investment policies of a Series as necessary to prevent any such
prospective rules and regulations from causing the Variable Contract Owners
to be considered the owners of the Series underlying the separate accounts.
See "Taxation" in the Trust's Statement of Additional Information for more
information on taxes, including information on the taxation of distributions
from a Series. Reference is made to the prospectus or offering memorandum of the
applicable separate account for information regarding the federal income tax
treatment respecting a Variable Contract.
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OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on August 3, 1988,
and currently consists of twenty-four portfolios that are operational,
sixteen of which are described in this Prospectus. Other portfolios may be
offered by means of a separate prospectus. The Board of Trustees may establish
additional portfolios in the future. The capitalization of the Trust consists
solely of an unlimited number of shares of beneficial interest with a par value
of $0.001 each. When issued in accordance with the terms of the Trust's
Agreement and Declaration of Trust ("Declaration of Trust"), shares of the Trust
are fully paid, freely transferable, and non-assessable by the Trust.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees, or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations
and thus should be considered remote.
VOTING RIGHTS
Shareholders of the Series are given certain voting rights. Each share of each
Series will be given one vote, unless a different allocation of voting rights
is required under applicable law for a mutual fund that is an investment medium
for variable insurance products.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
Series, or for the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies, or approving a contract for investment
advisory services. In the case of Variable Contracts, in accordance with current
laws, it is anticipated that an insurance company issuing a Variable Contract
funded by a Separate Account that invests in a Series and that is registered
with the SEC as a unit investment trust will request voting instructions from
Variable Contract Owners and will vote shares or other voting interests in the
separate account in proportion to the voting instructions received.
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HISTORY OF THE MANAGED GLOBAL SERIES
The Managed Global Series is a successor for accounting purposes to the Managed
Global Account (the "Managed Global Account") of Separate Account D of Golden
American. As of September 3, 1996, pursuant to an Agreement and Plan of
Reorganization (the "Plan") among Golden American (by itself and on behalf of
Separate Account B of Golden American), Separate Account D of Golden American,
and the Trust, the investment-related assets of the Managed Global Account were
transferred to a newly created division of Separate Account B. Separate Account
B is a separate account of Golden American that serves as a funding vehicle for
variable annuity contracts. Simultaneously, Separate Account B exchanged the
investment-related assets for shares of the Managed Global Series, a newly
created series of the Trust.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and effective yield of its
Liquid Asset Series, the current yield of the remaining Series, and the total
return of all Series in advertisements and sales literature. In the case of
Variable Contracts, performance information for the Series will not be
advertised or included in sales literature unless accompanied by comparable
performance information for a separate account to which the Series offers their
shares.
Current yield for the Liquid Asset Series will be based on income received by
a hypothetical investment over a given 7-day period (less expenses accrued
during the period), and then "annualized" (i.e., assuming that the 7-day yield
would be received for 52 weeks, stated in terms of an annual percentage return
on the investment). "Effective yield" for the Liquid Asset Series is calculated
in a manner similar to that used to calculate yield, but reflects the
compounding effect of earnings on reinvested dividends.
For the remaining Series, any quotations of yield will be based on all
investment income per share earned during a given 30-day period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and will be computed by dividing net investment income by
the maximum public offering price per share on the last day of the period.
Quotations of average annual total return for any Series will be expressed in
terms of the average annual compounded rate of return on a hypothetical
investment in the Series over a period of one, five, or ten years (or, if less,
up to the life of the Series), will reflect the deduction of a proportional
share of Series expenses (on an annual basis), and will assume that all
dividends and distributions are reinvested when paid. Quotations of total
return may also be shown for other periods.
Quotations of yield or total return for the Series will not take into account
charges or deductions against any separate account to which the Series' shares
are sold or charges and deductions against the pertinent Variable Contract,
although comparable performance information for the separate account will take
such charges into account. Performance information for any Series reflects only
the performance of a hypothetical investment in the Series during the particular
time period on which the calculations are based. Performance information should
be considered in light of the Series' investment objectives and policies,
characteristics, and quality of the portfolios, and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future. For a description of the methods used to
determine yield and total return for the Series, see the Statement of
Additional Information.
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LEGAL COUNSEL
Sutherland, Asbill & Brennan LLP, 1275 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2404 serves as counsel to the Trust.
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INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116-5072 serves as
independent auditors of the Trust.
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FINANCIAL STATEMENTS
The Trust's audited financial statements dated as of December 31, 1997 for all
Series, including notes thereto, are incorporated by reference in the Statement
of Additional Information from the Trust's Annual Report dated as of December
31, 1997. Information in the financial statements for all Series for the years
ended December 31, 1997 1996, 1995, 1994 and 1993 has been audited by Ernst &
Young LLP. Information in the financial statements for all Series except the
Managed Global Series for the years ended December 31, 1992, 1991, 1990, and
1989 was audited by another independent auditor. These financial statements do
not include information on the Growth Opportunities, Developing World, Mid-Cap
Growth, Research, Total Return, Growth & Income, Value + Growth and Global
Fixed Income Series because the Series had not commenced operations on December
31, 1997.
The information in the financial statements for the Managed Global Series is
presented as if the reorganization described under "Other Information-History
of the Managed Global Series" had always been in effect. Information in the
financial statements of the Managed Global Series for the period of October
21, 1992 (commencement of operations) to December 31, 1995 has been examined
by Ernst & Young LLP.
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YEAR 2000
Based on a study of its computer software systems and hardware, the Manager in
conjunction with an affiliate, Golden American Life Insurance Company ("Golden
American"), have determined their exposure to the Year 2000 change of the
century date issue. Some of these systems support certain trust operations.
The Manager believes its and Golden American's systems are or will be
substantially compliant by Year 2000 and has engaged external consultants to
validate this assumption. The Manager is in contact with the Trust's
Portfolio Managers and third party vendors to ensure that their systems will
be compliant by Year 2000. To the extent these Portfolio Managers and third
parties would be unable to transact business in the Year 2000 and thereafter,
the Trust's operations could be adversely affected.
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File Nos. 33-23512, 811-5629
Filed under Rule 497 (c)
THE GCG TRUST
1001 JEFFERSON STREET WILMINGTON, DELAWARE 19801
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This Prospectus offers shares of eleven portfolios (the "Series") of The
GCG Trust (the "Trust"), an open-end, management investment company. Each
Series has its own investment objective or objectives and investment policies.
Shares of the Series may be sold to separate accounts of insurance companies
to serve as the investment medium for variable life insurance policies and
variable annuity contracts issued by the insurance companies ("Variable
Contracts") and to certain qualified pension and retirement plans. In the
case of Variable Contracts, the separate accounts invest in shares of one or
more of the Series in accordance with allocation instructions received from
owners of the insurance policies and annuity contracts. Such allocation rights
are described further in Prospectuses for the separate account.
The Series are managed by Directed Services, Inc. ("DSI"), a wholly owned
subsidiary of ING Groep, N.V. ("ING"). DSI and the Trust have retained several
investment advisory firms ("Portfolio Managers") to provide investment advisory
services to the Series. The twenty-two Series and their respective Portfolio
Managers are as follows:
SERIES PORTFOLIO MANAGER
- ---------------------------- -----------------------------------------
FULLY MANAGED SERIES T. ROWE PRICE ASSOCIATES, INC.
LIMITED MATURITY BOND SERIES ING INVESTMENT MANAGEMENT, LLC
RISING DIVIDENDS SERIES KAYNE ANDERSON INVESTMENT MANAGEMENT, LLC
SMALL CAP SERIES FRED ALGER MANAGEMENT, INC.
MID-CAP GROWTH SERIES MASSACHUSETTS FINANCIAL SERVICES COMPANY
RESEARCH SERIES MASSACHUSETTS FINANCIAL SERVICES COMPANY
TOTAL RETURN SERIES MASSACHUSETTS FINANCIAL SERVICES COMPANY
GROWTH & INCOME SERIES ROBERTSON, STEPHENS & COMPANY INVESTMENT
MANAGEMENT, L.P.
VALUE + GROWTH SERIES ROBERTSON, STEPHENS & COMPANY INVESTMENT
MANAGEMENT, L.P.
GLOBAL FIXED INCOME SERIES BARING INTERNATIONAL INVESTMENT LIMITED
LIQUID ASSET SERIES ING INVESTMENT MANAGEMENT, LLC
Information about the investment objective or objectives, investment policies,
and restrictions of each Series, along with a detailed description of the types
of securities and other assets in which each Series may invest, are set forth
in this Prospectus. There can be no assurance that the investment objective or
objectives for any Series will be achieved.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the Series. A Statement of Additional
Information, dated May 1, 1998, containing additional and more detailed
information about the Series has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. The
Statement of Additional Information is available without charge and may be
obtained by writing to the Trust at the address printed above or by calling
the Trust at the Customer Service Center at the telephone number shown in the
accompanying prospectus.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH A PROSPECTUS FOR THE
SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
The Series' shares are not insured by the FDIC or any other agency. They are
not deposits or other obligations of any bank and are not bank guaranteed.
They are subject to market fluctuation, reinvestment risk and possible loss of
principal invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
MAY 1, 1998
<PAGE>
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TABLE OF CONTENTS
Page
PROSPECTUS SYNOPSIS..................... 1
FINANCIAL HIGHLIGHTS.................... 3
INVESTMENT OBJECTIVES AND POLICIES...... 9
Diversification......................... 9
Investment Restrictions................. 9
Fully Managed Series.................... 9
Limited Maturity Bond Series............ 10
Rising Dividends Series................. 12
Small Cap Series ....................... 13
Mid-Cap Growth Series................... 14
Research Series......................... 16
Total Return Series..................... 16
Growth & Income Series.................. 18
Value + Growth Series................... 19
Global Fixed Income Series.............. 21
Liquid Asset Series..................... 22
MANAGEMENT OF THE TRUST................. 24
The Manager............................. 24
The Portfolio Managers.................. 25
T. Rowe Price Associates, Inc. ......... 26
Kayne Anderson Investment
Management, LLC....................... 26
Fred Alger Management, Inc. ............ 26
ING Investment Management, LLC.......... 27
Massachusetts Financial Services
Company.............................. 27
Robertson, Stephens & Company
Investment Management, L.P. ......... 28
Baring International Investment
Limited.............................. 29
Total Expenses for the Series of the
Trust................................ 29
Distributor............................. 29
Custodian and Other Service Providers... 29
Page
DESCRIPTION OF SECURITIES AND
INVESTMENT TECHNIQUES............... 29
Mortgage-Backed Securities.............. 30
Mortgage Pass-Through Securities........ 30
Other Mortgage-Backed Securities........ 30
Risks of Mortgage-Backed Securities..... 30
Other Asset-Backed Securities........... 31
High Yield Bonds........................ 31
Repurchase Agreements................... 31
Illiquid Securities..................... 32
Restricted Securities................... 32
Short Sales............................. 32
Foreign Securities...................... 32
Indexed Securities and Structured Notes. 34
Investment in Gold and Other Precious
Metals............................... 34
Futures Contracts....................... 35
Risks Associated with Futures and
Futures Options...................... 35
Options on Securities................... 36
Risks of Options Transactions........... 36
Foreign Currency Transactions........... 37
Options on Foreign Currencies........... 37
Borrowing............................... 38
Hard Assets Securities.................. 38
Real Estate Securities.................. 38
Swaps................................... 39
Zero-Coupon Bonds....................... 39
Small Companies......................... 39
INVESTMENT RESTRICTIONS................. 40
PURCHASE OF SHARES...................... 40
NET ASSET VALUE......................... 41
REDEMPTION OF SHARES.................... 42
EXCHANGES............................... 42
PORTFOLIO TRANSACTIONS.................. 42
Brokerage Services...................... 42
Portfolio Turnover...................... 43
DIVIDENDS AND DISTRIBUTIONS............. 43
FEDERAL INCOME TAX STATUS............... 44
OTHER INFORMATION....................... 45
Capitalization.......................... 45
Voting Rights........................... 45
Performance Information................. 45
LEGAL COUNSEL........................... 46
INDEPENDENT AUDITORS.................... 46
FINANCIAL STATEMENTS.................... 46
YEAR 2000............................... 46
<PAGE>
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PROSPECTUS SYNOPSIS
THE TRUST
The GCG Trust (the "Trust") is an open-end management investment company,
organized as a Massachusetts business trust on August 3, 1988. This Prospectus
offers shares of eleven portfolios (the "Series") of the Trust, each with
its own investment objective or objectives and investment policies. There can
be no assurance that any particular Series' investment objective or objectives
will be attained. The Board of Trustees may establish additional Series at any
time and may discontinue offering a Series at any time.
The purpose of the Trust is to serve as an investment medium for (i) variable
life insurance policies and variable annuity contracts ("Variable Contracts")
offered by insurance companies, and (ii) certain qualified pension and retire-
ment plans as permitted under the federal tax rules relating to the Series
serving as investment mediums for Variable Contracts. See "Purchase of Shares."
In the case of Variable Contracts, the various Series may be used independently
or in combination. Within the limitations described in the Prospectus for the
applicable Variable Contract, an owner of a Variable Contract ("Variable
Contract Owner") may allocate premiums and reallocate investment value under
his or her Variable Contract among various divisions of the applicable separate
account, which, in turn, invest in the various Series. The assets of each Series
are segregated and a Variable Contract Owner's interest is limited to the Series
in which the divisions selected by the Variable Contract Owner have invested.
INVESTMENT OBJECTIVES
The investment objective or objectives of each of the Series are as follows:
The Fully Managed Series seeks, over the long term, a high total investment
return, consistent with the preservation of capital and prudent investment risk.
The Series seeks to achieve this objective by investing primarily in common
stocks. The Series may also invest in fixed income securities and money market
instruments to preserve its principal value during uncertain or declining market
conditions. The Series' strategy is based on the premise that, from time to
time, certain asset classes are more attractive long-term investments than
others.
The Limited Maturity Bond Series seeks the highest current income consistent
with low risk to principal and liquidity. The Series seeks to achieve this
objective by investing primarily in a diversified portfolio of limited maturity
debt securities. The Series also seeks to enhance its total return through
capital appreciation when market factors indicate that capital appreciation may
be available without significant risk to principal.
The Rising Dividends Series seeks capital appreciation by investing in equity
securities of high quality companies that meet the following four criteria:
consistent dividend increases; substantial dividend increases; reinvested
profits; and an under-leveraged balance sheet. Dividend income is a secondary
objective.
The Small Cap Series seeks to achieve long-term capital appreciation by invest-
ing in equity securities of companies that, at the time of purchase, have total
market capitalization within the range of companies included in the Russell 2000
Growth Index. Many of the securities in which the Series invests may be those of
new companies in a developmental stage or more seasoned companies believed by
the Portfolio Manager to be entering a new stage of growth.
The Mid-Cap Growth Series seeks long-term growth of capital by investing
primarily in equity securities with medium market capitalization.
The Research Series seeks to provide long-term growth of capital and future
income by investing a substantial portion of its assets in common stocks or
securities convertible into common stocks of companies believed to possess
better than average prospects for long-term growth.
1
<PAGE>
The Total Return Series primarily seeks to obtain above-average income
(compared to a Series entirely invested in equity securities) consistent with
the prudent employment of capital. The Series' secondary objective is to take
advantage of opportunities for growth of capital and income.
The Growth & Income Series seeks long-term total return by investing in equity
securities and debt securities, focusing on small- and mid-cap companies that
offer the potential for capital appreciation, current income, or both.
The Value + Growth Series seeks capital appreciation by investing primarily in
growth companies with favorable relationships between price/earnings ratios and
growth rates, in sectors offering the potential for above-average returns.
The Global Fixed-Income Series seeks high total return. Under normal conditions,
at least 65% of the Series' total assets will be invested in fixed income
securities of global issuers located in at least three countries, including the
United States. Under normal conditions, the Portfolio Manager expects that the
Series generally will be invested in at least six different countries, including
the United States, although the Series may at times invest all of its assets in
a single country.
The Liquid Asset Series seeks a high level of current income consistent with the
preservation of capital and liquidity.
THE MANAGER AND PORTFOLIO MANAGERS
The Manager of the Series is Directed Services, Inc. (the "Manager"), a wholly
owned subsidiary of ING Groep, N.V. ("ING"). The Trust and the Manager have
retained several investment advisory firms ("Portfolio Managers") to manage the
assets of the Series. The Series and their Portfolio Managers are as follows:
SERIES PORTFOLIO MANAGER
---------------------------- ------------------------------------------
Fully Managed Series T. Rowe Price Associates, Inc.
Limited Maturity Bond Series ING Investment Management, LLC
Rising Dividends Series Kayne Anderson Investment Management, LLC
Small Cap Series Fred Alger Management, Inc.
Mid-Cap Growth Series Massachusetts Financial Services Company
Research Series Massachusetts Financial Services Company
Total Return Series Massachusetts Financial Services Company
Growth & Income Series Robertson, Stephens & Company Investment
Management, L.P.
Value + Growth Series Robertson, Stephens & Company Investment
Management, L.P.
Global Fixed Income Series Baring International Investment Limited
Liquid Asset Series ING Investment Management, LLC
As Manager of the Series, Directed Services, Inc. has overall responsibility,
subject to the supervision of the Board of Trustees, for engaging Portfolio
Managers and for monitoring and evaluating the management of the assets of each
Series by the Portfolio Managers, for administering all operations of the
Series, and for providing or procuring all services necessary for the ordinary
operation of the Series. Pursuant to a Management Agreement, the Trust currently
pays the Manager for its services a monthly fee at an annual rate. See the fee
table under "Management of the Trust-The Manager."
Each Portfolio Manager has full investment discretion and makes all determina-
tions with respect to the investment of each Series' assets and the purchase and
sale of portfolio securities consistent with the investment objectives,
policies, and restrictions for such Series. The Portfolio Managers are compen-
sated by the Manager (and not the Trust).
2
<PAGE>
The Trust is distinct in that the expense structure of the Series is simpler and
more predictable than most mutual funds. The ordinary expenses for the Trust's
Series, including custodial, administrative, transfer agency, portfolio
accounting, auditing, and ordinary legal expenses are paid by the Manager;
whereas, most mutual funds pay for these expenses directly from their own
assets.
PURCHASE AND REDEMPTION OF SHARES
Shares of each Series are offered at the net asset value of each Series. Shares
of each Series may be redeemed without cost at the net asset value per share of
the Series next determined after receipt of the redemption request. The redemp-
tion price may be more or less than the purchase price.
SPECIAL CHARACTERISTICS AND INVESTMENT RISKS
Certain of the Series may engage in investment techniques that involve certain
risks that are described more fully in the section "Description of Securities
and Investment Techniques." For example, the Fully Managed Series may engage
in various types of futures transactions, lend its portfolio securities, invest
in non-U.S. dollar denominated securities of foreign issuers, engage in foreign
currency transactions and options on foreign currencies, engage in various put
and call options transactions and invest in high yield convertible bonds.
(High yield bonds are sometimes referred to as "junk bonds.")
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following tables present condensed financial information with respect to
each Series, except the Mid-Cap Growth, Total Return, Research, Growth & Income,
Value + Growth, Global Fixed Income Series which had not commenced operations
prior to December 31, 1997. Information in the tables for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993 is derived from the Trust's
financial statements for all Series that have been audited by Ernst & Young LLP.
Information in the tables for years ended December 31, 1992, 1991, 1990 and 1989
is derived from the Trust's financial statements for all Series that have been
audited by another independent auditor.
The condensed financial information below does not include deductions at the
separate account level or contract specific deductions that may be incurred
under a Variable Contract for which the Trust serves as an underlying investment
vehicle. These charges would reduce the total return to any owner of a Variable
Contract. The following tables should be read in conjunction with the Trust's
financial statements which are incorporated by reference in the Trust's State-
ment of Additional Information from the Trust's Annual Report dated as of
December 31, 1997. The Trust's Annual Report, which contains further infor-
mation about the Series' performance, are available to shareholders upon request
and without charge.
3
<PAGE>
- -----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FULLY MANAGED SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year.............. $ 14.82 $ 13.79 $ 11.70 $ 12.99 $ 12.43 $ 11.94 $ 9.51 $10.16 $ 10.00
-------- -------- -------- ------- -------- ------- ------- ------ ------
INCOME/(LOSS) FROM
INVESTMENT
OPERATIONS:
Net investment
income............ 0.39 0.56 0.45 0.35 0.19 0.28 0.29 0.33 0.28
Net realized and
unrealized
gain/(loss) on
investments....... 1.86 1.69 1.98 (1.29) 0.75 0.49 2.43 (0.65) 0.16
-------- -------- -------- ------- -------- ------- ------- ------ ------
Total from
investment
operations........ 2.25 2.25 2.43 (0.94) 0.94 0.77 2.72 (0.32) 0.44
-------- -------- -------- ------- -------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment
income............ (0.41) (0.56) (0.34) (0.35) (0.19) (0.28) (0.29) (0.33) (0.28)
Distributions from
capital gains..... (0.93) (0.66) -- -- (0.19) -- -- -- --
-------- -------- -------- ------- -------- ------- ------- ------ ------
Total
distributions..... (1.34) (1.22) (0.34) (0.35) (0.38) (0.28) (0.29) (0.33) (0.28)
-------- -------- -------- ------- -------- ------- ------- ------ ------
Net asset value, end
of year........... $ 15.73 $ 14.82 $ 13.79 $ 11.70 $ 12.99 $ 12.43 $ 11.94 $ 9.51 $ 10.16
======== ======== ======== ======= ======== ======= ======= ====== ======
Total return........ 15.27% 16.36% 20.80% (7.27)% 7.59% 6.23% 28.93% (3.18)% 3.90%++
======== ======== ======== ======= ======== ======= ======= ====== ======
RATIOS TO AVERAGE
NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of
year (in 000's)... $169,987 $136,660 $118,589 $ 99,854 $108,690 $ 37,696 $ 10,031 $5,426 $ 5,443
Ratio of operating
expenses to
average net
assets............ 0.99% 1.00% 1.01% 1.00% 1.01% 1.04% 1.50% 1.52% 2.69%+
Decrease reflected
in above expense
ratio due to
expense
limitations....... -- -- -- -- 0.04% 0.20% 0.68% 1.27% 0.19%+
Ratio of net
investment income
to average net
assets............ 2.67% 3.83% 3.41% 2.62% 2.12% 2.38% 2.71% 3.38% 3.07%+
Portfolio turnover
rate.............. 48% 45% 113% 66% 55% 27% 68% 100% 196%
Average commission
rate paid(a)...... $ 0.0369 $ 0.0597 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Fully Managed Series commenced operations on January 24, 1989.
** Since January 1, 1995, T. Rowe Price Associates, Inc. has served as Portfolio Manager for the Fully Managed
Series. Prior to that date, a different firm served as Portfolio Manager.
+ Annualized
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
4
<PAGE>
- - --------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
LIMITED MATURITY BOND SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97# 12/31/96# 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- --------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year............. $ 10.43 $ 11.15 $ 9.98 $ 10.62 $ 10.43 $ 10.54 $ 10.15 $10.16 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME/(LOSS) FROM
INVESTMENT
OPERATIONS:
Net investment
income........... 0.60 0.59 0.60 0.51 0.40 0.60 0.68 0.72 0.74
Net realized and
unrealized
gain/(loss) on
investments...... 0.09 (0.13) 0.57 (0.64) 0.23 (0.11) 0.42 -- 0.19
------- ------- ------- ------- ------- ------- ------- ------ ------
Total from
investment
operations....... 0.69 0.46 1.17 (0.13) 0.63 0.49 1.10 0.72 0.93
------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment
income........... (0.81) (1.15) -- (0.51) (0.40) (0.60) (0.68) (0.72) (0.74)
Distributions from
capital gains.... -- (0.03) -- -- (0.04) -- (0.03) (0.01) (0.03)
------- ------- ------- ------- ------- ------- ------- ------ ------
Total
distributions.... (0.81) (1.18) -- (0.51) (0.44) (0.60) (0.71) (0.73) (0.77)
------- ------- ------- ------- ------- ------- ------- ------ ------
Net asset value,
end of year...... $ 10.31 $ 10.43 $ 11.15 $ 9.98 $ 10.62 $ 10.43 $ 10.54 $10.15 $ 10.16
======= ======= ======= ======= ======= ======= ======= ====== ======
Total return....... 6.67% 4.32% 11.72% (1.19)% 6.20% 4.84% 11.27% 7.87% 9.69%++
======= ======= ======= ======= ======= ======= ======= ====== ======
RATIOS TO AVERAGE
NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of
year (in
000's)........... $53,839 $81,317 $ 90,081 $ 72,213 $ 72,219 $ 40,213 $ 16,144 $8,321 $ 2,631
Ratio of operating
expenses to
average net
assets........... 0.61% 0.61% 0.61% 0.60% 0.61% 0.72% 0.87% 0.81% 1.11%+
Decrease reflected
in above expense
ratio due to
expense
limitations...... -- -- -- -- 0.04% 0.27% 0.89% 2.09% 3.22%+
Ratio of net
investment income
to average net
assets........... 5.71% 5.33% 5.58% 4.73% 4.64% 5.71% 6.58% 7.47% 8.56%+
Portfolio turnover
rate............. 81% 250% 302% 209% 115% 63% 465% 373% 354%
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Limited Maturity Bond Series commenced operations on January 24, 1989.
** Since January 2, 1998, ING Investment Management, LLC has served as Portfolio Manager for the Limited
Maturity Bond Series. Prior to that date, Equitable Investment Services, Inc. served as Portfolio Manager
for the Limited Maturity Bond Series. Prior to August 13, 1997, different firms served as Portfolio Manager.
+ Annualized
++ Non-annualized
# Per share numbers have been calculated using the monthly average share method, which more appropriately
represents the per share data for the period.
</TABLE>
5
<PAGE>
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
RISING DIVIDENDS SERIES
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96# 12/31/95 12/31/94 12/31/93*
-------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 15.81 $ 13.30 $ 10.22 $ 10.30 $ 10.00
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................................... 0.14 0.14 0.13 0.14 0.01
Net realized and unrealized gain/(loss) on investments...... 4.57 2.61 3.04 (0.08) 0.30
-------- -------- ------- ------- -------
Total from investment operations............................ 4.71 2.75 3.17 0.06 0.31
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income........................ (0.13) (0.13) (0.09) (0.14) (0.01)
Distributions from capital gains............................ (0.35) (0.11) -- -- --
-------- -------- ------- ------- -------
Total distributions......................................... (0.48) (0.24) (0.09) (0.14) (0.01)
-------- -------- ------- ------- -------
Net asset value, end of year................................ $ 20.04 $ 15.81 $ 13.30 $ 10.22 $ 10.30
======== ======== ======= ======= =======
Total return................................................ 29.82% 20.65% 31.06% 0.59% 3.10%++
======== ======== ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's).......................... $ 252,191 $ 126,239 $ 81,210 $ 50,712 $14,430
Ratio of operating expenses to average net assets........... 0.99% 1.00% 1.01% 1.00% 0.24%+
Ratio of net investment income to average net assets........ 0.96% 0.99% 1.24% 1.88% 0.34%+
Portfolio turnover rate..................................... 26% 15% 43% 26% 3%
Average commission rate paid(a)............................. $ 0.0600 $ 0.0600 N/A N/A N/A
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Rising Dividends Series commenced operations on October 4, 1993.
+ Annualized
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
# Per share numbers have been calculated using the monthly average share method, which more appropriately
represents the per share data for the period.
</TABLE>
6
<PAGE>
- ----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL CAP SERIES
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/97 12/31/96*
-------- ---------
<S> <C> <C>
Net asset value, beginning of year.................................................. $ 12.01 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss................................................................. (0.03) (0.01)
Net realized and unrealized gain on investments..................................... 1.27 2.02
------- -------
Total from investment operations.................................................... 1.24 2.01
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................................................ -- --
Distributions from capital gains.................................................... -- --
------- -------
Total distributions................................................................. -- --
-------
Net asset value, end of year........................................................ $ 13.25 $ 12.01
======= =======
Total return........................................................................ 10.32% 20.10%++
======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's).................................................. $66,396 $34,365
Ratio of operating expenses to average net assets................................... 0.99% 0.99%++
Ratio of net investment loss to average net assets.................................. (0.34)% (0.08)%++
Portfolio turnover rate............................................................. 130% 117%
Average commission rate paid(a)..................................................... $0.0706 $0.0621
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Small Cap Series commenced operations on January 3, 1996.
++ Non-annualized
(a) Average commission rate paid per share of portfolio securities purchased and sold by the Series.
</TABLE>
7
<PAGE>
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
LIQUID ASSET SERIES**
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89*
-------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------ ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.050 0.049 0.054 0.040 0.030 0.030 0.050 0.070 0.080
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............ 0.050 0.049 0.054 0.040 0.030 0.030 0.050 0.070 0.080
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income..... (0.050) (0.049) (0.054) (0.040) (0.030) (0.030) (0.050) (0.070) (0.080)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions..... (0.050) (0.049) (0.054) (0.040) (0.030) (0.030) (0.050) (0.070) (0.080)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= =======
Total return............ 5.07% 5.01% 5.51% 3.89% 2.64% 3.13% 5.66% 7.75% 7.67%++
======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's)........... $ 59,453 $ 39,096 $ 38,589 $ 46,122 $ 16,808 $ 13,206 $ 9,790 $ 8,709 $ 2,352
Ratio of operating
expenses to average net
assets................ 0.61% 0.61% 0.61% 0.61% 0.61% 0.74% 0.76% 0.66% 0.90%+
Decrease reflected in
above expense ratio due
to expense
limitations........... -- -- -- -- 0.08% 0.50% 1.01% 1.84% 3.26%+
Ratio of net investment
income to average net
assets................ 4.99% 4.89% 5.39% 3.89% 2.60% 3.04% 5.48% 7.56% 8.99%+
</TABLE>
- - ------------------
<TABLE>
<C> <S>
* The Liquid Assets Series commenced operations on January 24, 1989.
** Since January 2, 1998 ING Investment Management, LLC has served as Portfolio Manager for the Liquid Asset
Series. Prior to that date, Equitable Investment Services, Inc. served as Portfolio Manager for the Liquid
Asset Series. Prior to that August 13, 1996, different firms served as Portfolio Manager.
+ Annualized
++ Non-annualized
</TABLE>
8
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
Each of the Series has a different investment objective or objectives that are
described below. Each Series' portfolio is managed by its own Portfolio Manager.
There can be no assurance that any Series will achieve its investment objective
or objectives. Because each Series seeks a different investment objective or
objectives and has different policies, each is subject to varying degrees of
financial, market, and credit risks. Each Series is subject to the risk of
changing economic conditions. As with any security, a risk of loss is inherent
in investment in a Series' shares. Therefore, investors should carefully con-
sider the investment objective or objectives, investment policies, and potential
risks of any Series before investing.
The different types of securities and investment techniques used by the
individual Series all have attendant risks of varying degrees. For example, 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 securities,
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 called for by the
instrument. In addition, the value of debt instruments generally rises and falls
inversely with interest rates.
Certain types of investments and investment techniques common to one or more
Series are described in greater detail, including the risks of each, in this
Prospectus under "Description of Securities and Investment Techniques" and in
the Statement of Additional Information.
DIVERSIFICATION
Each Series, unless specifically noted otherwise in the Series' investment
objective and policies section, is diversified, as defined in the Investment
Company Act of 1940. A diversified Series may not invest more than 5% of the
value of its total assets in any one issuer and it may not purchase more than
10% of the outstanding voting securities of any one issuer with respect to 75%
of its total assets, exclusive of amounts held in cash, cash items, and U.S.
Government securities. A Series classified as "non-diversified" is not limited
by the Investment Company Act of 1940 in the amount of assets that it may invest
in the securities of a single issuer. However, that Series will meet the diver-
sification requirements under the Internal Revenue Code applicable to mutual
funds and variable contracts. Because a Series is "non-diversified" and may
invest in a smaller number of individual issuers than a series which is "diver-
sified," an investment in any non-diversified Series may, under certain circum-
stances, present greater risk to an investor than an investment in a series
which is diversified. This risk may include greater exposure to the risk of
poor earnings or default of one issuer than would be the case for a more diver-
sified series. Each Series' policy on diversification is a fundamental policy
and may not be changed without approval of a majority of the outstanding voting
shares of that Series.
INVESTMENT RESTRICTIONS
Each Series is subject to investment restrictions that are described in the
Statement of Additional Information. The investment restrictions so designated
and, unless otherwise noted, the investment objective or objectives of each
Series are "fundamental policies" of each Series, which means that they may not
be changed without a majority vote of shareholders of the affected Series.
Except for these fundamental policies, all investment policies and practices
described in this Prospectus and in the Statement of Additional Information are
not fundamental, meaning that the Board of Trustees may change them without
shareholder approval.
FULLY MANAGED SERIES
The Fully Managed Series' investment objective is to earn, over the long-term,
a high total investment return, consistent with the preservation of capital and
prudent investment risk. It seeks to achieve this objective by investing
primarily in common stocks. The Series may also invest in fixed income secur-
ities and money market instruments to preserve its principal value during un-
certain or declining market conditions. The Series' strategy is based on the
premise that, from time to time, certain asset classes are more attractive long-
term investments than others. Total investment return consists of current in-
come, including dividends, interest and discount accruals, and capital apprecia-
tion. Current income will be an important component
9
<PAGE>
of the Series' effort to maximize total return. The Portfolio Manager for the
Series is T. Rowe Price Associates, Inc.
The Portfolio Manager expects that equity securities generally will constitute
25% to 85% of the Series' overall portfolio, and that the equity portfolio will
be widely diversified by number of issuers. The Portfolio Manager expects that
investment opportunities generally will be sought among securities of large-
capitalization, established companies, although securities of smaller, less well
known companies may also be selected. The Series may invest up to 25% of its
total assets in preferred stock.
In selecting investments for the Series, the Portfolio Manager uses a
"valuation" discipline to identify stocks whose prospects for price apprecia-
tion, over time, are believed to exceed the risk of loss of market value.
Through this process, a security's current market value is analyzed relative to
each of the following: the company's assets, such as natural resources and real
estate; the company's replacement cost of plant and equipment; the company's
consumer or commercial franchises, such as well recognized trademarks or estab-
lished brand names; and the company's earnings or growth potential. The Port-
folio Manager also seeks to identify securities that have been over-discounted
due to adverse operating results, deteriorating economic or industry conditions,
or unfavorable publicity. By investing after the adverse conditions are reflect-
ed in the price of the company's securities, the risks associated with such out-
of-favor investments may be limited. The utilization of this contrarian approach
may result in investment selections which are counter to those of most
investors.
It is anticipated that debt securities, including convertible bonds, may often
constitute between 25% and 50% of the Series' overall portfolio. Debt securities
purchased by the Series may be of any maturity. It is anticipated that the
weighted average maturity of the debt portfolio generally will be between four
and ten years, but may be shorter or longer. The Portfolio Manager may invest up
to 5% of the Series' assets, measured at the time of investment, in debt
securities that are rated below investment grade or, if not rated, of equivalent
quality. See "High Yield Bonds" in this Prospectus.
The balance of the Series' portfolio will generally be invested in the following
money market instruments which have remaining maturities not exceeding one year:
(i) obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (ii) negotiable certificates of deposit, bankers' accept-
ances and fixed time deposits and other obligations of domestic banks (includ-
ing foreign branches) that have more than $1 billion in total assets at the
time of investment and are members of the Federal Reserve System or are examined
by the Comptroller of the Currency or whose deposits are insured by the Federal
Deposit Insurance Corporation; (iii) commercial paper rated at the date of pur-
chase in the two highest rating categories; and (iv) repurchase agreements. The
Series also may invest in short-term U.S. dollar-denominated obligations of
foreign banks (including U.S. branches) at the time of purchase, if such banks
have more than $1 billion in total assets.
To maximize potential return, the Portfolio Manager may utilize the following
investment methods: writing "covered" listed put and call equity options, in-
cluding options on stock indexes, and purchasing such options; purchasing and
selling, for hedging purposes, stock index, interest rate, and other futures
contracts, and purchasing options on such futures; purchasing warrants and pre-
ferred and convertible preferred stocks; entering into repurchase agreements and
reverse repurchase agreements; lending portfolio securities to brokers, dealers,
banks, or other recognized institutional borrowers of securities; purchasing
restricted securities; purchasing securities of foreign issuers, with up to 20%
of total net assets invested in foreign equities; entering into forward currency
contracts and currency exchange trans- actions for hedging purposes; and bor-
rowing from banks to purchase securities. The Series will not engage in short
sales of securities other than short sales "against the box." The Series may
invest up to 10% of its net assets in illiquid securities. See "Description of
Securities and Investment Techniques" for further discussion of these investment
methods.
LIMITED MATURITY BOND SERIES
The Limited Maturity Bond Series' primary investment objective is to seek the
highest current income consistent with low risk to principal and liquidity. As a
secondary objective, the Series also seeks to enhance its total return through
capital appreciation when market factors, such as falling interest rates and
rising
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bond prices, indicate that capital appreciation may be available without
significant risk to principal. The Portfolio Manager for the Series is ING
Investment Management, LLC.
The Series pursues its objectives primarily by investing in a diversified port-
folio of limited maturity debt securities. These are short-to-intermediate-term
debt securities with actual remaining maturities of seven years or less, and
other debt securities with special features (e.g., puts, variable or floating
coupon rates, maturity extension arrangements, mortgage pass-throughs, etc.)
producing price characteristics similar to those of short-to-intermediate-term
debt securities. Generally, the Series' portfolio securities are selected from
as many as ten sectors of the fixed income market, each representing a different
type of fixed income investment. The ten sectors are as follows:
(i) U.S. Treasury obligations;
(ii) U.S. Government agency and instrumentality securities;
(iii) repurchase agreements with respect to U.S. Treasury obligations and
U.S. Government agency and instrumentality securities;
(iv) asset-backed securities, including mortgage-backed securities issued or
guaranteed by U.S. Government agencies or collateralized by U.S.
Treasury obligations or U.S. Government agency securities, mortgages
pooled by high quality financial institutions, and other asset-backed
securities representing pools of receivables unrelated to mortgage
loans;
(v) banking industry obligations, including certificates of deposit, time
deposits, and bankers' acceptances issued by commercial banks;
(vi) savings industry obligations, including certificates of deposit and
time deposits issued by savings and loan associations;
(vii) corporate debt securities;
(viii) corporate commercial paper, consisting primarily of unsecured notes
with maturities of nine months or less issued to finance short-term
credit needs;
(ix) variable or floating rate securities, the coupon rates of which vary
with a designated money market index; and
(x) foreign securities denominated in U.S. dollars.
For additional information as to the characteristics and risks of investments in
several of these sectors, see the "Description of Securities and Investment
Techniques" in this Prospectus.
The Portfolio Manager conducts a continuing review of sector yields and other
information. These data are analyzed in light of market conditions and trends
in order to determine which investment sectors offer the best values on a total
return basis. Where the yield of a sector exceeds that of comparable U.S.
Treasury obligations, the excess yield or "premium" is analyzed to determine
whether and to what extent it reflects additional risk in that sector. During
periods that yield differentials available in the non-governmental sectors do
not appear to justify the additional risks involved, the Series will invest more
heavily in U.S. Treasury obligations and U.S. Government agency and instrument-
ality securities.
Ordinarily, the Series' portfolio will include securities from five or more of
the investment sectors. The Series will not invest more than 25% of its total
assets in a single industry. And the Series will not invest more than 10% of
its total assets in foreign government securities.
After the sectors for investment have been chosen, individual securities are
selected from within these sectors on the basis of yield, creditworthiness, and
liquidity. The Series will invest in corporate debt securities and variable or
floating rate securities only if such securities are rated Baa or better by
Moody's or BBB or better by Standard & Poor's, or, if not rated by Moody's or
Standard & Poor's, if the Portfolio Manager determines that they are of
equivalent quality. The Series will invest in corporate commercial paper only
if rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by Standard & Poor's, or,
if not rated by
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Moody's or Standard & Poor's, if the Portfolio Manager determines that the com-
mercial paper is of equivalent quality. For additional information, see "Appen-
dix 1: Description of Bond Ratings" in the Statement of Additional Information.
The Series seeks to reduce risk, increase income, and preserve or enhance total
return by actively managing the maturity of its portfolio in light of market
conditions and trends. When, in the opinion of the Portfolio Manager, market
indicators point to higher interest rates and lower bond prices, average
maturity generally will be shortened. When falling interest rates and rising
bond prices are indicated, a longer average portfolio maturity generally can
be expected.
During periods of rising or falling interest rates, the Series may also seek to
hedge all or a part of its portfolio against related changes in securities
prices by buying or selling interest rate futures contracts and options thereon.
Such a strategy involves using the contracts as a maturity management device
that reduces risk and preserves total return while the Series is restructuring
its portfolio in response to the changing interest rate environment. For infor-
mation on such contracts, see "Description of Securities and Investment Tech-
niques."
The dollar-weighted average maturity of the Series' portfolio will not exceed
five years, and, in periods of rapidly rising interest rates, may be shortened
to one year or less. For these purposes, (i) the maturity of mortgage-backed
securities is determined on an "expected life" basis, (ii) variable or floating
rate securities are deemed to mature at the next interest rate adjustment date,
and (iii) debt securities with put features are deemed to mature at the next put
exercise date. Positions in interest rate futures contracts (long or short) will
be reflected in average portfolio maturity on the basis of the maturities of the
securities underlying the futures contracts. The Series may invest in futures
contracts, purchase and sell interest rate futures contracts, and purchase and
write options on such futures contracts.
The Series may invest in private placements of debt securities. These invest-
ments may be considered to be restricted securities. The Series may invest up
to 10% of its net assets in these and other illiquid securities. The Series may
also purchase securities (including mortgage-backed securities such as GNMA,
FNMA, and FHLMC Certificates) on a when-issued basis. A description of these
techniques and their attendant risks is contained in the section of this Pros-
pectus entitled "Description of Securities and Investment Techniques."
The Series may write covered call options and purchase put options, and purchase
call and write put options to close out options previously written by the
Series. The Series may engage in options transactions to reduce the effect of
price fluctuations of securities owned by the Series (and involved in the
options) on the Series' net asset value per share. This Series will purchase put
options involving portfolio securities only when the Portfolio Manager believes
that a temporary defensive position is desirable in light of market conditions,
but does not desire to sell the portfolio security. The Series will engage only
in short sales "against the box."
The Series may borrow up to 10% of the value of its net assets, and for
temporary purposes may increase this amount to 25%. The Series may transfer as
collateral securities owned by the Series in connection with permissible
borrowings.
RISING DIVIDENDS SERIES
The investment objective of the Rising Dividends Series is capital appreciation.
Dividend income is a secondary objective. The Portfolio Manager for the Series
is Kayne Anderson Investment Management, LLC.
In seeking these objectives, the Series normally invests at least 80% of its net
assets in equity securities of companies determined to be of high quality by the
Portfolio Manager that meet the following four criteria:
(i) Consistent dividend increases-The company should have increased its
dividends in seven of the last ten years.
(ii) Substantial dividend increases-The company should have at least
doubled its dividends in the last ten years.
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(iii) Reinvested profits-The company should have reinvested at least 35%
of its profits annually.
(iv) Under-leveraged balance sheet-The company should have less than 35%
of its total capitalization in long-term debt.
In selecting equity securities, the Portfolio Manager screens databases to
create a universe of companies that meet the preceding criteria. The companies
that have the required attributes are then analyzed from a fundamental perspec-
tive. This research involves study of industry competitive conditions, discus-
sions with company management, spreadsheet analysis and valuation projections.
A proprietary computer model is employed to regularly compare expected rates of
return for each equity security in the universe. The final decision to invest in
an equity is based on the Portfolio Manager's appraisal of the company's fund-
amental strengths and relative attractiveness from an expected return stand-
point. The individual security selection is overlaid with a sector allocation
discipline to avoid over-concentration in any single sector.
It is anticipated that the Series' portfolio will generally contain a minimum of
30-40 issues. It is the policy of the Series that no equity security will be
acquired if, after its acquisition, more than 15% of the Series' total assets
would be invested in any one industry or more than 5% would be invested in any
one issuer. The Portfolio Manager does not intend to invest any of the Series'
assets in securities that, at the time of investment, it believes to be
illiquid, but may hold up to 15% of its assets in these securities. The Port-
folio Manager periodically monitors the Series' equity securities to assure they
meet the four criteria. A security will generally be sold when it reaches its
target price, when negative changes occur in either the company or its industry,
or when any one or more of the four criteria are no longer satisfied. A 15%
price decline in a stock, relative to the market, triggers a re-appraisal. The
reappraisal may result in a sale, but each buy/sell decision is made on the
merits and fundamentals of that particular situation. There may from time to
time be other equity securities in the Portfolio which meet most, but not all,
of the criteria, but which the Portfolio Manager deems a suitable investment.
Equity securities are deemed to include common stocks, securities convertible
into common stocks, or rights or warrants to subscribe for or purchase common
stocks.
The Portfolio Manager may enter into forward currency contracts and currency ex-
change transactions for hedging purposes. During those times when equity
securities that meet the Portfolio Manager's investment criteria cannot be
found, for temporary defensive purposes or pending longer-term investment, the
Series may invest any amount of its assets in short-term fixed income securities
or in cash or cash equivalents. The Series may invest in mortgage- and asset-
backed securities, enter into repurchase agreements, invest in foreign equity
securities, including Depositary Receipts, make short sales "against the box,"
and may borrow up to 10% of its net assets, and for temporary purposes may bor-
row up to 25% of its assets for such items as large redemptions.
SMALL CAP SERIES
The investment objective of the Series is long-term capital appreciation. The
Series invests at least 65% of its total assets in equity securities of com-
panies that, at the time of purchase of the securities, have total market cap-
italization within the range of companies included in the Russell 2000 Growth
Index ("Russell Index") or the S&P Small-Cap 600 Index ("S&P 600 Index"), up-
dated quarterly. Both indexes are broad indexes of small capitalization stocks.
As of December 31, 1997, the range of market capitalization companies in the
Russell Index was $20 million to $2.97 billion; the range of the market
capitalization the companies in the S&P 600 Index at that date was $21 million
to $2.93 billion. The combined range as of that date was $20 million to $2.97
billion. The Series may invest up to 35% of its total assets in equity
securities of companies that, at the time of purchase, have total market cap-
italization outside this combined range, and in excess of that amount (up to
100% of its assets) during temporary defensive periods. The Portfolio Manager
for the Series is Fred Alger Management, Inc.
The Series seeks to achieve its objective by investing in equity securities,
such as common or preferred stocks, or securities convertible into or exchange-
able for equity securities, including warrants and rights. The Series will
invest primarily in companies whose securities are traded on domestic stock ex-
changes or in the over-the-counter market. These companies may still be in the
developmental stage, may be older companies that appear to be entering a new
stage of growth owing to factors such as management changes
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or development of new technology, products or markets, or may be companies pro-
viding products or services with a high unit volume growth rate. In order to
afford the Series the flexibility to take advantage of new opportunities for
investments in accordance with its investment objective, it may hold up to 15%
of its net assets in money market instruments and repurchase agreements and in
excess of that amount (up to 100% of its assets), after receipt of new monies,
or during temporary defensive periods. This amount may be higher than that
maintained by other funds with similar investment objectives.
Investing in smaller, newer issuers generally involves greater risk than invest-
ing in larger, more established issuers. Companies in which the Series is likely
to invest may have limited product lines, markets or financial resources and may
lack management depth. The securities of such companies may have limited market-
ability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Accordingly, an investment in the Series may not be appropriate for all
investors.
The Series may use the following various investment strategies and techniques
when the Portfolio Manager determines that such use is appropriate in an effort
to meet the Series' investment objective: short sales of securities; investing
in securities of foreign issuers (including Depositary Receipts), including not
more than 10% of its total assets in foreign government securities denominated
in U.S. dollars; engaging in futures contracts, including purchasing and sell-
ing stock index futures contracts and interest rate futures contracts; purchas-
ing and selling options on securities; purchasing options on stock index
futures contracts, interest rate futures contracts, and foreign currency
futures contracts; entering into foreign currency transactions and options on
foreign currencies; entering into repurchase and reverse repurchase agreements;
purchase mortgage- and asset-backed securities; and lending portfolio securities
to brokers, dealers, bankers, and other recognized insti- tutional borrowers of
securities. The Series may not exceed a total of 25% of net assets in short
sales, but this amount is decreased by any amount the Series has borrowed. The
Series may from time to time increase its ownership of securities above the
amounts otherwise possible by borrowing from banks on an unsecured basis and
investing the borrowed funds. The Series may borrow up to 10% of its net assets
to purchase securities and up to 25% of its net assets for temporary purposes.
In connection with permissible borrowings the Series may transfer as collateral
securities owned by the Series. The Series may invest up to 15% of its net
assets in illiquid securities.
MID-CAP GROWTH SERIES
The investment objective of the Mid-Cap Growth Series is to obtain long-term
growth of capital. The Series seeks to achieve its objective by investing
primarily in equity securities of companies with medium market capitalization
which the Portfolio Manager believes have above-average growth potential under
normal circumstances. The Portfolio Manager for the Series is Massachusetts
Financial Services Company.
Medium market capitalization companies whose market capitalization falls within
the range of the Standard and Poor's MidCap 400 Index (the "S&P MidCap 400
Index") at the time of the Series' investment. The S&P MidCap 400 Index is a
widely recognized, unmanaged index of mid-cap common stock prices. Companies
whose capitalization falls outside this range after purchase continue to be
considered medium-capitalization companies for purposes of the Series'
investment policy. The Series may, but is not required to, purchase securities
of companies included in the S&P MidCap 400 Index. This index is only used by
the Series for purposes of defining the market capitalization range of companies
in which the Series will invest; it is not intended to be used a benchmark
against which the Series compares its investment performance. As of December
31, 1997, the S&P MidCap 400 Index included companies with capitalizations of
between $213 million and $13.7 billion.
The Series may invest a significant portion of its assets in over-the-counter
("OTC") securities. OTC securities are any securities that are not listed on
a major exchange but are, as their name implies, traded over the counter.
Investing in securities traded on the OTC securities market can involve greater
risk than is customarily associated with investing in securities traded on the
New York or American Stock Exchanges since OTC securities are generally
securities of companies which are smaller or newer than those listed on the New
York or American Stock Exchange. For example, these companies often have limited
product lines, markets, or financial resources, may be dependent for management
on one or a few key persons, and can be more susceptible to losses. Also, their
securities may be thinly traded (and therefore have to be sold at a
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discount from current prices or sold in small lots over an extended period of
time), may be followed by fewer investment research analysts and may be subject
to wider price swings and thus may create a greater risk of loss than securities
of larger capitalization or established companies. Shares of the Series, there-
fore, are subject to greater fluctuation in value than shares of a conservative
equity fund or of a growth fund which invests entirely in proven growth stocks.
Therefore, the Series is intended for long-term investors who understand and can
accept the risks entailed in seeking long-term growth of capital. The Series is
not meant to provide a vehicle for those who wish to play short-term swings in
the stock market. Accordingly, an investment in shares of the Series should not
be considered a complete investment program. Each prospective purchaser should
take into account his investment objectives as well as his other investments
when considering the purchase of shares of the Series.
Debt securities of issuers in which the Series may invest include all types of
long- or short-term debt obligations, such as bonds, debentures, notes and
commercial paper. Fixed income securities in which the Series may invest include
securities in the lower rating categories of recognized rating agencies (and
comparable unrated securities). Fixed income securities in which the Series may
invest also include zero-coupon bonds, deferred interest bonds and bonds on
which the interest is payable in kind. Such investments involve certain risks.
See "Description of Securities and Investment Techniques-High Yield Bonds" and
the Statement of Additional Information for a discussion of the risks involved
in investing in lower-rated securities.
When the Portfolio Manager believes that investing for temporary defensive pur-
poses is appropriate, such as during periods of unusual market conditions, part
or all of the Series' assets may be temporarily invested in cash (including
foreign currency) or cash equivalent short-term obligations including, but not
limited to, certificates of deposit, commercial paper, short-term notes,
obligations issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities, and repurchase agreements.
The Series may invest 20% or more of its net assets in foreign securities (not
including American Depositary Receipts ("ADRs"), however, under normal market
conditions, the Series expects to invest less than 35% of its net assets in
foreign securities. The Series may invest up to 10% of its net assets in
emerging markets or countries with limited or developing capital markets.
Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers. (See
"Description of Securities and Investment Techniques-Foreign Securities" and the
Statement of Additional Information for a discussion of the risks involved in
foreign investing.)
The Series may invest in ADRs which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Although ADRs
are issued by a U.S. depository, they are subject to many of the risks of
foreign securities such as changes in exchange rates and more limited infor-
mation about foreign issuers.
The Series may also purchase illiquid or restricted securities (such as private
placements). The Series' may not invest more than 15% of its net assets in
illiquid securities.
The Series is classified as a "non-diversified" investment company as described
above under "Diversification." See "Diversification" for risks associated with
investing in a non-diversified Series.
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Portfolio
Manager is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Series changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of Series turnover is not a limiting factor
when a change in the Series is otherwise appropriate. Because the Series is
expected to have a Series turnover rate of over 100%, transaction costs incurred
by the Series and the realized capital gains and losses of the Series may be
greater than that of a Series with a lesser turnover rate.
The Series may also enter into repurchase agreements, lend securities, purchase
securities on a "when-issued" or on a "forward delivery" basis (which means that
the securities will be delivered to the Series at a future date usually beyond
customary settlement time), invest in indexed securities (whose value is linked
to foreign currencies, commodities, indexes, or other financial indicators),
enter into mortgage "dollar roll"
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transactions with selected banks and broker-dealers, purchase restricted securi-
ties, corporate asset-backed securities, options on securities, options on stock
indexes, options on foreign currencies, futures contracts, options on futures
contracts and forward foreign currency exchange contracts.
All of the Series investments and transactions described in this section are
described in greater detail in the Description of Securities and Investment
Techniques section of this Prospectus and in the Statement of Additional
Information.
RESEARCH SERIES
The investment objective of the Research Series is to provide long-term growth
of capital and future income. The portfolio securities of the Research Series
are selected by a committee of investment research analysts. This committee
includes investment analysts employed not only by the Portfolio Manager but also
by a wholly owned international subsidiary of the Portfolio Manager. The Series'
assets are allocated among industries by the analysts acting together as a
group. Individual analysts are then responsible for selecting what they view as
the securities best suited to meet the Series' investment objective within their
assigned industry responsibility. The Portfolio Manager for the Series is
Massachusetts Financial Services Company.
The Series' policy is to invest a substantial proportion of its assets in the
common stocks or securities convertible into common stocks of companies believed
to possess better than average prospects for long-term growth. A smaller propor-
tion of the assets may be invested in bonds, short-term obligations, preferred
stocks or common stocks whose principal characteristic is income production
rather than growth. Such securities may also offer opportunities for growth of
capital as well as income. In the case of both growth stocks and income issues,
emphasis is placed on the selection of progressive, well-managed companies. The
Series' debt investments, if any, may consist of investment grade securities
(e.g., rated Baa or better by Moody's Investor Services, Inc. ("Moody's") or BBB
or better by Standard & Poor's Ratings Group ("Standard & Poor's")) and, with
respect to no more than 10% of its net assets, securities in the lower rated
categories (e.g., rated BA or lower by Moody's or BB or lower by Standard &
Poor's or Fitch IBCA, Inc. ("Fitch")), or securities which the Portfolio Manager
believes to be of similar quality to these lower rated securities (commonly
known as "junk bonds"). For a description of bond ratings, see the Statement of
Additional Information. It is not the Series' policy to rely exclusively on
ratings issued by established credit rating agencies but rather to supplement
such ratings with the Portfolio Manager's own independent and ongoing review of
credit quality. The Series' achievement of its investment objective may be more
dependent on the Portfolio Manager's own credit analysis than in the case of a
Series investing in primarily higher quality bonds. From time to time, the
Series' management will exercise its judgment with respect to the proportions
invested in growth stocks, income-producing securities or cash (including
foreign currency) and cash equivalents depending on its view of their relative
attractiveness.
The Series may enter into repurchase agreements, make loans of its fixed income
securities, invest in ADRs, invest up to 20% of its net assets in foreign
securities (not including ADRs), invest in emerging markets or countries with
limited or developing capital markets and purchase "Rule 144A securities."
Investing in these type of securities involves certain risks. See "Description
of Securities and Investment Techniques" and the Statement of Additional Inform-
ation for a discussion of the risks involved with investing in the above listed
securities transactions.
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Portfolio
Manager is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Series changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of Series turnover is not a limiting factor
when a change in the Series is otherwise appropriate.
TOTAL RETURN SERIES
The primary investment objective of the Total Return Series is to obtain above-
average income (compared to a Series entirely invested in equity securities)
consistent with the prudent employment of capital. While current income is the
primary objective, the Series believes that there should also be a reasonable
opportunity for growth of capital and income, since many securities offering a
better than average yield may
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also possess growth potential. Thus, in selecting securities for its Series, the
Series considers each of these objectives. Under normal market conditions, at
least 25% of the Series' assets will be invested in fixed income securities and
at least 40% and no more than 75% of the Series' assets will be invested in
equity securities. The Portfolio Manager for the Series is Massachusetts
Financial Services Company.
The Series' policy is to invest in a broad list of securities, including short-
term obligations. The list may be diversified not only by companies and
industries, but also by type of security. Fixed income securities and equity
securities (which include: common stocks and preferred stocks; securities such
as bonds, warrants or rights that are convertible into stock; and depositary
receipts for those securities) may be held by the Series. Some fixed income
securities may also have a call on common stock by means of a conversion
privilege or attached warrants. The Series may vary the percentage of assets
invested in any one type of security in accordance with the Portfolio Manager's
interpretation of economic and money market conditions, fiscal and monetary
policy and underlying security values. The Series' debt, investments may consist
of both investment grade securities (rated Baa or better by Moody's or BBB or
better by Standard & Poor's, Fitch or Duff & Phelps Credit Rating Co. ("Duff")
and securities that are unrated or are in the lower rating categories (rated BA
or lower by Moody's or BB or lower by Standard & Poor's, Fitch or Duff)
(commonly known as "junk bonds") including up to 20% of its assets in non-
convertible fixed income securities that are in these lower rating categories
and comparable unrated securities. Generally, most of the Series' long-term debt
investments will consist of "investment grade" securities. See the Statement of
Additional Information for a description of these ratings. It is not the Series'
policy to rely exclusively on ratings issued by established credit rating
agencies but rather to supplement such ratings with the Portfolio Manager's own
independent and ongoing review of credit quality.
The Series may also invest in U.S. Government securities, including: (i) U.S.
Treasury obligations, which differ only in their interest rates, maturities and
times of issuance; 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 greater than ten years), all of which are backed by the
full faith and credit of the U.S. Government; and (ii) obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, some of which are
backed by the full faith and credit of the U.S. Treasury, e.g., direct pass-
through certificates of GNMA; some of which are supported by the right of the
issuer to borrow from the U.S. Government, e.g., obligations of Federal Home
Loan Banks; and some of which are backed only by the credit of the issuer
itself, e.g., obligations of the Student Loan Marketing Association.
The Series may invest in mortgage pass-through securities. Mortgage pass-through
securities are securities representing interests in "pools" of mortgage loans.
Monthly payments of interest and principal by the individual borrowers on mort-
gages are passed through to the holders of the securities (net of fees paid to
the issuer or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. Payment of principal and interest on some mortgage
pass-through securities (but not the market value of the securities themselves)
may be guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by GNMA); or guaranteed by U.S. Government-
sponsored corporations (such as FNMA or FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by non-govern-
mental issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers). Fixed income securities that the Series may invest in also include
zero-coupon bonds, deferred interest bonds and bonds on which the interest is
payable in kind ("PIK bonds"). See "Description of Securities and Investment
Techniques" for a further discussion of these securities.
The Series may invest in ADRs which are certificates issued by a U.S. depository
(usually a bank), that represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Although ADRs are
issued by a U.S. depository, they are subject to many of the risks of foreign
securities such as changes in exchange rates and more limited information about
foreign issuers.
The Series may invest up to 20% (and generally expects to invest between 5% and
20%) of its net assets in foreign securities (including investments in emerging
markets or countries with limited or developing capital markets) (not including
ADRs). Investing in securities of foreign issuers generally involves risks not
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ordinarily associated with investing in securities of domestic issuers. (See
"Description of Securities and Investment Techniques-Foreign Investments" and
the Statement of Additional Information for a discussion of the risks involved
in foreign investing.)
In order to protect the value of the Series' investments from interest rate
fluctuations, the Series may enter into various hedging transactions, such as
interest rate swaps, and the purchase or sale of interest rate caps, floors and
collars. (See the Statement of Additional Information for information relating
to these transactions including related risks.)
The Series may purchase "Rule 144A securities"; enter into repurchase
agreements; lend portfolio securities; purchase securities on a "when-issued" or
on a "delayed delivery" basis; invest in indexed securities linked to foreign
currencies, indexes, or other financial indicators; enter into mortgage "dollar
roll" transactions; invest a portion of its assets in loan participations and
other direct indebtedness; purchase restricted securities, corporate asset-
backed securities, options on securities, options on stock indexes, options on
foreign currencies, futures contracts, options on futures contracts and forward
foreign currency exchange contracts. See "Description of Securities and Invest-
ment Techniques" for more information regarding these transactions and the risks
associated with them.
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Portfolio
Manager is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Series changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of Series turnover is not a limiting factor
when a change in the Series is otherwise appropriate. Because the Series is
expected to have a Series turnover rate of over 100%, transactions costs incur-
red by the Series and the realized capital gains and losses of the Series may be
greater than that of a Series with a lesser turnover rate.
GROWTH & INCOME SERIES
The investment objective of the Growth & Income Series is long-term total
return. The Series will pursue this objective primarily by investing in equity
and debt securities, focusing on small- and mid-cap companies that offer the
potential for capital appreciation, current income, or both. The Portfolio
Manager for the Series is Robertson, Stephens & Company Investment Management,
L.P.
The Series will normally invest the majority of its assets in common and pre-
ferred stocks, convertible securities, bonds, and notes. Although the Series
will focus on companies with market capitalizations of up to $3 billion, the
Series intends to remain flexible and may invest in securities of larger com-
panies. The Series may also engage in short sales of securities it expects to
decline in price. The Series may invest a substantial portion of its assets
in securities issued by small, small-cap and mid-cap companies. Such companies
may offer greater opportunities for capital appreciation than larger companies,
but investments in such companies may involve certain special risks. See Des-
cription of Securities and Investment Techniques-Small Companies" for a dis-
cussion of such risks.
The Series may invest in securities principally traded in foreign markets and
may buy or sell foreign currencies and options and futures contracts on foreign
currencies for hedging purposes in connection with its foreign investments. The
Series also may at times invest a substantial portion of its assets in securi-
ties of issuers in developing countries. The Series may at times invest a sub-
stantial portion of its assets in securities traded in the over- the-counter
markets in such countries and not on any exchange, which may affect the
liquidity of the investment and expose the Series to the credit risk of its
counterparties in trading those investments. International investing in
general may involve greater risks than U.S. investments. These risks may be
intensified in the case of investments in emerging markets or countries with
limited or developing capital markets.
The Series may invest without limit in debt securities and other fixed-income
securities. The Series may invest in lower-quality, high yielding debt securi-
ties. Lower-rated debt securities (commonly called "junk bonds") are considered
to be of poor standing and predominantly speculative. The Series may at times
invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. The Series
will not necessarily dispose of a security when its debt rating is reduced below
its rating at the time of purchase, although the Portfolio
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Manager will monitor the investment to determine whether continued investment in
the security will assist in meeting the Series' investment objective Such
investments involve certain risks. See "Description of Securities and Inves-
tment Techniques."
To hedge against changes in net asset value or to attempt to realize a greater
current return, the Series may use the following investment strategies and
techniques. The Series may buy and sell put and call options; index futures
contracts and options on index futures and on indexes; warrants on foreign
securities indexes; purchase and sell options in the over-the-counter markets
only when appropriate exchange-traded transactions are unavailable and when, in
the opinion of the Portfolio Manager, the pricing mechanism and liquidity of the
over-the-counter markets are satisfactory and the participants are responsible
parties likely to meet their obligations. The Series will not purchase futures
or options on futures or sell futures if, as a result, the sum of the initial
margin deposits on the Series' existing futures positions and premiums paid for
outstanding options on futures contracts would exceed 5% of the Series' assets.
(For options that are "in-the-money" at the time of purchase, the amount by
which the option is "in-the-money" is excluded from this calculation.) The
Series may lend portfolio securities to broker-dealers and may enter into
repurchase agreements.
At times the Series may invest more than 25% of its assets in securities of
issuers in one or more market sectors such as, for example, the technology
sector. A market sector may be made up of companies in a number of related
industries. The Series would only concentrate its investments in a particular
market sector if the Series' Portfolio Manager were to believe the investment
return available from concentration in that sector justifies any additional risk
associated with concentration in that sector. When the Series concentrates its
investments in a market sector, financial, economic, business, and other
developments affecting issuers in that sector will have a greater effect on the
Series than if it had not concentrated its assets in that sector.
At times, the Series' Portfolio Manager may judge that market conditions make
pursuing the Series' basic investment strategy inconsistent with the best
interests of its shareholders. At such times, the Series' Portfolio Manager may
temporarily use alternative strategies, primarily designed to reduce fluc-
tuations in the values of the Series' assets. In implementing these "defensive"
strategies, the Series may invest in U.S. Government securities, other high-
quality debt instruments, and other securities the Series' Portfolio Manager
believes to be consistent with the Series' best interests.
VALUE + GROWTH SERIES
The investment objective of the Value + Growth Series is capital appreciation.
The Series invests primarily in growth companies with favorable relationships
between price/earnings ratios and growth rates, in sectors offering the poten-
tial for above-average returns. The Portfolio Manager for the Series is
Robertson, Stephens & Company Investment Management, L.P.
In selecting investments for the Series, the primary emphasis of the Portfolio
Manager, is typically on evaluating a company's management, growth prospects,
business operations, revenues, earnings, cash flows, and balance sheet in
relationship to its share price. The Portfolio Manager may select stocks which
it believes are undervalued relative to the current stock price. Undervaluation
of a stock can result from a variety of factors, such as a lack of investor
recognition of (i) the value of a business franchise and continuing growth
potential, (ii) a new, improved or upgraded product, service or business
operation, (iii) a positive change in either the economic or business
condition for a company, (iv) expanding or changing markets that provide a
company with either new earnings direction or acceleration, or (v) a catalyst,
such as an impending or potential asset sale or change in management, that could
draw increased investor attention to a company. The Portfolio Manager also may
use similar factors to identify stocks which it believes to be overvalued and
may engage in short sales of such securities.
The Series may invest a substantial portion of its assets in securities issued
by small companies. Such companies may offer greater opportunities for capital
appreciation than larger companies, but investments in such companies may
involve certain special risks. See "Description of Securities and Investment
Techniques-Small Companies" for a discussion of such risks.
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The Series may invest in securities principally traded in foreign markets and
may buy or sell foreign currencies and options and futures contracts on foreign
currencies for hedging purposes in connection with its foreign investments. The
Series also may at times invest a substantial portion of its assets in securi-
ties of issuers in developing countries and securities traded in the over-the-
counter markets in such countries and not on any exchange, which may affect the
liquidity of the investment and expose the Series to the credit risk of its
counterparties in trading those investments. International investing in general
may involve greater risks than U.S. investments. These risks may be intensified
in the case of investments in emerging markets or countries with limited or
developing capital markets. (See "Description of Securities and Investment
Techniques").
The Series may invest in debt securities from time to time if the Portfolio
Manager believes that it might help achieve the Series' objective. The Series
may invest in debt securities to the extent consistent with its investment
policies, although the Portfolio Manager expects that under normal circum-
stances, the Series would not likely invest a substantial portion of its assets
in debt securities. The Series will invest only in securities rated investment
grade (generally securities rated Baa or better by Moody's or BBB or better by
Standard & Poor's) or considered by the Portfolio Manager to be of comparable
quality. Descriptions of the securities ratings assigned by Moody's and
Standard & Poor's are contained in the Appendix of the Statement of Additional
Information. The Series may at times invest in so-called "zero-coupon" bonds
and "payment-in-kind" bonds. See "Descriptions of Securities and Investment
Techniques-Zero-Coupon Bond." The Series will not necessarily dispose of a
security when its debt rating is reduced below its rating at the time of pur-
chase, although the Portfolio Manager will monitor the investment to determine
whether continued investment in the security will assist in meeting the Series'
investment objective.
To hedge against changes in net asset value or to attempt to increase its
investment return the Series may buy and sell: put and call options; futures
contracts; options on futures contracts; index futures contracts and options on
index futures and on indexes; warrants foreign securities indexes; purchase no
more than 25% of the value of its net assets long-term exchange-traded options
called Long-Term Equity Anticipation Securities ("LEAPs") and Buy-Write Option
Unitary Derivatives ("BOUNDs"); and options in the over-the-counter markets bu
only when appropriate exchange- traded transactions are unavailable and when,
in the opinion of the Portfolio Manager, the pricing mechanism and liquidity of
over-the-counter markets are satisfactory and the participants are responsible
parties likely to meet their obligations. The Series will not purchase futures
or options on futures or sell futures if, a result, the sum of the initial
margin deposits on the Series' existing futures position and premiums paid for
outstanding options on futures contracts would exceed 5% of the Series' assets.
(For options that are "in-the-money" at the time of purchase, the amount by
which the options is "in-the-money is excluded from this calculation.)
At times the Series may invest more than 25% of its assets in securities of
issuers in one or more market sectors such as, for example, the technology
sector. A market sector may be made up of companies in a number of related
industries. The Series would only concentrate its investments in a particular
market sector if the Series' Portfolio Manager were to believe the investment
return available from concentration in that sector justifies any additional risk
associated with concentration in that sector. When the Series concentrates its
investments in a market sector, financial, economic, business, and other
developments affecting issuers in that sector will have a greater effect on the
Series than if it had not concentrated its assets in that sector.
The Series may lend portfolio securities to broker-dealers and may enter into
repurchase agreements. These transactions must be fully collateralized at all
times, but involve some risk to the Series if the other party should default on
its obligations and the Series is delayed or prevented from recovering the
collateral.
At times, the Portfolio Manager may judge that market conditions make pursuing
the Series' basic investment strategy inconsistent with the best interests of
its shareholders. At such times, the Portfolio Manager may temporarily use
alternative strategies, primarily designed to reduce fluctuations in the values
of the Series' assets. In implementing these "defensive" strategies, the Series
may invest in U.S. Government securities, other high-quality debt instruments,
and other securities the Portfolio Manager believes to be consistent with the
Series' best interests.
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The length of time a Series has held a particular security is not generally a
consideration in investment decisions. The investment policies of a Series may
lead to frequent changes in the Series' investments, particularly in periods of
volatile market movements. Such portfolio turnover generally involves some
expense to a Series, including brokerage commissions or dealer markups and other
transaction costs on the sale of securities and reinvestment in other securi-
ties. Such sales may result in realization of taxable capital gains.
GLOBAL FIXED INCOME SERIES
The investment objective of the Global Fixed Income Series is to provide high
total return. The Series will seek to achieve its objective by investing at
least 65% in both domestic and foreign debt securities and related foreign
currency transactions. The total return will be sought through a combination of
current income, capital gains and gains in currency positions. The Portfolio
Manager for the Series is Baring International Investment Limited.
Under normal market conditions, the Series will invest primarily in: (i) obliga-
tions issued or guaranteed by foreign national governments, their agencies,
instrumentalities, or political subdivisions (including any entity which is
majority owned by such government, agency, instrumentality, or political sub-
division); (ii) U.S. Government securities; and (iii) debt securities issued or
guaranteed by supranational organizations, considered to be "government securi-
ties." The Series may also invest in non-government foreign and domestic debt
securities, including corporate debt securities, bank obligations, mortgage-
backed or asset-backed securities, and repurchase agreements.
As a global portfolio, the Series may invest in securities issued in any cur-
rency and may hold foreign currencies. Under normal conditions, the Series'
Portfolio Manager expects that the Series generally will be invested in at least
six different countries, including the U.S., although the Series may at times
invest all of its assets in a single country. It is currently anticipated that
the Series' assets will be invested principally within, or in the currencies of,
Australia, Canada, Japan, New Zealand, the United States, Scandinavia, and West-
ern Europe and in securities denominated in the currencies of those countries or
denominated in multinational currency units, such as the European Currency Unit
("ECU"), which is a "basket" consisting of specified amounts of the currencies
of certain states of the European Community. The specific amounts of currencies
comprising the ECU may be adjusted by the Council of Ministers of the European
Community to reflect changes in the relative values of the underlying cur-
rencies. Securities of issuers within a given country may be denominated in the
currency of another country. In addition, when the Series' Portfolio Manager
believes that U.S. securities offer superior opportunities for achieving the
Series' investment objective, or for temporary defensive purposes, the Series
may invest substantially all of its assets in securities of U.S. issuers or
securities denominated in U.S. dollars. The Series may also acquire securities
and currency in less developed countries as well as in developing countries.
International investing in general may involve greater risks than U.S. invest-
ments. These risks may be intensified in the case of investments in emerging
markets or countries with limited or developing capital markets.
The Series is also authorized to invest in debt securities 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 (i.e., the World Bank, the European Investment Bank and the Asian
Development Bank). The Series is further authorized to invest in "semi-govern-
mental securities," which are debt securities 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.
The Series may invest in debt securities of any type of issuer, including
foreign and domestic corporations, the 100 largest foreign commercial banks in
terms of total assets, and other business organizations, domestic and foreign
governments and their political subdivisions, including the U.S. Government, its
agencies, and authorities or instrumentalities. The Series may invest in debt
securities with varying maturities. Under current market conditions, it is ex-
pected that the dollar-weighted average maturity of the Series' debt investments
will not exceed 10 years. Generally, the average maturity of the Series' debt
portfolio will be shorter when interest rates worldwide or in a particular coun-
try are expected to rise, and longer when interest rates are expected to fall.
To protect against credit risk, the Portfolio invests primarily
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in high-grade debt securities. At least 65% of the Series' investments will
consist of securities rated within the three highest rating categories of Stan-
dard & Poor's (AAA, AA, A) or Moody's (AAA, AA or A) or if unrated, will be
considered by thePortfolio Manager to be of equivalent quality. The Series may
engage in certain transactions, which include dollar roll transactions, reverse
repurchase agreements, interest rate transactions, options on securities and
indexes, futures and options on futures, options on foreign currencies, foreign
exchange transactions and over the counter options. (See "Description of Secur-
ities and Investment Techniques.")
The Series is classified as a "non-diversified" investment company as described
above under "Diversification." See "Diversification" for risks associated with
investing in a non-diversified Series.
The Series' net asset value per share fluctuates, depending on (i) current
worldwide market interest rates, (ii) the value of the currencies in which the
Portfolio's securities are denominated when compared to the U.S. dollar, (iii)
the success of the Portfolio Manager's currency hedging techniques, and (iv) the
creditworthiness of the issuers in which the Series is invested. In pursuing the
Series' investment objective, however, the Portfolio Manager actively manages
the Series in an effort to minimize the effect of such factors on the Series'
net asset value per share. The Portfolio Manager allocates the Series' invest-
ments among those markets, issuers and currencies which it believes offer the
most attractive combination of high income and principal stability. In evaluat-
ing investments for the Series, the Portfolio Manager analyzes relative yields
and the appreciation potential of securities in particular markets; world inter-
est rates and monetary trends; economic, political and financial market condi-
tions in different countries; credit quality; and the relationship of individual
foreign currencies to the U.S. dollar. The Portfolio Manager also relies on
internally and externally generated financial, economic, and credit research to
evaluate alternative investment opportunities.
The Series may adjust its portfolio as it deems advisable in view of prevailing
or anticipated market conditions to accomplish the Series' investment objective.
For example, the Portfolio may sell portfolio securities in anticipation of a
movement in interest rates. Frequency of portfolio turnover will not be a limit-
ing factor if the Portfolio considers it advantageous to purchase or sell secur-
ities. The Portfolio Manager anticipates that the Series portfolio turnover rate
generally will not exceed 300%. A higher rate of portfolio turnover may result
in correspondingly higher portfolio transaction costs which would have to be
borne directly by the Trust and ultimately by the shareholders.
LIQUID ASSET SERIES
The investment objective of the Liquid Asset Series is to achieve a high level
of current income consistent with the preservation of capital and liquidity. The
Portfolio Manager for the Series is ING Investment Management, LLC.
In managing the Series, the Portfolio Manager employs a number of professional
money management techniques, including varying the composition of investments
and the average maturity of the portfolio based upon the Portfolio Manager's
assessment of the relative values of the various money market securities and
future interest rate patterns. These assessments will change in response to
changing economic and money market conditions and to shifts in fiscal and mone-
tary policy. The Portfolio Manager also seeks to improve yield by taking advan-
tage of yield disparities that regularly occur in the money markets. For
example, market conditions frequently result in similar securities trading at
different prices. Also, there are frequently differences in the yield between
the various types of money market securities. The Series seeks to enhance yield
by purchasing and selling securities based upon these yield disparities.
The Series invests in one or more of the following:
(i) U.S. Government Securities. Obligations of the U.S. Government and its
agencies and instrumentalities maturing in 13 months or less from the
date of acquisition or purchased pursuant to repurchase agreements
that provide for repurchase by the seller within 13 months from the
date of acquisition;
(ii) Bank Obligations. Obligations of commercial banks (including foreign
branches), savings and loan associations, and foreign banks with
maturities
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not exceeding 13 months. Such obligations include nego-
tiable certificates of deposit, variable rate certificates of deposit,
bankers' acceptances, fixed time deposits, and commercial paper. Bank
money market instruments in which the Series may invest must be issued
by depository institutions with total assets of at least $1 billion,
except that up to 10% of total assets may be invested in certificates
of deposit of smaller institutions if such certificates of deposit
are federally insured. Fixed time deposits, unlike negotiable cer-
tificates of deposit, generally do not have a market and may be sub-
ject to penalties for early withdrawal of funds;
(iii) Commercial Paper. Short-term unsecured promissory notes with matur-
ities not exceeding nine months issued in bearer form by bank holding
companies, corporations, and finance companies; and
(iv) Short-Term Corporate Debt Securities. Corporate debt securities (other
than commercial paper) maturing in 13 months or less.
The Series may invest only in U.S. dollar denominated money market instruments
that present minimal credit risk and, with respect to at least 95% of its total
assets, measured at the time of investment, that are of the highest quality. The
Portfolio Manager shall determine whether a security presents minimal credit
risk under procedures adopted by the Trust's Board of Trustees. A money market
instrument will be considered to be of highest quality under standards adopted
by the Board of Trustees and consistent with applicable Securities and Exchange
Commission ("SEC") rules relating to money market funds. With respect to no more
than 5% of its total assets, measured at the time of investment, the Series may
also invest in money market instruments that are rated in the second highest
rating category for short-term debt obligations. A money market instrument will
be considered to be in the second-highest rating category under the standards
described above.
The Series may not invest more than 5% of its total assets, measured at the time
of investment, in securities of any one issuer, except that this limitation
shall not apply to U.S. Government securities and repurchase agreements thereon.
The Series may not invest more than the greater of 1% of its total assets or
$1,000,000, measured at the time of investment, in securities of any one issuer
that are rated in the second-highest rating category, except that this limit-
ation shall not apply to U.S. Government securities. In the event that an
instrument acquired by the Series is downgraded or otherwise ceases to be of the
quality that is eligible for the Series, the Portfolio Manager, under procedures
approved by the Board of Trustees (or the Board of Trustees itself if the Port-
folio Manager becomes aware an unrated security is downgraded below high quality
(within the first or second highest rating category) and the Portfolio Manager
does not dispose of the security or such security does not mature within five
business days), shall promptly reassess whether such security presents minimal
credit risk and determine whether to retain the instrument.
From time to time, in the ordinary course of business, the Series may purchase
securities on a when-issued or delayed delivery basis. The Series shall engage
only in short sales "against the box." The Series may also enter into repur-
chase agreements; the Series may purchase mortgage-backed securities, invest up
to 10% in illiquid securities and may borrow up to 10% of its net assets to
purchase securities and up to 25% of its net assets for temporary purposes. In
connection with permissible borrowings the Series may transfer as collateral
securities owned by the Series. See "Description of Securities and Investment
Techniques" for descriptions of these techniques.
The Series seeks to maintain a net asset value of $1.00 per share for purposes
of purchases and redemptions; however, there can be no assurance that the net
asset value will not vary. The Series will be affected by general changes in
interest rates resulting in increases or decreases in the value of the obliga-
tions held by the Series.
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MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of the
Board of Trustees. The Trustees are J. Michael Earley, R. Barbara Gitenstein,
Robert A. Grayson, Elizabeth J. Newell, Stanley B. Seidler and Roger B. Vincent.
The Executive Officers of the Trust are Barnett Chernow, Myles R. Tashman and
Mary Bea Wilkinson. Additional information about the Trustees and officers of
the Trust may be found in the Statement of Additional Information under the
heading "Management of the Trust."
THE MANAGER
Directed Services, Inc. ("DSI" or the "Manager") serves as the Manager to the
Trust pursuant to a Management Agreement with the Trust. DSI is a New York cor-
poration and is a wholly owned subsidiary of ING. DSI is registered with the
SEC as an investment adviser and a broker-dealer. The Trust currently offers
shares of its operating Series to, among others, separate accounts of Golden
American to serve as the investment medium for Variable Contracts issued by
Golden American. DSI is the principal underwriter and distributor of the
Variable Contracts issued by Golden American. Golden American is a stock life
insurance company organized under the laws of the State of Delaware. Prior to
December 30, 1993, Golden American was a Minnesota corporation. Golden American
is a wholly owned subsidiary of ING. One of the Portfolio Managers, ING
Investment Management, LLC is an affiliate of DSI and Golden American. Prior to
October 24, 1997, DSI was a wholly owned subsidiary of Equitable of Iowa
Companies and an affiliate of one of the Portfolio Managers, Equitable Inves-
tment Services, Inc.
DSI performs the activities described above in this Prospectus and below under
the caption "Distributor." Under the Management Agreement, DSI has overall re-
sponsibility, subject to the supervision of the Board of Trustees, for engaging
Portfolio Managers and for monitoring and evaluating the management of the
assets of each Series by the Portfolio Managers. The Manager is also responsible
for monitoring and evaluating the Portfolio Managers on a periodic basis, and
will consider their performance records with respect to the investment objec-
tives and policies of each Series. The Manager may, if appropriate, recommend
that the Trustees consider a change in the Portfolio Manager, although the
Manager does not expect to recommend frequent changes in Portfolio Managers as a
matter of operating procedure for the Series.
As Manager, DSI is responsible, subject to the supervision of the Board of Trus-
tees, for providing administrative and other services necessary for the ordinary
operation of the Series in addition to advisory services. The Manager provides
the overall business management and administrative services necessary for the
Series' operation and provides or procures the services and information neces-
sary to the proper conduct of the business of the Series. The Manager is
responsible for providing or procuring, at the Manager's expense, the services
reasonably necessary for the ordinary operation of the Series, including
custodial, administrative, transfer agency, portfolio accounting, dividend dis-
bursing, auditing, and ordinary legal services. The Manager also acts as
liaison among the various service providers to the Series, including the
custodian, portfolio accounting agent, Portfolio Managers, and the insurance
company or companies to which the Series offer their shares. The Manager is also
responsible for ensuring that the Series operate in compliance with applicable
legal requirements and for monitoring the Portfolio Managers for compliance with
requirements under applicable law and with the investment policies and restric-
tions of the Series. DSI does not bear the expense of brokerage fees and other
transactional expenses for securities or other assets (which are generally
considered part of the cost for the assets), taxes (if any) paid by a Series,
interest on borrowing, fees and expenses of the independent trustees, and extra-
ordinary expenses, such as litigation or indemnification expenses.
Pursuant to the Management Agreement, the Manager is authorized to exercise full
investment discretion and make all determinations with respect to the investment
of a Series' assets and the purchase and sale of portfolio securities for one or
more Series in the event that at any time no Portfolio Manager is engaged to
manage the assets of a Series. The Management Agreement may be terminated with-
out penalty by the vote of the Board of Trustees or the shareholders of the
Series, or by the Manager, upon 60 days' written notice
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by the Board or the Manager, and will terminate automatically if assigned as
that term is described in the Investment Company Act of 1940.
The Trust pays the Manager for its services under the Management Agreements a
fee, payable monthly, based on the average daily net assets of the Series at the
following annual rates of the average daily net assets of the Series:
Series Fee (based on combined assets of the
indicated groups of Series)
- ------------------------------- --------------------------------------------
Fully Managed, Rising 1.00% on the first $750 million in combined
Dividends, and Small Cap assets of these Series;
0.95% on the next $1.250 billion;
0.90% on the next $1.5 billion; and
0.85% on the amount in excess of $3.5 billion
Mid-Cap Growth, Total Return, 1.00% of first $250 million in combined
and Research assets of these Series;
0.95% of next $400 million;
0.90% of next $450million; and
0.85% of amount in excess of $1.1 billion
Growth & Income and 1.10% of first $250 million;
Value +Growth 1.05% of next $400 million;
1.00% of next $450 million; and
0.95% of amount in excess of $1.1 billion
Global Fixed Income 1.60%
Limited Maturity Bond 0.60% on the first $200 million in combined
and Liquid Asset assets of these Series;
0.55% on the next $300 million; and
0.50% on the amount in excess of $500 million
As compensation for its services during the most recent fiscal year, the Trust,
pursuant to the Management Agreement, paid the Manager fees which represented
the following percentage of each Series' average daily net assets: Fully Managed
Series - 0.99%; Limited Maturity Bond Series - 0.60%; Rising Dividends Series -
0.99%; Liquid Asset Series - 0.60% and Small Cap Series - 0.99%. The Mid-Cap
Growth, Total Return, Research, Growth & Income, Value + Growth and Global Fixed
Income Series had not commenced operations as of the end of December 31, 1997.
For more information on the Management Agreement, see the Statement of
Additional Information.
The Trust is distinct in that the expense structure of most Series is simpler
and more predictable than most mutual funds. For all Series many of the ordinary
expenses for each Series, including custodial, administrative, transfer agency,
portfolio accounting, auditing, and ordinary legal expenses are paid by the
Manager; whereas, most mutual funds for these expenses directly from their own
assets.
THE PORTFOLIO MANAGERS
The Trust and the Manager have entered into Portfolio Management Agreements with
each of the Portfolio Managers. Under these Agreements, the Portfolio Manager of
each Series has full investment discretion and makes all determinations with
respect to the investment of a Series' assets and the purchase and sale of port-
folio securities and other investments. The Portfolio Management Agreements may
be terminated without penalty by the vote of the Board of Trustees or the share-
holders of a Series, by the Portfolio Manager, or by the Manager, on 60 days'
written notice by any party to a Portfolio Management Agreement and will ter-
minate automatically if assigned as that term is described in the Investment
Company Act of 1940. A description of each Portfolio Manager follows.
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T. ROWE PRICE ASSOCIATES, INC.
The Portfolio Manager to the Fully Managed Series is T. Rowe Price Associates,
Inc. ("T. Rowe Price"), located at 100 East Pratt St., Baltimore, MD 21202. T.
Rowe Price was founded in 1937 by the late Thomas Rowe Price, Jr. As of December
31, 1997, the firm and its affiliates managed over $126 billion in assets.
With respect to its investment management of the Fully Managed Series, the Port-
folio Manager has an Investment Advisory Committee composed of the following
members: Richard P. Howard, Chairman; Arthur B. Cecil, III; Charles A. Morris;
Charles M. Ober and Brian C Rogers. The Committee Chairman has day-to-day re-
sponsibility for managing the Fully Managed Series and works with the Committee
in developing and executing the Fully Managed Series' investment program. Mr.
Howard has been Chairman of the Committee since 1989. He joined T. Rowe Price in
1982 and has been managing investments since 1989.
From the Fully Managed Series' commencement of operations through December 31,
1994, Weiss, Peck & Greer Advisers, Inc. served as Portfolio Manager.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays T. Rowe Price a monthly fee equal to an annual rate of 0.50% of the average
daily net assets of the Fully Managed Series.
KAYNE ANDERSON INVESTMENT MANAGEMENT, LLC
The Portfolio Manager to the Rising Dividends Series is Kayne Anderson Invest-
ment Management, LLC ("Kayne Anderson"), located at 1800 Avenue of the Stars,
Suite 200, Los Angeles, California, 90067. The Portfolio Manager is a registered
investment adviser under the Investment Advisors Act of 1940, as amended. It
was organized on June 29, 1994 as a California limited partnership and changed
its form of organization to a California limited liability company during 1997.
Kayne Anderson (in its original form) has been in the business of furnishing
investment advice to institutional and private clients since 1984, when founded
by Richard A. Kayne and John E. Anderson. Messrs. Kayne, Anderson and Allan M.
Rudnick own in the aggregate over 80% of Kayne Anderson. As of June 30, 1997,
Kayne Anderson managed portfolios which, in the aggregate, amounted to approx-
imately $2.7 billion.
Mr. Rudnick is the Senior Portfolio Manager responsible for the management of
the Rising Dividends Series since its inception. Prior to August, 1989, Mr.
Rudnick was President of Pilgrim Asset Management and Chief Investment Officer
of the Pilgrim Group of Mutual Funds.
Prior to January 1, 1995, Kayne, Anderson Investment Management, Inc. served as
Portfolio Manager to the Rising Dividends Series. From January 1, 1995 to
September 30, 1997, the Portfolio Manager was Kayne Anderson Investment Manage-
ment, L.P. ("KAIMLP"). On September 30, 1997, KAIMLP was merged into Kayne
Anderson. KAIMLP had become the Portfolio Manager pursuant to a substitution
agreement. No change in the personnel managing the Rising Dividends Series
resulted from such substitution.
Pursuant to the Portfolio Management Agreement, the Manager (and not the Trust)
pays Kayne Anderson a monthly fee equal to an annual rate of 0.50% of the
average daily net assets of the Rising Dividends Series.
FRED ALGER MANAGEMENT, INC.
The Portfolio Manager to the Small Cap Series is Fred Alger Management, Inc.,
located at 75 Maiden Lane, New York, NY 10038. The Portfolio Manager has been in
the business of providing investment advisory services since 1964 and, as of
January 31, 1998, had approximately $7.8 billion under management, $4.5 billion
in mutual fund accounts and $3.3 billion in other advisory accounts. The Port-
folio Manager is owned by Fred Alger & Company, Incorporated ("Alger Inc."),
which in turn is owned by Alger Associates, Inc., a financial services holding
company. Fred M. Alger III and his brother, David D. Alger, are the majority
shareholders of Alger Associates, Inc. and may be deemed to control that company
and its subsidiaries.
David D. Alger, President of the Portfolio Manager, is primarily responsible for
the day-to-day management of the Series. He has been employed by the Portfolio
Manager as Executive Vice President and Director of Research since 1971 and as
President since 1995 and he serves as Portfolio Manager for other mutual funds
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and investment accounts managed by the Portfolio Manager. Also participating in
the management of the Series are Ronald Tartaro and Seilai Khoo. Mr. Tartaro has
been employed by the Portfolio Manager since 1990 and he serves as a senior
research analyst. Prior to 1990, he was a member of the technical staff at AT&T
Bell Laboratories. Ms. Khoo has been employed by the Portfolio Manager since
1989 and she serves as a senior research analyst.
Pursuant to a Portfolio Management Agreement, the Manager (and not the Trust)
pays the Portfolio Manager a monthly fee equal to an annual rate of 0.50% of the
average daily net assets of the Small Cap Series.
ING INVESTMENT MANAGEMENT, LLC
The Portfolio Manager to the Limited Maturity Bond Series and the Liquid Asset
Series is ING Investment Management, LLC ("IIM LLC"), located at 5780 Powers
Ferry Road, N.W., Suite 300, Atlanta, Georgia 30327-4349. The Portfolio Manager
is a limited liability corporation, incorporated in Delaware, which is engaged
in the business of providing investment advice to affiliated insurance companies
possessing portfolios which, as of December 31, 1997, were valued at $12
billion. The Portfolio Manager is a wholly owned subsidiary of ING and is
affiliated with DSI. The Portfolio Manager is also a sub-adviser to the Equi-
Select Series Trust, a registered investment company that serves as the invest-
ment vehicle underlying certain variable annuity contracts issued by Equitable
Life Insurance Company of Iowa and Golden American.
Robert F. Bowman has served as the senior Portfolio Manager responsible for the
day-to-day management of the Limited Maturity Bond Series since August, 1996.
Mr. Bowman has been employed by the Portfolio Manager since January 2, 1998.
Prior to that, he served as the Series' Portfolio Manager while working for
Equitable Investment Services, Inc. ("EISI"). He joined EISI as Executive Vice
President in 1986, and has over 18 years of direct investment experience.
Under the Portfolio Management Agreement, the Manager (and not the Trust) pays
IIM LLC a fee, payable monthly, based on the average daily net assets of the
Limited Maturity Bond Series at the following annual rates of the average daily
net assets of the Series: 0.30% of the first $25 million; 0.25% of the next $50
million; 0.20% of the next $75 million; and 0.15% of the amount over $150 mil-
lion, subject to a minimum annual fee of $35,000 (payable at the end of each
calendar year). The Manager (and not the Trust) pays ING Investment Management,
LLC, a fee, payable monthly, based on the average daily net assets of the Liquid
Asset Series at the following annual rates of the average daily net assets of
the Series: 0.20% of the first $25 million; 0.15% of the next $50 million; and
0.10% of the amount over $75 million, subject to a minimum annual fee of $35,000
(payable at the end of each calendar year).
IIM LLC or its affiliate EISI have served as Portfolio Manager to the Limited
Maturity Bond and the Liquid Asset Series since August 13, 1996. IIM LLC
assumed portfolio management responsibilities for the Limited Maturity Bond and
Liquid Assets Series on January 2, 1998. EISI served as Portfolio Manager from
August 14, 1996 through January 1, 1998. Bankers Trust Company served as Port-
folio Manager from May 1, 1992 through August 13, 1996. Prior to that date, a
different firm served as Portfolio Manager to both Series.
MASSACHUSETTS FINANCIAL SERVICES COMPANY
The Portfolio Manager to the Mid-Cap Growth Series, Research Series and Total
Return Series is Massachusetts Financial Services Company ("MFS"), located at
500 Boylston Street, Boston, Massachusetts 02116. MFS is America's oldest
mutual fund organization. MFS and its predecessor organizations have a history
of money management dating from 1924 and the founding of the first mutual fund
in the United States, Massachusetts Investors Trust. Net assets under the man-
agement of the MFS organization were approximately $70.2 billion on behalf of
approximately $2.7 million investor accounts as of December 31, 1997. As of such
date, the MFS organization managed approximately $45.7 billion of assets in
equity securities and $24.5 billion of assets in fixed income securities. MFS is
a subsidiary of Sun Life Assurance Company of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
Sun Life, a mutual life insurance company, is one of the largest international
life
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insurance companies and has been operating in the U.S. since 1895, establishing
a headquarters office in the U.S. in 1973. The executive officers of MFS report
to the Chairman of Sun Life.
Kevin R. Parke is the portfolio manager for the Research Series. Mr. Parke over-
sees the selection of portfolio securities made by various equity research
analysts employed by MFS. Mr. Parke is a Senior Vice President-Investments of
MFS and has been employed as a portfolio manager by MFS since 1985.
David M. Calabro heads a team of portfolio managers of MFS for the Total Return
Series. Mr. Calabro is a Vice President-Investments of MFS and manages the
equity portion of the Series along with Judith N. Lamb, a Vice President-Invest-
ments of MFS, Lisa B. Nurme, a Vice President-Investments of MFS and Maura
Shaughnessy, a Vice President-Investments of MFS. Geoffrey L. Kurinsky, a Senior
Vice President-Investment manages the fixed income portion of the Series and has
been employed as a portfolio manager by MFS since 1987. Mr. Calabro has been
employed as a portfolio manager by MFS since 1992. Ms. Lamb has been employed as
a portfolio manager by MFS since 1992. Ms. Nurme has been employed as a port-
folio manager by MFS since 1987. Ms. Shaughnessy has been employed as a port-
folio manager by MFS since 1991.
John W. Ballen and Mark Regan are the portfolio managers for the Mid-Cap Growth
Series. Mr. Ballen is a Senior Vice President-Investments and the Chief Equity
Officer of MFS and has been employed by MFS since 1984. Mr. Regan is a Vice
President-Investments at MFS and has been employed as a portfolio manager by MFS
since 1989.
MFS and the individuals named previously have served in similar capacities for
similar series of the Equi-Select Series Trust, the predecessor series of the
Mid-Cap Growth, Research and Total Return Series. Pursuant to the Portfolio
Management Agreement, the Manager (not the Trust) pays to MFS a monthly fee
equal to an annual rate of 0.40 % of first $300 million and 0.25% of average net
assets over and above $300 million for each of the Mid-Cap Growth, Research and
Total Return Series.
ROBERTSON, STEPHENS & COMPANY INVESTMENT MANAGEMENT, L.P.
The Portfolio Manager to the Growth & Income and Value + Growth Series is
Robertson, Stephens & Company Investment Management, L.P. ("RSIM, L.P."),
located at 555 California Street, San Francisco, CA 94104. RSIM, L.P., a
California limited partnership, was formed in 1993 and is registered as an
investment adviser with the Securities and Exchange Commission. The general
partner of RSIM, L.P. is Robertson, Stephens Investment Company. RSIM, L.P. is
affiliated with BancAmerica Robertson Stephens, a major investment banking firm
specializing in emerging growth companies that has developed substantial inves-
tment research, underwriting, and venture capital expertise. RSIM, L.P. and its
affiliates have in excess of $4.5 billion under management in public and private
investment funds. BankAmerica Corporation may be deemed to be a control person
of RSIM, L.P.
Ronald E. Elijah joined RSIM, L.P. in 1992 and is the portfolio manager for the
Value + Growth Series. From August 1985 to January, 1990, Mr. Elijah was a
securities analyst for Robertson, Stephens & Company, LLC (now BancAmerica
Robertson Stephens). From January 1990 to January 1992, Mr. Elijah was an
analyst and portfolio manager for Water Street Capital, which managed short
selling investment funds.
John L. Wallace is the portfolio manager for the Growth & Income Series. Prior
to joining RSIM, L.P., Mr. Wallace was Vice President of Oppenheimer Management
Corp., where he was portfolio manager of the Oppenheimer Main Street Income and
Growth Fund.
Robertson, Stephens and the individuals named previously have served in similar
capacities for similar series of the Equi-Select Series Trust, the predecessor
series of the Growth & Income and Value + Growth Series. Pursuant to the Port-
folio Management Agreement, the Manager (not the Trust) pays to Robertson,
Stephens a monthly fee equal to an annual rate of 0.55% of the first $200 mil-
lion and 0.45% of over $200 million of average daily net assets of the Growth &
Income Series; and 0.55% of first $500 million and 0.45% of over $500 million of
average daily net assets of the Value + Growth Series.
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BARING INTERNATIONAL INVESTMENT LIMITED
The Portfolio Manager to the Global Fixed Income series is Baring International
Investment Limited ("BIIL"), located at 155 Bishopsgate, London. BIIL is regis-
tered under the Investment Advisor's Act of 1940 and provides investment manage-
ment services. BIIL is a wholly owned subsidiary of Baring Asset Management
Holdings Limited ("BAMHL"). BAMHL, a company registered is England and Wales,
is the parent of the world-wide group of investment management companies that
operate under the collective name Baring Asset Management ("BAM"). BAMHL is a
wholly owned indirect subsidiary of ING a publicly traded company based in the
Netherlands with worldwide insurance and banking subsidiaries.
BAM provides global investment management services and maintains major invest-
ment offices in Boston, London, Hong Kong and Tokyo, and together with its pre-
decessor corporation was founded in 1762. BAM provides advisory services to
institutional investors, offshore investment companies, insurance companies and
private clients. As of December 31, 1997, BAM managed approximately $36.1 bil-
lion of assets.
The Global Fixed Income Portfolio will be managed by Paul Thursby. Mr. Thursby
has been an investment professional with BIIL since 1991 and has 18 years of
investment. He is a specialist in the Japanese domestic bond market and lived
in Japan for two years while working for Prudential Bache. He has recently been
recognized by Micropal for his outstanding management of fixed income funds. He
is a senior member of the Fixed Income and Currency Team and sits on the Fixed
Income Strategy Group. His specialization is the construction of diversified
portfolios on behalf of U.S., U.K. and Japanese clients.
Pursuant to the Portfolio Management Agreement, the Manager (not the Trust)
shall pay to BIIL 0.45% of first $200 million, 0.30% of next $500 million, 0.25%
of next $1 billion, 0.10% of $2 billion of average daily net asset of the Global
Fixed Income Portfolio.
TOTAL EXPENSES FOR THE SERIES OF THE TRUST
The expenses of the ordinary operations of each Series are borne by the Manager
pursuant to Management Agreement. In addition to the management fee, the Trust
bears the expenses of taxes (if any) paid by a Series, the fees and expenses of
its independent trustees, any extraordinary expenses, such as any litigation or
indemnification expenses, as well as other expenses as described under "The
Manager." Any such Trust expenses directly attributable to a Series are charged
to that Series; other expenses are allocated among all the Series. For the
Trust's fiscal year ended December 31, 1996, total Series expenses as a percent-
age of net assets were as follows: Fully Managed Series -0.99%; Limited Maturity
Bond Series - 0.61%; Rising Dividends Series -0.99%; Small Cap -0.99% and Liquid
Asset Series - 0.61%. The other Series had not commenced operations as of
December 31, 1997.
DISTRIBUTOR
Directed Services, Inc. acts as distributor ("Distributor") of shares of the
Series, in addition to serving as Manager for the Trust. The Distributor's
address is 1001 Jefferson Street, Wilmington, Delaware 19801. The Distributor is
a registered broker-dealer and a member of the National Association of
Securities Dealers and acts as Distributor without remuneration from the Trust.
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Series is Bankers Trust Company. First Data Investors
Services Group of First Data Corporation provides certain administrative and
portfolio accounting services for all Series.
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes certain types of securities and investment
techniques used by one or more Series and enumerates potential risks associated
with these investments. The actual securities in which a series may invest are
described in "Investment Objectives and Policies."
For more detailed information on these investment techniques, as well as
information on some types of securities in which some or all of the Series may
invest, including information on U.S. Government securities, debt securities
generally, variable and floating rate securities, reverse repurchase agreements,
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lending portfolio securities, warrants, other investment companies, and short
sales, including short sales against the box, see the Statement of Additional
Information.
MORTGAGE-BACKED SECURITIES
MORTGAGE PASS-THROUGH SECURITIES
Many mortgage-backed securities are mortgage pass-through securities, which are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are made periodically, in effect
"passing through" periodic payments made by the individual borrowers on the
residential mortgage loans which underlie the securities (net of fees paid to
the issuer or guarantor of the securities and possibly others). Such instruments
differ from typical bonds because principal is repaid monthly over the term of
the loan rather than returned in a lump sum at maturity. Timely payment of
principal and interest on some mortgage pass-through securities may be
guaranteed by the full faith and credit of the U.S. Government, as in the case
of securities guaranteed by the Government National Mortgage Association, or
"GNMA," or guaranteed by agencies or instrumentalities of the U.S. Government,
as in the case of securities guaranteed by the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
which are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations and not by the full faith and credit of
the U.S. Government. For more information on GNMA certificates and FNMA and
FHLMC mortgage-backed obligations, see "Mortgage-Backed Securities" in the
Statement of Additional Information.
OTHER MORTGAGE-BACKED SECURITIES
Some Series may purchase mortgage-backed securities issued by financial
institutions such as commercial banks, savings and loan associations, mortgage
banks, and securities broker-dealers (or affiliates of such institutions
established to issue these securities) in the form of either collateralized
mortgage obligations ("CMOs") or mortgage-backed bonds. CMOs are obligations
fully collateralized directly or indirectly by a pool of mortgages on which
payments of principal and interest are dedicated to payment of principal and
interest on the CMOs. Payments are passed through to the holders, although not
necessarily on a pro rata basis, on the same schedule as they are received.
Mortgage-backed bonds are general obligations of the issuer fully collateralized
directly or indirectly by a pool of mortgages. The mortgages serve as collateral
for the issuer's payment obligations on the bonds but interest and principal
payments on the mortgages are not passed through either directly (as with GNMA
certificates and FNMA and FHLMC pass-through securities) or on a modified basis
(as with CMOs). Accordingly, a change in the rate of prepayments on the pool of
mortgages could change the effective maturity of a CMO but not that of a mort-
gage-backed bond (although, like many bonds, mortgage-backed bonds can provide
that they are callable by the issuer prior to maturity). Although the mortgage-
related securities securing these obligations may be subject to a government
guarantee or third-party support, the obligation itself is not so guaranteed.
Therefore, if the collateral securing the obligation is insufficient to make
payment on the obligation, a holder could sustain a loss.
RISKS OF MORTGAGE-BACKED SECURITIES
Although mortgage loans constituting a pool of mortgages, such as those
underlying GNMA certificates, may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization and may
be prepaid prior to maturity. In the case of mortgage pass-through securities
such as GNMA certificates or FNMA and FHLMC mortgage-backed obligations, or
modified pass-through securities such as collateralized mortgage obligations
issued by various financial institutions, early repayment of principal arising
from prepayments of principal on the underlying mortgage loans due to the sale
of the underlying property, the refinancing of the loan, or foreclosure may
expose a Series to a lower rate of return upon reinvestment of the principal.
Prepayment rates vary widely and may be affected by changes in market interest
rates. In periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of the mortgage-backed
security.
Conversely, when interest rates are rising, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the mortgage-backed
security. Accordingly, it is not possible to accurately predict the average life
of a particular pool. Reinvestment of prepayments may occur at higher or lower
rates than the original yield on the certificates. Therefore, the actual
maturity and realized yield on pass-through or
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modified pass-through mortgage-backed securities will vary based upon the pre-
payment experience of the underlying pool of mortgages.
With respect to GNMA certificates, although GNMA guarantees timely payment even
if homeowners delay or default, tracking the "pass-through" payments may, at
times, be difficult. Expected payments may be delayed due to the delays in
registering the newly traded paper securities. The custodian's policies for
crediting missed payments while errant receipts are tracked down may vary. Other
mortgage-backed securities such as those of FHLMC and FNMA trade in book-entry
form and are not subject to this risk of delays in timely payment of income.
OTHER ASSET-BACKED SECURITIES
Some Series may purchase other asset-backed securities (unrelated to mortgage
loans) such as "CARSSM" ("Certificates for Automobile Receivables") and Credit
Card Receivable Securities and any other asset-backed securities that may be
developed in the future. See the Statement of Additional Information for a
description of these instruments.
HIGH YIELD BONDS
Generally, high yield/high risk debt securities are those rated lower than Baa
or BBB, or, if not rated by Moody's or Standard & Poor's, of equivalent quality
and which are commonly referred to as "junk bonds." Investment in such
securities generally provides greater income and increased opportunity for
capital appreciation than investments in higher quality debt securities, but
they also typically entail greater potential price volatility and principal and
income risk.
In general, high yield bonds are not considered to be investment grade. They are
regarded as predominately speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in high
yield bond prices. In the case of high yield bonds structured as zero-coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market on which high yield bonds are traded is generally less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Series could sell a
high yield bond, and could adversely affect the daily net asset value of the
Series' shares. At times of less liquidity, it may be more difficult to value
the high yield bonds because such valuation may require more research, and
elements of judgment may play a greater role in the valuation because there is
less reliable, objective data available.
REPURCHASE AGREEMENTS
Repurchase agreements permit an investor to maintain liquidity and earn income
over periods of time as short as overnight. Repurchase agreements may be
characterized as loans collateralized by the underlying securities. In these
transactions, a Series purchases securities such as U.S. Treasury obligations
or U.S. Government securities (the "underlying securities") from a broker or
bank, which agrees to repurchase the underlying securities on a certain date or
on demand and at a fixed price calculated to produce a previously agreed-upon
return to the Series. If the broker or bank were to default on its repurchase
obligation and the underlying securities were sold for a lesser amount, the
Series would realize a loss, and may incur disposition costs in connection with
liquidating the collateral. In the event bankruptcy proceedings are commenced
with respect to the seller, realization of the collateral by a Series may be
delayed or limited, and a loss may be incurred if the collateral securing the
repurchase agreement declines in value during the bankruptcy proceedings.
A Series may engage in repurchase transactions in accordance with guidelines
approved by the Board of Trustees of the Trust, which include monitoring the
creditworthiness of the parties with which the Series engages in repurchase
transactions, obtaining collateral at least equal in value to the repurchase
obligation, and marking the collateral to market on a daily basis. See the
Statement of Additional Information
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"Description of Securities and Investment Techniques" for further information
regarding repurchase agreements.
ILLIQUID SECURITIES
Illiquid securities include repurchase agreements maturing in more than seven
days, unregistered or restricted securities and any security which a Portfolio
Manager is unable to sell within seven days or less. Each Series may invest in
illiquid securities up to its illiquidity limit.
RESTRICTED SECURITIES
Restricted securities owned by a Series that are determined to be illiquid are
subject to that Series' illiquidity limitation. Restricted securities may be
sold only in privately negotiated transactions, in a public offering with
respect to which a registration statement is in effect under the Securities Act
of 1933, or in a transaction that is exempt from such registration. Where
registration is required, a Series may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Series may be permitted to sell a security
under an effective registration statement. If, during such a period adverse
market conditions were to develop, the Series might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities may be
priced at fair value as determined in good faith by the Series' Portfolio
Manager.
SHORT SALES
A short sale is a transaction in which a Series sells a security it does not own
in anticipation of a decline in market price. When a Series makes a short sale,
the proceeds it receives are retained by the broker until the Series replaces
the borrowed security. In order to deliver the security to the buyer, the Series
must arrange through a broker to borrow the security and, in so doing, the
Series becomes obligated to replace the security borrowed at its market price at
the time of replacement, whatever that price may be. The Series may have to pay
a premium to borrow the security. The Series must also pay any dividends or
interest payable on the security until the Series replaces the security.
The Series' obligation to replace the security borrowed in connection with the
short sale will be secured by collateral deposited with the broker, consisting
of cash or securities acceptable to the broker. In addition, with respect to any
short sale, other than short sales against the box, the Series will be required
to deposit collateral consisting of cash, cash items, or U.S. Government
securities in a segregated account with its custodian in an amount such that the
value of the sum of both collateral deposits is at all times equal to at least
100% of the current market value of the securities sold short. The deposits do
not necessarily limit the Series' potential loss on a short sale, which may
exceed the entire amount of the collateral.
A Series is not required to liquidate an existing short sale position solely
because a change in market values has caused one or more of these percentage
limitations to be exceeded. For more information on short sales, see the
Statement of Additional Information.
FOREIGN SECURITIES
Series may invest in equity securities of foreign issuers, including American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts") which are
described below. Some Series may invest in foreign branches of commercial banks
and foreign banks. See the "Banking Industry and Savings Industry Obligations"
discussion in the Statement of Additional Information for further description of
these securities.
Each Series is subject to the following guidelines for diversification of
foreign security investments. If a Series has less than 20% of its assets in
foreign issuers, then all of such investment may be in issuers located in one
country. If a Series has at least 20% but less than 40% of its assets in
foreign issuers, then such investment must be allocated to issuers located
in at least two different countries. Similarly, if a Series has at least 40%
but less than 60% of its assets in foreign issuers, such investment must be
allocated to at least three different countries. Foreign investments must be
allocated to at least four different countries if at least 60% of a Series'
assets is in foreign issuers, and to at least five different countries if at
least 80% is in foreign issuers. if at least. For purposes of allocating a
Series' investments, a company will be considered located in the country in
which it is domiciled, in which it is primarily traded, from which it derives
a significant portion of its revenues, or in which a significant portion of
its goods or services are produced.
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Each Series may have no more than 25% of its
net assets invested in securities of issuers located in any one emerging market
country and no more than 50% of its assets invested in securities of any one
country, except that a Series may have additional investments of its net assets
invested in securities of issuers located in any one of the following countries:
Australia, Canada, France, Japan, the United Kingdom, or Germany. A Series'
investments in U.S. issuers are not subject to the foreign country
diversification guidelines.
Investments in foreign securities offer potential benefits not available solely
in securities of domestic issuers by offering the opportunity to invest in
foreign issuers that appear to offer growth potential, or in foreign countries
with economic policies or business cycles different from those of the United
States, or to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Series may invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, other foreign taxation, political or social instability, or diplomatic
developments that could adversely affect investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the United States. A Series
might have greater difficulty taking appropriate legal action with respect to
foreign investments in non-U.S. courts than with respect to domestic issuers in
U.S. courts.
In addition, transactions in foreign securities may involve greater time from
the trade date until settlement than domestic securities transactions and
involve the risk of possible losses through the holding of securities by
custodians and securities depositories in foreign countries.
"Sovereign Debt" consists of debt obligations of governmental issuers in
emerging market countries and industrialized countries. The sovereign debt
issued or guaranteed by certain emerging market governmental entities and
corporate issuers in which the Series may invest potentially involves a high
degree of risk and may be deemed the equivalent in terms of quality to high
risk, low rated securities (i.e., high yield bonds) and subject to many of the
same risks as such securities. Similarly, the Series may have difficulty
disposing of certain of these debt obligations because there may be a thin
trading market for such securities. In the event a governmental issuer defaults
on its obligations, the Series may have limited legal recourse against the
issuer or guarantor, if any. Remedies must, in some cases, be pursued in the
courts of the defaulting party itself, and the ability of the holder of foreign
government debt securities to obtain recourse may be subject to the political
climate in the relevant country. The issuers of the government debt securities
in which the Series may invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which has led to
defaults on certain obligations and the restructuring of certain indebtedness.
See "Description of Securities and Investment Techniques-High Yield Bonds" in
this Prospectus and "Debt Securities-Sovereign Debt" in the Statement of
Additional Information.
Dividend and interest income from foreign securities may generally be subject to
withholding taxes by the country in which the issuer is located and may not be
recoverable by a Series or its investors.
ADRs are Depositary Receipts typically issued by a U.S. bank or trust company
which evidence ownership of underlying securities issued by a foreign cor-
poration. EDRs and GDRs are typically issued by foreign banks or trust compan-
ies, although they also may be issued by U.S. banks or trust companies, and
evidence
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ownership of underlying securities issued by either a foreign or
U.S. 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. Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the United
States and, therefore, there may be less information available regarding such
issuers and there may not be a correlation between such information and the
market value of the Depositary Receipts. Depositary Receipts also involve the
risks of other investments in foreign securities.
INDEXED SECURITIES AND STRUCTURED NOTES
Indexed securities are securities whose value is linked to one or more
currencies, interest rates, commodities, or financial or commodity indexes.
An indexed security enables the investor to purchase a note whose coupons and/or
principal redemption are linked to the performance of an underlying asset.
Indexed securities may be positively or negatively indexed (i.e., their value
may increase or decrease if the underlying instrument appreciates). Indexed
securities may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself,
and present many of the same risks as investing in futures and options. Indexed
securities are also subject to credit risks associated with the issuer of the
security with respect to both principal and interest. Only securities linked to
one or more non-agricultural commodities or commodity indexes will be considered
a Hard Asset security.
Indexed securities may be publicly traded or may be two-party contracts (such
two-party agreements are referred to here collectively as structured notes).
When a Series purchases a structured note, a type of derivative, it will make a
payment of principal to the counterparty. Some structured notes have a
guaranteed repayment of principal while others place a portion (or all) of the
principal at risk. A Series will purchase structured notes only from counter-
parties rated A or better by Standard & Poor's, Moody's or another nationally
recognized statistical rating organization. The Portfolio Manager will monitor
the liquidity of structured notes under the supervision of the Board of
Trustees, and notes determined to be illiquid will be aggregated with other
illiquid securities for purposes of the limitation on illiquid investments.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS
Some Series may invest in gold bullion and coins and other precious metals
(silver or platinum) bullion and in futures contracts with respect to such
metals. In order to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended, each Series intends to
manage its metal investments and/or futures contracts on metals so that less
than 10% of the gross income of the Series for tax purposes during any fiscal
year (the current limit on so-called non-qualifying income) is derived from
these and other sources that produce such non-qualifying income.
Metals will not be purchased in any form that is not readily marketable, and
gold coins will be purchased for their intrinsic value only, i.e., coins will
not be purchased for their numismatic value. Any metals purchased by a Series
will be delivered to and stored with a qualified custodian bank. Metal invest-
ments do not generate interest or dividend income.
Metal investments are considered speculative and are affected by various world-
wide economic, financial, and political factors. Prices may fluctuate sharply
over short time periods due to changes in inflation expectations in various
countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and govern-
mental prohibitions or restriction on the private ownership of certain precious
metals or minerals. Furthermore, at the present time, there are four major
producers of gold bullion: the Republic of South Africa, the United States,
Canada, and Australia. Political and economic conditions in these countries will
have a direct effect on the mining and distribution of gold and, consequently,
on its price. Many of these risks also may affect the value of securities of
companies engaged in operations respecting gold and other precious metals.
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FUTURES CONTRACTS
Some Series may engage in futures contracts. They may purchase and sell
interest rate, stock index, gold and other futures contracts based upon other
financial instruments. They may also purchase and write options on such con-
tracts. For a general description of these futures contracts and options
thereon, including information on margin requirements, see the Statement of
Additional Information.
These Series may engage in such futures transactions as an adjunct to their
securities activities. The transactions in futures contracts must constitute
bona fide hedging or other strategies under regulations promulgated by the
Commodities Futures Trading Commission (the "CFTC"), under which a Series
engaging in futures transactions would not be a "commodity pool."
At the time a Series purchases a futures contract, an amount of cash and/or
securities equal to the fair market value less initial and variation margin of
the futures contract will be deposited in a segregated account with the Trust's
custodian to collateralize the position and thereby ensure that such futures
contract is covered. In addition, each Series will comply with certain
regulations of the CFTC to qualify for an exclusion from being a "commodity
pool," which require a Series to set aside cash and short-term obligations with
respect to long positions in a futures contract or a futures option. These
requirements are described in the Statement of Additional Information.
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS
There are several risks associated with the use of futures and futures options.
The value of a futures contract may decline. While a Series' transactions in
futures may protect the Series against adverse movements in the general level of
interest rates or other economic conditions, such transactions could also
preclude the Series from the opportunity to benefit from favorable movements in
the level of interest rates or other economic conditions. With respect to
transactions for hedging, there can be no guarantee that there will be
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on both
the hedged securities in a Series and the hedging vehicle so that the Series'
return might have been better if hedging had not been attempted. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures and futures options on securities,
including technical influences in futures trading and futures options, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. A decision as
to whether, when, and how to hedge involves the exercise of skill and judgment
and even a well conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected interest rate trends.
There can be no assurance that a liquid market will exist at a time when a
Series seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. The daily
limit governs only price movements during a particular trading day and therefore
does not limit potential losses because the limit may work to prevent the
liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses. Lack of a
liquid market for any reason may prevent the Series from liquidating an
unfavorable position and the Series would remain obligated to meet margin
requirements and continue to incur losses until the position is closed.
Most Series will only enter into futures contracts or futures options which are
standardized and traded on a U.S. exchange or board of trade, or, in the case of
futures options, for which an established over-the-counter market exists. A
Series will not enter into a futures contract or purchase a futures option if
immediately thereafter the initial margin deposits for futures contracts held
by the Series plus premiums paid by it for open futures options positions, less
the amount by which any such positions are "in-the-money," would exceed 5% of
the Series' total assets.
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Foreign markets may offer advantages such as trading in indexes that are not
currently traded in the United States. Foreign markets, however, may have
greater risk potential than domestic markets. Unlike trading on domestic
commodity exchanges, trading on foreign commodity markets is not regulated by
the CFTC and may be subject to greater risk than trading on domestic exchanges.
For example, some foreign exchanges are principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. Trading in foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the CFTC's regulations, and the rules of the National
Futures Association and any domestic exchange, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by
the National Futures Association or any domestic futures exchange. Amounts
received for foreign futures or foreign options transactions may not be provided
the same protections as funds received in respect of transactions on United
States futures exchanges. A Series could incur losses or lose any profits that
had been realized in trading by adverse changes in the exchange rate of the
currency in which the transaction is denominated. Transactions on foreign
exchanges may include both commodities that are traded on domestic exchanges and
boards of trade and those that are not.
The Trust reserves the right to engage in other types of futures transactions in
the future and to use futures and related options for other than hedging
purposes to the extent permitted by regulatory authorities.
OPTIONS ON SECURITIES
Some Series may engage in transactions on options on securities, may purchase
and write put and call options on securities and on stock indexes at such times
as the Series' Portfolio Manager deems appropriate and consistent with the
Series' investment objective, may purchase and write put and call options on
securities, may write call and put options only if they are covered or secured,
and may purchase or sell options to effect closing transactions, may buy covered
listed put equity options and sell covered listed call equity options, including
options on stock indexes, may purchase protective puts, and may purchase calls
and puts other than protective puts. Some Series may engage in options
transactions not only on U.S. domestic markets but also on exchanges and other
markets outside the United States.
Series able to invest in options may enter into closing transactions in order
to terminate its obligations either as a writer or a purchaser of an option
prior to the expiration of the option. For a general description of purchasing
and writing options on securities and securities indexes, see "Options on
Securities and Securities Indexes" in the Statement of Additional Information.
RISKS OF OPTIONS TRANSACTIONS
The purchase and writing of options involves certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. If a put or call
option purchased by the Series is not sold when it has remaining value, and if
the market price of the underlying security, in the case of a put, remains
equal to or greater than the exercise price or, in the case of a call, remains
less than or equal to the exercise price, the Series will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security.
There can be no assurance that a liquid market will exist when a Series seeks to
close out an option position. Furthermore, if trading restrictions or suspen-
sions are imposed on the options markets, a Series may be unable to close
out a position. If a Series cannot effect a closing transaction, it will not be
able to sell the underlying security while the previously written option remains
outstanding, even though it might otherwise be advantageous to do so. Possible
reasons for the absence of a liquid secondary market on a national securities
exchange could include: insufficient trading interest, restrictions imposed by
national securities exchanges, trading halts or suspensions with respect to call
options or their underlying securities,
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inadequacy of the facilities of national securities exchanges or the Options
Clearing Corporation due to a high trading volume or other event, and a decision
by one or more national securities exchanges to discontinue the trading of call
options or to impose restrictions on types of orders.
Since option premiums paid or received by a Series, as compared to underlying
investments, are small in relation to the market value of such investments,
buying and selling put and call options offer large amounts of leverage. Thus,
the leverage offered by trading in options could result in the Series' net asset
value being more sensitive to changes in the value of the underlying securities.
FOREIGN CURRENCY TRANSACTIONS
A forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. A Series may either accept or make delivery of the currency at the
maturity of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. A Series
will engage in forward currency transactions in anticipation of or to protect
itself against fluctuations in currency exchange rates, as further described
in the Statement of Additional Information.
A Series will not enter into a forward contract with a term of greater than
one year. At the maturity of a forward contract, a Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. If the Series retains the portfolio security and engages in
an offsetting transaction, the Series will incur a gain or a loss to the extent
that there has been movement in forward contract prices. For more information
on closing a forward currency position, including information on associated
risks, see the Statement of Additional Information.
Forward contracts are not traded on regulated commodities exchanges. There can
be no assurance that a liquid market will exist when a Series seeks to close out
a forward currency position, in which case a Series might not be able to effect
a closing purchase transaction at any particular time. In addition, a Series
entering into a forward foreign currency contract incurs the risk of default by
the counter party to the transaction. While forward foreign currency contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
Although each Series values its assets daily in terms of U.S. dollars, they do
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Series may do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Series at one rate, while offering a lesser rate of exchange should the
Series desire to resell that currency to the dealer.
OPTIONS ON FOREIGN CURRENCIES
A Series may purchase call and put options on foreign currencies as a hedge
against changes in the value of the U.S. dollar (or another currency) in
relation to a foreign currency in which portfolio securities of the Series
may be denominated. For a general description and other information on options
on foreign currencies, see "Options on Foreign Currencies" in the Statement of
Additional Information. Hedging against a change in the value of a foreign
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions reduce or preclude the opportunity for gain if the value
of the hedged currency should change relative to the U.S. dollar. A Series will
not speculate in options on foreign currencies. A Series may invest in options
on foreign currency which are either listed on a domestic securities exchange
or traded on a recognized foreign exchange.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a Series will
purchase only exchange-traded options, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at
any particular time. In
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the event no liquid secondary market exists, it might not be possible to effect
closing transactions in particular options. If a Series cannot close out an
exchange-traded option which it holds, it would have to exercise its option in
order to realize any profit and would incur transactional costs on the sale of
the underlying assets.
BORROWING
Leveraging by means of borrowing will exaggerate the effect of any increase or
decrease in the value of portfolio securities on a Series' net asset value;
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. The use of borrowing tends to result in a faster than average
movement, up or down, in the net asset value of the Series' shares. A Series
also may be required to maintain minimum average balances in connection with
such borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
Reverse repurchase agreements, short sales of securities, and short sales of
securities against the box will be included as borrowing subject to the
borrowing limitations described above, except those Series that are permitted to
engage in short sales of securities with respect to an additional 15% of the
Series' net assets in excess of the limits otherwise applicable to borrowing.
Securities purchased on a when-issued or delayed delivery basis will not be
subject to the Series' borrowing limitations to the extent that a Series
establishes and maintains liquid assets in a segregated account with the Trust's
custodian equal to the Series' obligations under the when-issued or delayed
delivery arrangement.
HARD ASSET SECURITIES
The production and marketing of Hard Assets may be affected by actions and
changes in governments. In addition, Hard Asset Companies and securities of hard
asset companies may be cyclical in nature. During periods of economic or
financial instability, the securities of some Hard Asset Companies may be
subject to broad price fluctuations, reflecting volatility of energy and basic
materials prices and possible instability of supply of various Hard Assets. In
addition, some Hard Asset Companies may also be subject to the risks generally
associated with extraction of natural resources, such as the risks of mining and
oil drilling, and the risks of the hazards associated with natural resources,
such as fire, drought, increased regulatory and environmental costs, and others.
Securities of Hard Asset Companies may also experience greater price fluctua-
tions than the relevant Hard Asset. In periods of rising Hard Asset prices,
such securities may rise at a faster rate, and, conversely, in time of falling
Hard Asset prices, such securities may suffer a greater price decline.
REAL ESTATE SECURITIES
Real estate securities include real estate investment trusts ("REITs") and other
companies in the real estate industry or companies with substantial real estate
investments. A Series investing in such real estate securities may be subject
to the risks associated with the direct ownership of real estate because of its
policy of concentration in the securities of companies which own, construct,
manage, or sell residential, commercial, or industrial real estate. These risks
include: declines in the value of real estate, adverse changes in the climate
for 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,
leveraging of interests in real estate, 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, REITs may be affected by any changes
in the value of the underlying property owned by the trusts or by the quality
of any credit extended. REITs are dependent upon management skill, are not
diversified, and are therefore subject to the risk of financing single or a
limited number of projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation, and the possibility of
failing to qualify for special tax treatment under Subchapter M of the Internal
Revenue Code of 1986 and to maintain an exemption under the Investment Company
Act of 1940. Finally, certain REITs may be self-liquidating in that a specific
term of existence is provided for in the trust document and such REITs run the
risk of liquidating at an economically inopportune time.
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SWAPS
Swap agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard swap transaction, two parties agree to exchange the returns (or
differential in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
or in a "basket" of securities representing a particular index.
The use of swaps is a highly specialized activity which involved investment
techniques and risks different from those associated with ordinary portfolio
transactions. Whether the Series' use of swap agreements will be successful in
furthering its investment objective will depend on the Portfolio Manager's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Moreover, the Series bears the
risk of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. Swaps are
generally considered illiquid and will be aggregated with other illiquid
positions for purposes of the limitation on illiquid investments.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect the Series' ability to terminate existing
swap agreements or to realize amounts to be received under such agreements.
ZERO-COUPON BONDS
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option, to make current
interest payments on the bonds either in cash or in additional bonds. The values
of zero-coupon bonds and payment-in-kind bonds are subject to greater
fluctuation in response to changes in market interest rates than bonds which pay
interest currently, and may involve greater credit risk than such bonds.
Zero-coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero-
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide that the issuer thereof may, at its option, pay interest on such
bonds in cash or in the form of additional debt obligations. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Series will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other Series securities to
satisfy the Series' distribution obligations.
SMALL COMPANIES
Certain small- and mid-cap companies may present greater opportunities for
investment return, but may also involve greater risks. They may have limited
product lines, markets, or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and in limited
volume. As a result, the prices of these securities may fluctuate more than
prices of securities of larger, widely traded companies.
The Series are subject to investment restrictions that are described in the
Statement of Additional Information. Those investment restrictions so designated
and the investment objective of each Series are "fundamental policies" of the
Series, which means that they may not be changed without a majority vote of the
shareholders of the affected Series. Except for those restrictions specifically
identified as fundamental and each Series' investment objective, all other
investment policies and practices described in this Prospectus and the Statement
of Additional Information are not fundamental, meaning that the Board of
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Trustees may change them without shareholder approval. The vote of a majority of
the outstanding voting securities of a Series means the vote, at an annual or
special meeting, of (a) 67% or more of the voting securities present at such
meeting, if the holders of more than 50% of the outstanding voting securities of
such Series are present or represented by proxy; or (b) more than 50% of the
outstanding voting securities of such Series, whichever is less.
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INVESTMENT RESTRICTIONS
The investment restrictions are stated in full in the Statement of Additional
Information, and a brief description of some of them follows. A Series will not,
with respect to 75% of its assets, invest more than 5% of its assets (taken at
market value at the time of such investment) in securities of any one issuer,
except that this restriction does not apply to U.S. Government securities. A
Series will not, with respect to 75% of its assets, invest more than 10% (taken
at market value at the time of such investment) of any one issuer's outstanding
voting securities, except that this restriction does not apply to U.S. Govern-
ment securities. No Series will concentrate more than 25% of its assets in any
particular industry, except that this restriction does not apply to U.S. Govern-
ment securities and with respect to the Liquid Asset Series, securities or obli-
gations issued by U.S. banks.
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PURCHASE OF SHARES
Shares of the Series may be offered for purchase by separate accounts of
insurance companies to serve as an investment medium for the Variable Contracts
issued by the insurance companies and to certain qualified pension and
retirement plans, as permitted under the federal tax rules relating to the
Series serving as investment mediums for Variable Contracts. Shares of the
Series are sold to insurance company separate accounts funding both variable
annuity contracts and variable life insurance contracts and may be sold to
insurance companies that are not affiliated. The Trust currently does not
foresee any disadvantages to Variable Contract Owners or other investors
arising from offering the Trust's shares to separate accounts of unaffiliated
insurers, separate accounts funding both life insurance policies and annuity
contracts, or certain qualified pension and retirement plans; however, due to
differences in tax treatment or other considerations, it is theoretically
possible that the interests of owners of various contracts or pension and
retirement plans participating in the Trust might at some time be in conflict.
However, the Board of Trustees and insurance companies whose separate accounts
invest in the Trust are required to monitor events in order to identify any
material conflicts between variable annuity contract owners and variable life
policy owners, between separate accounts of unaffiliated insurers, and between
various contract owners and pension and retirement plans. The Board of Trustees
will determine what action, if any, should be taken in the event of such a
conflict. If such a conflict were to occur, one or more insurance company
separate accounts might withdraw their investment in the Trust. This might
force the Trust to sell securities at disadvantageous prices.
Shares of each Series are sold at their respective net asset values (without a
sales charge) next computed after receipt of a purchase order by an insurance
company whose separate account invests in the Trust.
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NET ASSET VALUE
A Series' net asset value is determined by dividing the value of each Series'
net assets by the number of its shares outstanding. That determination is made
once each business day, Monday through Friday, at or about 4:00 p.m., New York
City time, on each day that the New York Stock Exchange is open for trading.
The Board of Trustees has established procedures to value each Series' assets
to determine net asset value. In general, these valuations are based on actual
or estimated market value, with special provisions for assets not having
readily available market quotations and short-term debt securities. The net
asset values per share of each Series will fluctuate in response to changes in
market conditions and other factors, except that the net asset value of the
shares of the Liquid Asset Series will not fluctuate in response to changes in
market conditions for so long as the Series is using the amortized cost method
of valuation.
The Liquid Asset Series' portfolio securities are valued using the amortized
cost method of valuation. This involves valuing a security at cost on the date
of acquisition and thereafter assuming a constant accretion of a discount or
amortization of a premium to maturity. See the Statement of Additional
Information for a description of certain conditions and procedures followed by
the Series in connection with amortized cost valuation.
All other Series are valued as follows:
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last
reported sales price, or, if no sales are reported, the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market makers. In other cases, securities are valued
at their fair value as determined in good faith by the Board of Trustees,
although the actual calculations will be made by persons acting under the
direction of the Board and subject to the Board's review. Money market
instruments are valued at market value, except that instruments maturing in
sixty days or less may be valued using the amortized cost method of
valuation. The value of a foreign security is determined in its national
currency based upon the price on the foreign exchange as of its close of
business immediately preceding the time of valuation. Securities traded in over-
the-counter markets outside the United States are valued at the last available
price in the over-the-counter market prior to the time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity sixty days or less at their
date of acquisition valued under the amortized cost method), are normally valued
on the basis of quotes obtained from brokers and dealers or pricing services,
which take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. Debt obligations having
a maturity of sixty days or less may be valued at amortized cost unless the
Portfolio Manager believes that amortized cost does not approximate market
value.
When a Series writes a put or call option, the amount of the premium is included
in the Series' assets and an equal amount is included in its liabilities. The
liability thereafter is adjusted to the current market value of the option.
The premium paid for an option purchased by the Series is recorded as an asset
and subsequently adjusted to market value. Futures and options thereon which
are traded on commodities exchanges or boards of trade will be valued at their
closing settlement price on such exchange or board of trade. Foreign securities
quoted in foreign currencies generally are valued at appropriately translated
foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets in European and
Pacific Basin countries is normally completed well before 4:00 p.m., New York
City time. Trading on these exchanges may not take place on all New York busi-
ness days and in addition, trading takes place in various foreign markets on
days which are not business days in New York and on which the Trust's net asset
value is not calculated. As a result, the calculation of the net asset value of
a Series investing in foreign securities may not take place contemporaneously
with the determination of the prices of the securities included in the calcu-
lation. Further, under the Trust's procedures, the prices of foreign securities
are determined using information
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derived from pricing services and other sources. Prices derived under these
procedures will be used in determining daily net asset value. Information that
becomes known to the Trust or its agents after the time that the net asset value
is calculated on any business day may be assessed in determining net asset
value per share after the time of receipt of the information, but will not be
used to retroactively adjust the price of the security so determined earlier or
on a prior day. Events that may affect the value of these securities that occur
between the time their prices are determined and the time the Series' net asset
value is determined may not be reflected in the calculation of net asset value
of the Series unless the Manager or the Portfolio Manager, acting under
authority delegated by the Board of Trustees, deems that the particular event
would materially affect net asset value. In this event, the securities would
be valued at fair market value as determined in good faith by the Board of
Trustees of the Trust, although the actual calculations will be made by the
Manager or the Portfolio Manager acting under the direction of the Board and
subject to the Board's review.
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REDEMPTION OF SHARES
Shares of any Series may be redeemed on any business day. Redemptions are
effected at the per share net asset value next determined after receipt of the
redemption request by an insurance company whose separate account invests in
the Series. Redemption proceeds normally will be paid within seven days
following receipt of instructions in proper form. The right of redemption may
be suspended by the Trust or the payment date postponed beyond seven days when
the New York Stock Exchange is closed (other than customary weekend and holiday
closings) or for any period during which trading thereon is restricted because
an emergency exists, as determined by the SEC, making disposal of portfolio
securities or valuation of net assets not reasonably practicable, and whenever
the SEC has by order permitted such suspension or postponement for the
protection of shareholders. If the Board of Trustees should determine that it
would be detrimental to the best interests of the remaining shareholders of a
Series to make payment wholly or partly in cash, the Series may pay the
redemption price in whole or part by a distribution in kind of securities from
the portfolio of the Series, in lieu of cash, in conformity with applicable
rules of the SEC. If shares are redeemed in kind, the redeeming shareholder
might incur brokerage costs in converting the assets into cash.
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EXCHANGES
Shares of any one Series may be exchanged for shares of any of the other Series
described in this Prospectus. Exchanges are treated as a redemption of shares
of one Series and a purchase of shares of one or more of the other Series and
are effected at the respective net asset values per share of each Series on the
date of the exchange. The Trust reserves the right to modify or discontinue its
exchange privilege at any time without notice. Variable Contract Owners do not
deal directly with the Trust with respect to the purchase, redemption, or
exchange of shares of the Series, and should refer to the prospectus for the
applicable Variable Contract for information on allocation of premiums and on
transfers of account value among divisions of the pertinent insurance company
separate account that invest in the Series.
The Trust reserves the right to discontinue offering shares of one or more
Series at any time. In the event that a Series ceases offering its shares,
any investments allocated by an insurance company to such Series will be
invested in the Liquid Asset Series or any successor to such Series.
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PORTFOLIO TRANSACTIONS
BROKERAGE SERVICES
Pursuant to the Portfolio Management Agreements, the Portfolio Manager places
orders for the purchase and sale of portfolio investments for the Series'
accounts with brokers or dealers selected by the Portfolio Manager in its
discretion. In executing transactions, the Portfolio Manager will attempt to
obtain the best
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execution for a Series, taking into account such factors as price (including
the applicable brokerage commission or dollar spread), size of order, the nature
of the market for the security, the timing of the transaction, the reputation,
the experience and financial stability of the broker dealer involved, the
quality of the service, the difficulty of execution, execution capabilities,
and operational facilities of the firms involved, and the firm's risk in
positioning a block of securities. In transactions on stock exchanges in the
United States, payments of brokerage commissions are negotiated. In effecting
purchases and sales of portfolio securities in transactions on U.S. stock
exchanges for the account of a Series, the Portfolio Manager may pay higher
commission rates than the lowest available when the Portfolio Manager believes
it is reasonable to do so in light of the value of the brokerage and research
services provided by the broker effecting the transaction. In the case of
securities traded on some foreign stock exchanges, brokerage commissions may be
fixed and the Portfolio Manager may be unable to negotiate commission rates for
these transactions. In the case of securities traded on the over-the-counter
markets, there is generally no stated commission, but the price includes an
undisclosed commission or markup.
Some securities considered for investment by the Series may also be considered
for other clients served by the Portfolio Manager and/or its affiliates. For
information on trade allocation, see "Portfolio Transactions and Brokerage--
Investment Decisions" in the Statement of Additional Information.
A Portfolio Manager may place orders for the purchase and sale of portfolio
securities with itself, acting as broker-dealer, or with a broker-dealer that
is an affiliate of the Portfolio Manager or the Trust where, in the judgment
of the Portfolio Manager, such firm will be able to obtain a price and
execution at least as favorable as other qualified brokers. SEC rules further
require that commission paid to such an affiliated broker-dealer or Portfolio
Manager by a Series on exchange transactions not exceed "usual and customary
brokerage commissions."
PORTFOLIO TURNOVER
For reporting purposes, each Series' portfolio turnover rate is calculated by
dividing the value of the lesser of purchases or sales of portfolio securities
for the fiscal year by the monthly average of the value of portfolio securities
owned by the Series during the fiscal year. In determining such portfolio
turnover, all securities whose maturities at the time of acquisition were one
year or less are excluded. A 100% portfolio turnover rate would occur, for
example, if all of the securities in the portfolio (other than short-term
securities) were replaced once during the fiscal year. The portfolio turnover
rate for each of the Series will vary from year to year, and depending on market
conditions, turnover could be greater in periods of unusual market movement and
volatility. A higher turnover rate would result in heavier brokerage commissions
or other transactional expenses which must be borne, directly or indirectly, by
a Series and ultimately by the Series' shareholders. Such transactions may
result in realization of taxable gains. The portfolio turnover rates for each
Series are presented in the data shown in "Financial Highlights" in this
Prospectus.
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DIVIDENDS AND DISTRIBUTIONS
Net investment income of the Liquid Asset Series is declared as a dividend daily
and paid monthly. For all other Series, net investment income will be paid
annually, except that the Limited Maturity Bond Series may declare a dividend
monthly or quarterly. Any net realized long-term capital gains (the excess of
net long-term capital gains over net short-term capital losses) for any Series
will be declared and paid at least once annually. Net realized short-term
capital gains may be declared and paid more frequently.
Any distributions made by any Series will be automatically reinvested in
additional shares of that Series, unless an election is made by a shareholder
to receive distributions in cash. Dividends or distributions by a Series other
than the Liquid Asset Series (which attempts to maintain a constant $1.00 per
share net asset value) will reduce the per share net asset value by the per
share amount so paid.
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FEDERAL INCOME TAX STATUS
Each Series intends to qualify each year and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, a Series generally expects not to be subject
to federal income tax if it meets certain source of income, diversification of
assets, income distribution, and other requirements, to the extent it
distributes its investment company taxable income and its net capital gains.
Distributions of investment company taxable income and net realized capital
gains are automatically reinvested in additional shares of the Series, unless
an election is made by a shareholder to receive distributions in cash. Tax
consequences to the Variable Contract Owners are described in the prospectuses
for the pertinent separate accounts.
Certain requirements relating to the qualification of a Series as a regulated
investment company under the Code may limit the extent to which a Series will
be able to engage in transactions in options, futures contracts, or forward
contracts.
To comply with regulations under Section 817(h) of the Code, each Series
generally will be required to diversify its investments, so that on the last
day of each quarter of a calendar year, no more than 55% of the value of its
assets is represented by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented by any three
investments, and no more than 90% is represented by any four investments.
For this purpose, securities of a single issuer are treated as one investment
and each U.S. Government agency or instrumentality is treated as a separate
issuer. Any security issued, guaranteed, or insured (to the extent so
guaranteed or insured) by the United States or an agency or instrumentality of
the United States is treated as a security issued by the U.S. Government or its
agency or instrumentality, whichever is applicable. These regulations will
limit the ability of a Series to invest more than 55% of its assets in direct
obligations of the U.S. Treasury or in obligations which are deemed to be
issued by a particular agency or instrumentality of the U.S. Government. If a
Series fails to meet the diversification requirements under Code Section
817(h), income with respect to Variable Contracts invested in the Series at
any time during the calendar quarter in which the failure occurred could
become currently taxable to the owners of such Variable Contracts and income
for prior periods with respect to such Contracts also would be taxable, most
likely in the year of the failure to achieve the required diversification.
Other adverse tax consequences also could ensue. If a Series failed to qualify
as a regulated investment company, the results would be substantially the same
as a failure to meet the diversification requirements under Code Section 817(h).
In connection with the issuance of the regulations governing diversification
under Section 817(h) of the Code, the Treasury Department announced that it
would issue future regulations or rulings addressing the circumstances in
which a Variable Contract Owner's control of the investments of a separate
account may cause the contract owner, rather than the insurance company, to
be treated as the owner of the assets held by the separate account. If the
Variable Contract Owner is considered the owner of the securities underlying
the separate account, income and gains produced by those securities would be
included currently in the Variable Contract Owner's gross income. It is not
known what standards will be incorporated in future regulations or other
pronouncements.
In the event that unfavorable rules or regulations are adopted, there can be
no assurance that the Series will be able to operate as currently described
in the Prospectus, or that a Series will not have to change its investment
objectives, investment policies, or investment restrictions. While a Series'
investment objective is fundamental and may be changed only by a vote of a
majority of its outstanding shares, the Trustees have reserved the right to
modify the investment policies of a Series as necessary to prevent any such
prospective rules and regulations from causing the Variable Contract Owners
to be considered the owners of the Series underlying the separate accounts.
See "Taxation" in the Trust's Statement of Additional Information for more
information on taxes, including information on the taxation of distributions
from a Series. Reference is made to the prospectus or offering memorandum of the
applicable separate account for information regarding the federal income tax
treatment respecting a Variable Contract.
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OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on August 3, 1988,
and currently consists of twenty-four portfolios that are operational,
sixteen of which are described in this Prospectus. Other portfolios may be
offered by means of a separate prospectus. The Board of Trustees may establish
additional portfolios in the future. The capitalization of the Trust consists
solely of an unlimited number of shares of beneficial interest with a par value
of $0.001 each. When issued in accordance with the terms of the Trust's
Agreement and Declaration of Trust ("Declaration of Trust"), shares of the Trust
are fully paid, freely transferable, and non-assessable by the Trust.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees, or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations
and thus should be considered remote.
VOTING RIGHTS
Shareholders of the Series are given certain voting rights. Each share of each
Series will be given one vote, unless a different allocation of voting rights
is required under applicable law for a mutual fund that is an investment medium
for variable insurance products.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
Series, or for the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies, or approving a contract for investment
advisory services. In the case of Variable Contracts, in accordance with current
laws, it is anticipated that an insurance company issuing a Variable Contract
funded by a Separate Account that invests in a Series and that is registered
with the SEC as a unit investment trust will request voting instructions from
Variable Contract Owners and will vote shares or other voting interests in the
separate account in proportion to the voting instructions received.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and effective yield of its
Liquid Asset Series, the current yield of the remaining Series, and the total
return of all Series in advertisements and sales literature. In the case of
Variable Contracts, performance information for the Series will not be
advertised or included in sales literature unless accompanied by comparable
performance information for a separate account to which the Series offers their
shares.
Current yield for the Liquid Asset Series will be based on income received by
a hypothetical investment over a given 7-day period (less expenses accrued
during the period), and then "annualized" (i.e., assuming that the 7-day yield
would be received for 52 weeks, stated in terms of an annual percentage return
on the investment). "Effective yield" for the Liquid Asset Series is calculated
in a manner similar to that used to calculate yield, but reflects the
compounding effect of earnings on reinvested dividends.
For the remaining Series, any quotations of yield will be based on all
investment income per share earned during a given 30-day period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and will be computed by dividing net investment income by
the maximum public offering price per share on the last day of the period.
Quotations of average annual total return for any Series will be expressed in
terms of the average annual compounded rate of return on a hypothetical
investment in the Series over a period of one, five, or ten years
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(or, if less, up to the life of the Series), will reflect the deduction of a
proportional share of Series expenses (on an annual basis), and will assume
that all dividends and distributions are reinvested when paid. Quotations of
total return may also be shown for other periods.
Quotations of yield or total return for the Series will not take into account
charges or deductions against any separate account to which the Series' shares
are sold or charges and deductions against the pertinent Variable Contract,
although comparable performance information for the separate account will take
such charges into account. Performance information for any Series reflects only
the performance of a hypothetical investment in the Series during the particular
time period on which the calculations are based. Performance information should
be considered in light of the Series' investment objectives and policies,
characteristics, and quality of the portfolios, and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future. For a description of the methods used to
determine yield and total return for the Series, see the Statement of
Additional Information.
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LEGAL COUNSEL
Sutherland, Asbill & Brennan LLP, 1275 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2404 serves as counsel to the Trust.
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INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116-5072 serves as
independent auditors of the Trust.
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FINANCIAL STATEMENTS
The Trust's audited financial statements dated as of December 31, 1997 for all
Series, including notes thereto, are incorporated by reference in the Statement
of Additional Information from the Trust's Annual Report dated as of December
31, 1997. Information in the financial statements for all Series for the years
ended December 31, 1997 1996, 1995, 1994 and 1993 has been audited by Ernst &
Young LLP. Information in the financial statements for all Series except the
Managed Global Series for the years ended December 31, 1992, 1991, 1990, and
1989 was audited by another independent auditor. These financial statements do
not include information on the Mid-Cap Growth, Research, Total Return, Growth
& Income, Value + Growth and Global Fixed Income Series because the Series
had not commenced operations on December 31, 1997.
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YEAR 2000
Based on a study of its computer software systems and hardware, the Manager in
conjunction with an affiliate, Golden American Life Insurance Company ("Golden
American"), have determined their exposure to the Year 2000 change of the
century date issue. Some of these systems support certain trust operations.
The Manager believes its and Golden American's systems are or will be
substantially compliant by Year 2000 and has engaged external consultants to
validate this assumption. The Manager is in contact with the Trust's
Portfolio Managers and third party vendors to ensure that their systems will
be compliant by Year 2000. To the extent these Portfolio Managers and third
parties would be unable to transact business in the Year 2000 and thereafter,
the Trust's operations could be adversely affected.
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File Nos. 33-23512, 811-5629
Filed under Rule 497 (c)
THE GCG TRUST
1001 JEFFERSON STREET WILMINGTON, DELAWARE 19801
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This Prospectus offers shares of three portfolios (the "Series") of The
GCG Trust (the "Trust"), an open-end, management investment company. Each
Series has its own investment objective or objectives and investment policies.
Shares of the Series may be sold to separate accounts of insurance companies
to serve as the investment medium for variable life insurance policies and
variable annuity contracts issued by the insurance companies ("Variable
Contracts") and to certain qualified pension and retirement plans. In the
case of Variable Contracts, the separate accounts invest in shares of one or
more of the Series in accordance with allocation instructions received from
owners of the insurance policies and annuity contracts. Such allocation rights
are described further in Prospectuses for the separate account.
The Series are managed by Directed Services, Inc. ("DSI"), a wholly owned
subsidiary of ING Groep, N.V. ("ING"). DSI and the Trust have retained several
investment advisory firms ("Portfolio Managers") to provide investment advisory
services to the Series. The twenty-two Series and their respective Portfolio
Managers are as follows:
SERIES PORTFOLIO MANAGER
- ---------------------------- -----------------------------------------
MID-CAP GROWTH SERIES MASSACHUSETTS FINANCIAL SERVICES COMPANY
RESEARCH SERIES MASSACHUSETTS FINANCIAL SERVICES COMPANY
TOTAL RETURN SERIES MASSACHUSETTS FINANCIAL SERVICES COMPANY
Information about the investment objective or objectives, investment policies,
and restrictions of each Series, along with a detailed description of the types
of securities and other assets in which each Series may invest, are set forth
in this Prospectus. There can be no assurance that the investment objective or
objectives for any Series will be achieved.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the Series. A Statement of Additional
Information, dated May 1, 1998, containing additional and more detailed
information about the Series has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. The
Statement of Additional Information is available without charge and may be
obtained by writing to the Trust at the address printed above or by calling
the Trust at the Customer Service Center at the telephone number shown in the
accompanying prospectus.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH A PROSPECTUS FOR THE
SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
The Series' shares are not insured by the FDIC or any other agency. They are
not deposits or other obligations of any bank and are not bank guaranteed.
They are subject to market fluctuation, reinvestment risk and possible loss of
principal invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
MAY 1, 1998
<PAGE>
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TABLE OF CONTENTS
Page
PROSPECTUS SYNOPSIS..................... 1
FINANCIAL HIGHLIGHTS.................... 2
INVESTMENT OBJECTIVES AND POLICIES...... 2
Diversification......................... 2
Investment Restrictions................. 3
Mid-Cap Growth Series................... 3
Research Series......................... 4
Total Return Series..................... 5
MANAGEMENT OF THE TRUST................. 7
The Manager............................. 7
The Portfolio Managers.................. 8
Massachusetts Financial Services
Company.............................. 8
Total Expenses for the Series of the
Trust................................ 9
Distributor............................. 9
Custodian and Other Service Providers... 9
DESCRIPTION OF SECURITIES AND
INVESTMENT TECHNIQUES............... 9
Mortgage-Backed Securities.............. 10
Mortgage Pass-Through Securities........ 10
Other Mortgage-Backed Securities........ 10
Risks of Mortgage-Backed Securities..... 10
Other Asset-Backed Securities........... 11
High Yield Bonds........................ 11
Repurchase Agreements................... 11
Illiquid Securities..................... 12
Restricted Securities................... 12
Short Sales............................. 12
Foreign Securities...................... 12
Indexed Securities and Structured Notes. 14
Investment in Gold and Other Precious
Metals............................... 14
Futures Contracts....................... 15
Page
DESCRIPTION OF SECURITIES AND
INVESTMENT TECHNIQUES (CONTINUED)
Risks Associated with Futures and
Futures Options...................... 15
Options on Securities................... 16
Risks of Options Transactions........... 16
Foreign Currency Transactions........... 17
Options on Foreign Currencies........... 17
Borrowing............................... 18
Hard Assets Securities.................. 18
Real Estate Securities.................. 18
Swaps................................... 19
Zero-Coupon Bonds....................... 19
Small Companies......................... 19
INVESTMENT RESTRICTIONS................. 20
PURCHASE OF SHARES...................... 20
NET ASSET VALUE......................... 21
REDEMPTION OF SHARES.................... 22
EXCHANGES............................... 22
PORTFOLIO TRANSACTIONS.................. 22
Brokerage Services...................... 22
Portfolio Turnover...................... 23
DIVIDENDS AND DISTRIBUTIONS............. 23
FEDERAL INCOME TAX STATUS............... 23
OTHER INFORMATION....................... 24
Capitalization.......................... 24
Voting Rights........................... 25
Performance Information................. 25
LEGAL COUNSEL........................... 25
INDEPENDENT AUDITORS.................... 26
FINANCIAL STATEMENTS.................... 26
YEAR 2000............................... 26
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PROSPECTUS SYNOPSIS
THE TRUST
The GCG Trust (the "Trust") is an open-end management investment company,
organized as a Massachusetts business trust on August 3, 1988. This Prospectus
offers shares of twenty-two portfolios (the "Series") of the Trust, each with
its own investment objective or objectives and investment policies. There can
be no assurance that any particular Series' investment objective or objectives
will be attained. The Board of Trustees may establish additional Series at any
time and may discontinue offering a Series at any time.
The purpose of the Trust is to serve as an investment medium for (i) variable
life insurance policies and variable annuity contracts ("Variable Contracts")
offered by insurance companies, and (ii) certain qualified pension and retire-
ment plans as permitted under the federal tax rules relating to the Series
serving as investment mediums for Variable Contracts. See "Purchase of Shares."
In the case of Variable Contracts, the various Series may be used independently
or in combination. Within the limitations described in the Prospectus for the
applicable Variable Contract, an owner of a Variable Contract ("Variable
Contract Owner") may allocate premiums and reallocate investment value under
his or her Variable Contract among various divisions of the applicable separate
account, which, in turn, invest in the various Series. The assets of each Series
are segregated and a Variable Contract Owner's interest is limited to the Series
in which the divisions selected by the Variable Contract Owner have invested.
INVESTMENT OBJECTIVES
The investment objective or objectives of each of the Series are as follows:
The Mid-Cap Growth Series seeks long-term growth of capital by investing
primarily in equity securities with medium market capitalization.
The Research Series seeks to provide long-term growth of capital and future
income by investing a substantial portion of its assets in common stocks or
securities convertible into common stocks of companies believed to possess
better than average prospects for long-term growth.
The Total Return Series primarily seeks to obtain above-average income
(compared to a Series entirely invested in equity securities) consistent with
the prudent employment of capital. The Series' secondary objective is to take
advantage of opportunities for growth of capital and income.
THE MANAGER AND PORTFOLIO MANAGERS
The Manager of the Series is Directed Services, Inc. (the "Manager"), a wholly
owned subsidiary of ING Groep, N.V. ("ING"). The Trust and the Manager have
retained several investment advisory firms ("Portfolio Managers") to manage the
assets of the Series. The Series and their Portfolio Managers are as follows:
SERIES PORTFOLIO MANAGER
---------------------------- ------------------------------------------
Mid-Cap Growth Series Massachusetts Financial Services Company
Research Series Massachusetts Financial Services Company
Total Return Series Massachusetts Financial Services Company
As Manager of the Series, Directed Services, Inc. has overall responsibility,
subject to the supervision of the Board of Trustees, for engaging Portfolio
Managers and for monitoring and evaluating the management of the assets of each
Series by the Portfolio Managers, for administering all operations of the
Series, and for providing or procuring all services necessary for the ordinary
operation of the Series. Pursuant to a Management Agreement, the Trust currently
pays the Manager for its services a monthly fee at an annual rate. See the fee
table under "Management of the Trust-The Manager."
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The Portfolio Manager has full investment discretion and makes all determina-
tions with respect to the investment of each Series' assets and the purchase and
sale of portfolio securities consistent with the investment objectives,
policies, and restrictions for such Series. The Portfolio Manager is compen-
sated by the Manager (and not the Trust).
The Trust is distinct in that the expense structure of the Series is simpler and
more predictable than most mutual funds. The ordinary expenses for the Trust's
Series, including custodial, administrative, transfer agency, portfolio
accounting, auditing, and ordinary legal expenses are paid by the Manager;
whereas, most mutual funds pay for these expenses directly from their own
assets.
PURCHASE AND REDEMPTION OF SHARES
Shares of each Series are offered at the net asset value of each Series. Shares
of each Series may be redeemed without cost at the net asset value per share of
the Series next determined after receipt of the redemption request. The redemp-
tion price may be more or less than the purchase price.
SPECIAL CHARACTERISTICS AND INVESTMENT RISKS
Certain of the Series may engage in investment techniques that involve certain
risks that are described more fully in the section "Description of Securities
and Investment Techniques." For example, the Mid-Cap Growth Series may purchase
over-the-counter, fixed income and foreign securities; engage in futures,
options and foreign currency transactions; and may enter into repurchase and
mortgage "dollar roll" transactions.
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FINANCIAL HIGHLIGHTS
As the Mid-Cap Growth, Total Return, or Research Series had not commenced
operations prior to December 31, 1997, no financial highlights appear in this
propsectus.
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INVESTMENT OBJECTIVES AND POLICIES
Each of the Series has a different investment objective or objectives that are
described below. Each Series' portfolio is managed by its own Portfolio Manager.
There can be no assurance that any Series will achieve its investment objective
or objectives. Because each Series seeks a different investment objective or
objectives and has different policies, each is subject to varying degrees of
financial, market, and credit risks. Each Series is subject to the risk of
changing economic conditions. As with any security, a risk of loss is inherent
in investment in a Series' shares. Therefore, investors should carefully con-
sider the investment objective or objectives, investment policies, and potential
risks of any Series before investing.
The different types of securities and investment techniques used by the
individual Series all have attendant risks of varying degrees. For example, 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 securities,
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 called for by the
instrument. In addition, the value of debt instruments generally rises and falls
inversely with interest rates.
Certain types of investments and investment techniques common to one or more
Series are described in greater detail, including the risks of each, in this
Prospectus under "Description of Securities and Investment Techniques" and in
the Statement of Additional Information.
DIVERSIFICATION
Each Series, unless specifically noted otherwise in the Series' investment
objective and policies section, is diversified, as defined in the Investment
Company Act of 1940. A diversified Series may not invest more than 5% of the
value of its total assets in any one issuer and it may not purchase more than
10% of the outstanding voting securities of any one issuer with respect to 75%
of its total assets, exclusive of amounts held in cash, cash items, and U.S.
Government securities. A Series classified as "non-diversified" is not
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limited by the Investment Company Act of 1940 in the amount of assets that it
may invest in the securities of a single issuer. However, that Series will meet
the diversification requirements under the Internal Revenue Code applicable to
mutual funds and variable contracts. Because a Series is "non-diversified" and
may invest in a smaller number of individual issuers than a series which is
"diversified," an investment in any non-diversified Series may, under certain
circumstances, present greater risk to an investor than an investment in a
series which is diversified. This risk may include greater exposure to the risk
of poor earnings or default of one issuer than would be the case for a more
diversified series. Each Series' policy on diversification is a fundamental
policy and may not be changed without approval of a majority of the outstanding
voting shares of that Series.
INVESTMENT RESTRICTIONS
Each Series is subject to investment restrictions that are described in the
Statement of Additional Information. The investment restrictions so designated
and, unless otherwise noted, the investment objective or objectives of each
Series are "fundamental policies" of each Series, which means that they may not
be changed without a majority vote of shareholders of the affected Series.
Except for these fundamental policies, all investment policies and practices
described in this Prospectus and in the Statement of Additional Information are
not fundamental, meaning that the Board of Trustees may change them without
shareholder approval.
MID-CAP GROWTH SERIES
The investment objective of the Mid-Cap Growth Series is to obtain long-term
growth of capital. The Series seeks to achieve its objective by investing
primarily in equity securities of companies with medium market capitalization
which the Portfolio Manager believes have above-average growth potential under
normal circumstances. The Portfolio Manager for the Series is Massachusetts
Financial Services Company.
Medium market capitalization companies whose market capitalization falls within
the range of the Standard and Poor's MidCap 400 Index (the "S&P MidCap 400
Index") at the time of the Series' investment. The S&P MidCap 400 Index is a
widely recognized, unmanaged index of mid-cap common stock prices. Companies
whose capitalization falls outside this range after purchase continue to be
considered medium-capitalization companies for purposes of the Series'
investment policy. The Series may, but is not required to, purchase securities
of companies included in the S&P MidCap 400 Index. This index is only used by
the Series for purposes of defining the market capitalization range of companies
in which the Series will invest; it is not intended to be used a benchmark
against which the Series compares its investment performance. As of December
31, 1997, the S&P MidCap 400 Index included companies with capitalizations of
between $213 million and $13.7 billion.
The Series may invest a significant portion of its assets in over-the-counter
("OTC") securities. OTC securities are any securities that are not listed on
a major exchange but are, as their name implies, traded over the counter.
Investing in securities traded on the OTC securities market can involve greater
risk than is customarily associated with investing in securities traded on the
New York or American Stock Exchanges since OTC securities are generally
securities of companies which are smaller or newer than those listed on the New
York or American Stock Exchange. For example, these companies often have limited
product lines, markets, or financial resources, may be dependent for management
on one or a few key persons, and can be more susceptible to losses. Also, their
securities may be thinly traded (and therefore have to be sold at a discount
from current prices or sold in small lots over an extended period of time),
may be followed by fewer investment research analysts and may be subject
to wider price swings and thus may create a greater risk of loss than securities
of larger capitalization or established companies. Shares of the Series, there-
fore, are subject to greater fluctuation in value than shares of a conservative
equity fund or of a growth fund which invests entirely in proven growth stocks.
Therefore, the Series is intended for long-term investors who understand and can
accept the risks entailed in seeking long-term growth of capital. The Series is
not meant to provide a vehicle for those who wish to play short-term swings in
the stock market. Accordingly, an investment in shares of the Series should not
be considered a complete investment program. Each prospective purchaser should
take into account his investment objectives as well as his other investments
when considering the purchase of shares of the Series.
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Debt securities of issuers in which the Series may invest include all types of
long- or short-term debt obligations, such as bonds, debentures, notes and
commercial paper. Fixed income securities in which the Series may invest include
securities in the lower rating categories of recognized rating agencies (and
comparable unrated securities). Fixed income securities in which the Series may
invest also include zero-coupon bonds, deferred interest bonds and bonds on
which the interest is payable in kind. Such investments involve certain risks.
See "Description of Securities and Investment Techniques-High Yield Bonds" and
the Statement of Additional Information for a discussion of the risks involved
in investing in lower-rated securities.
When the Portfolio Manager believes that investing for temporary defensive pur-
poses is appropriate, such as during periods of unusual market conditions, part
or all of the Series' assets may be temporarily invested in cash (including
foreign currency) or cash equivalent short-term obligations including, but not
limited to, certificates of deposit, commercial paper, short-term notes,
obligations issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities, and repurchase agreements.
The Series may invest 20% or more of its net assets in foreign securities (not
including American Depositary Receipts ("ADRs"), however, under normal market
conditions, the Series expects to invest less than 35% of its net assets in
foreign securities. The Series may invest up to 10% of its net assets in
emerging markets or countries with limited or developing capital markets.
Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers. (See
"Description of Securities and Investment Techniques-Foreign Securities" and the
Statement of Additional Information for a discussion of the risks involved in
foreign investing.)
The Series may invest in ADRs which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Although ADRs
are issued by a U.S. depository, they are subject to many of the risks of
foreign securities such as changes in exchange rates and more limited infor-
mation about foreign issuers.
The Series may also purchase illiquid or restricted securities (such as private
placements). The Series' may not invest more than 15% of its net assets in
illiquid securities.
The Series is classified as a "non-diversified" investment company as described
above under "Diversification." See "Diversification" for risks associated with
investing in a non-diversified Series.
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Portfolio
Manager is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Series changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of Series turnover is not a limiting factor
when a change in the Series is otherwise appropriate. Because the Series is
expected to have a Series turnover rate of over 100%, transaction costs incurred
by the Series and the realized capital gains and losses of the Series may be
greater than that of a Series with a lesser turnover rate.
The Series may also enter into repurchase agreements, lend securities, purchase
securities on a "when-issued" or on a "forward delivery" basis (which means that
the securities will be delivered to the Series at a future date usually beyond
customary settlement time), invest in indexed securities (whose value is linked
to foreign currencies, commodities, indexes, or other financial indicators),
enter into mortgage "dollar roll" transactions with selected banks and broker-
dealers, purchase restricted securities, corporate asset-backed securities,
options on securities, options on stock indexes, options on foreign currencies,
futures contracts, options on futures contracts and forward foreign currency
exchange contracts.
All of the Series investments and transactions described in this section are
described in greater detail in the Description of Securities and Investment
Techniques section of this Prospectus and in the Statement of Additional
Information.
RESEARCH SERIES
The investment objective of the Research Series is to provide long-term growth
of capital and future income. The portfolio securities of the Research Series
are selected by a committee of investment research analysts.
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This committee includes investment analysts employed not only by the Portfolio
Manager but also by a wholly owned international subsidiary of the Portfolio
Manager. The Series' assets are allocated among industries by the analysts
acting together as a group. Individual analysts are then responsible for
selecting what they view as the securities best suited to meet the Series'
investment objective within their assigned industry responsibility. The Port-
folio Manager for the Series is Massachusetts Financial Services Company.
The Series' policy is to invest a substantial proportion of its assets in the
common stocks or securities convertible into common stocks of companies believed
to possess better than average prospects for long-term growth. A smaller propor-
tion of the assets may be invested in bonds, short-term obligations, preferred
stocks or common stocks whose principal characteristic is income production
rather than growth. Such securities may also offer opportunities for growth of
capital as well as income. In the case of both growth stocks and income issues,
emphasis is placed on the selection of progressive, well-managed companies. The
Series' debt investments, if any, may consist of investment grade securities
(e.g., rated Baa or better by Moody's Investor Services, Inc. ("Moody's") or BBB
or better by Standard & Poor's Ratings Group ("Standard & Poor's")) and, with
respect to no more than 10% of its net assets, securities in the lower rated
categories (e.g., rated BA or lower by Moody's or BB or lower by Standard &
Poor's or Fitch IBCA, Inc. ("Fitch")), or securities which the Portfolio Manager
believes to be of similar quality to these lower rated securities (commonly
known as "junk bonds"). For a description of bond ratings, see the Statement of
Additional Information. It is not the Series' policy to rely exclusively on
ratings issued by established credit rating agencies but rather to supplement
such ratings with the Portfolio Manager's own independent and ongoing review of
credit quality. The Series' achievement of its investment objective may be more
dependent on the Portfolio Manager's own credit analysis than in the case of a
Series investing in primarily higher quality bonds. From time to time, the
Series' management will exercise its judgment with respect to the proportions
invested in growth stocks, income-producing securities or cash (including
foreign currency) and cash equivalents depending on its view of their relative
attractiveness.
The Series may enter into repurchase agreements, make loans of its fixed income
securities, invest in ADRs, invest up to 20% of its net assets in foreign
securities (not including ADRs), invest in emerging markets or countries with
limited or developing capital markets and purchase "Rule 144A securities."
Investing in these type of securities involves certain risks. See "Description
of Securities and Investment Techniques" and the Statement of Additional Inform-
ation for a discussion of the risks involved with investing in the above listed
securities transactions.
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Portfolio
Manager is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Series changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of Series turnover is not a limiting factor
when a change in the Series is otherwise appropriate.
TOTAL RETURN SERIES
The primary investment objective of the Total Return Series is to obtain above-
average income (compared to a Series entirely invested in equity securities)
consistent with the prudent employment of capital. While current income is the
primary objective, the Series believes that there should also be a reasonable
opportunity for growth of capital and income, since many securities offering a
better than average yield may also possess growth potential. Thus, in selecting
securities for its Series, the Series considers each of these objectives. Under
normal market conditions, at least 25% of the Series' assets will be invested
in fixed income securities and at least 40% and no more than 75% of the Series'
assets will be invested in equity securities. The Portfolio Manager for the
Series is Massachusetts Financial Services Company.
The Series' policy is to invest in a broad list of securities, including short-
term obligations. The list may be diversified not only by companies and
industries, but also by type of security. Fixed income securities and equity
securities (which include: common stocks and preferred stocks; securities such
as bonds, warrants or rights that are convertible into stock; and depositary
receipts for those securities) may be held by the Series. Some fixed income
securities may also have a call on common stock by means of a conversion
privilege or attached warrants. The Series may vary the percentage of assets
invested in any one type of security in
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accordance with the Portfolio Manager's interpretation of economic and money
market conditions, fiscal and monetary policy and underlying security values.
The Series' debt, investments may consist of both investment grade securities
(rated Baa or better by Moody's or BBB or better by Standard & Poor's, Fitch or
Duff & Phelps Credit Rating Co. ("Duff") and securities that are unrated or are
in the lower rating categories (rated BA or lower by Moody's or BB or lower by
Standard & Poor's, Fitch or Duff) (commonly known as "junk bonds") including up
to 20% of its assets in non-convertible fixed income securities that are in
these lower rating categories and comparable unrated securities. Generally, most
of the Series' long-term debt investments will consist of "investment grade"
securities. See the Statement of Additional Information for a description of
these ratings. It is not the Series' policy to rely exclusively on ratings
issued by established credit rating agencies but rather to supplement such
ratings with the Portfolio Manager's own independent and ongoing review of
credit quality.
The Series may also invest in U.S. Government securities, including: (i) U.S.
Treasury obligations, which differ only in their interest rates, maturities and
times of issuance; 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 greater than ten years), all of which are backed by the
full faith and credit of the U.S. Government; and (ii) obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, some of which are
backed by the full faith and credit of the U.S. Treasury, e.g., direct pass-
through certificates of GNMA; some of which are supported by the right of the
issuer to borrow from the U.S. Government, e.g., obligations of Federal Home
Loan Banks; and some of which are backed only by the credit of the issuer
itself, e.g., obligations of the Student Loan Marketing Association.
The Series may invest in mortgage pass-through securities. Mortgage pass-through
securities are securities representing interests in "pools" of mortgage loans.
Monthly payments of interest and principal by the individual borrowers on mort-
gages are passed through to the holders of the securities (net of fees paid to
the issuer or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. Payment of principal and interest on some mortgage
pass-through securities (but not the market value of the securities themselves)
may be guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by GNMA); or guaranteed by U.S. Government-
sponsored corporations (such as FNMA or FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by non-govern-
mental issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers). Fixed income securities that the Series may invest in also include
zero-coupon bonds, deferred interest bonds and bonds on which the interest is
payable in kind ("PIK bonds"). See "Description of Securities and Investment
Techniques" for a further discussion of these securities.
The Series may invest in ADRs which are certificates issued by a U.S. depository
(usually a bank), that represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Although ADRs are
issued by a U.S. depository, they are subject to many of the risks of foreign
securities such as changes in exchange rates and more limited information about
foreign issuers.
The Series may invest up to 20% (and generally expects to invest between 5% and
20%) of its net assets in foreign securities (including investments in emerging
markets or countries with limited or developing capital markets) (not including
ADRs). Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers. (See
"Description of Securities and Investment Techniques-Foreign Investments" and
the Statement of Additional Information for a discussion of the risks involved
in foreign investing.)
In order to protect the value of the Series' investments from interest rate
fluctuations, the Series may enter into various hedging transactions, such as
interest rate swaps, and the purchase or sale of interest rate caps, floors and
collars. (See the Statement of Additional Information for information relating
to these transactions including related risks.)
The Series may purchase "Rule 144A securities"; enter into repurchase
agreements; lend portfolio securities; purchase securities on a "when-issued" or
on a "delayed delivery" basis; invest in indexed securities linked to foreign
currencies, indexes, or other financial indicators; enter into mortgage "dollar
roll" transactions;
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invest a portion of its assets in loan participations and
other direct indebtedness; purchase restricted securities, corporate asset-
backed securities, options on securities, options on stock indexes, options on
foreign currencies, futures contracts, options on futures contracts and forward
foreign currency exchange contracts. See "Description of Securities and Invest-
ment Techniques" for more information regarding these transactions and the risks
associated with them.
While it is not generally the Series' policy to invest or trade for short-term
profits, the Series may dispose of a portfolio security whenever the Portfolio
Manager is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Series changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss. Therefore, the rate of Series turnover is not a limiting factor
when a change in the Series is otherwise appropriate. Because the Series is
expected to have a Series turnover rate of over 100%, transactions costs incur-
red by the Series and the realized capital gains and losses of the Series may be
greater than that of a Series with a lesser turnover rate.
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MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of the
Board of Trustees. The Trustees are J. Michael Earley, R. Barbara Gitenstein,
Robert A. Grayson, Elizabeth J. Newell, Stanley B. Seidler and Roger B. Vincent.
The Executive Officers of the Trust are Barnett Chernow, Myles R. Tashman and
Mary Bea Wilkinson. Additional information about the Trustees and officers of
the Trust may be found in the Statement of Additional Information under the
heading "Management of the Trust."
THE MANAGER
Directed Services, Inc. ("DSI" or the "Manager") serves as the Manager to the
Trust pursuant to a Management Agreement with the Trust. DSI is a New York cor-
poration and is a wholly owned subsidiary of ING. DSI is registered with the
SEC as an investment adviser and a broker-dealer. The Trust currently offers
shares of its operating Series to, among others, separate accounts of Golden
American to serve as the investment medium for Variable Contracts issued by
Golden American. DSI is the principal underwriter and distributor of the
Variable Contracts issued by Golden American. Golden American is a stock life
insurance company organized under the laws of the State of Delaware. Prior to
December 30, 1993, Golden American was a Minnesota corporation. Golden American
is a wholly owned subsidiary of ING. One of the Portfolio Managers, ING
Investment Management, LLC is an affiliate of DSI and Golden American. Prior to
October 24, 1997, DSI was a wholly owned subsidiary of Equitable of Iowa
Companies and an affiliate of one of the Portfolio Managers, Equitable Inves-
tment Services, Inc.
DSI performs the activities described above in this Prospectus and below under
the caption "Distributor." Under the Management Agreement, DSI has overall re-
sponsibility, subject to the supervision of the Board of Trustees, for engaging
Portfolio Managers and for monitoring and evaluating the management of the
assets of each Series by the Portfolio Managers. The Manager is also responsible
for monitoring and evaluating the Portfolio Managers on a periodic basis, and
will consider their performance records with respect to the investment objec-
tives and policies of each Series. The Manager may, if appropriate, recommend
that the Trustees consider a change in the Portfolio Manager, although the
Manager does not expect to recommend frequent changes in Portfolio Managers as a
matter of operating procedure for the Series.
As Manager, DSI is responsible, subject to the supervision of the Board of Trus-
tees, for providing administrative and other services necessary for the ordinary
operation of the Series in addition to advisory services. The Manager provides
the overall business management and administrative services necessary for the
Series' operation and provides or procures the services and information neces-
sary to the proper conduct of the business of the Series. The Manager is
responsible for providing or procuring, at the Manager's expense, the services
reasonably necessary for the ordinary operation of the Series, including
custodial, administrative, transfer agency, portfolio accounting, dividend dis-
bursing, auditing, and ordinary legal services. The Manager also acts as
liaison among the various service providers to the Series, including the
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custodian, portfolio accounting agent, Portfolio Managers, and the insurance
company or companies to which the Series offer their shares. The Manager is also
responsible for ensuring that the Series operate in compliance with applicable
legal requirements and for monitoring the Portfolio Managers for compliance with
requirements under applicable law and with the investment policies and restric-
tions of the Series. DSI does not bear the expense of brokerage fees and other
transactional expenses for securities or other assets (which are generally
considered part of the cost for the assets), taxes (if any) paid by a Series,
interest on borrowing, fees and expenses of the independent trustees, and extra-
ordinary expenses, such as litigation or indemnification expenses.
Pursuant to the Management Agreement, the Manager is authorized to exercise full
investment discretion and make all determinations with respect to the investment
of a Series' assets and the purchase and sale of portfolio securities for one or
more Series in the event that at any time no Portfolio Manager is engaged to
manage the assets of a Series. The Management Agreement may be terminated with-
out penalty by the vote of the Board of Trustees or the shareholders of the
Series, or by the Manager, upon 60 days' written notice by the Board or the
Manager, and will terminate automatically if assigned as that term is described
in the Investment Company Act of 1940.
The Trust pays the Manager for its services under the Management Agreements a
fee, payable monthly, based on the average daily net assets of the Series at the
following annual rates of the average daily net assets of the Series:
Series Fee (based on combined assets of the
indicated groups of Series)
- ------------------------------- ------------------------------------------
Mid-Cap Growth, Total Return, 1.00% of first $250 million in combined
and Research assets of these Series;
0.95% of next $400 million;
0.90% of next $450million; and
0.85% of amount in excess of $1.1 billion
As of the date of this Prospectus, Mid Cap Growth, Total Return, and Research
Series had not commenced operations and no fee had been paid to the Manager. For
more information on the Management Agreement, see the Statement of Additional
Information.
The Trust is distinct in that the expense structure of most Series is simpler
and more predictable than most mutual funds. For all Series many of the ordinary
expenses for each Series, including custodial, administrative, transfer agency,
portfolio accounting, auditing, and ordinary legal expenses are paid by the
Manager; whereas, most mutual funds for these expenses directly from their own
assets.
THE PORTFOLIO MANAGER
The Trust and the Manager have entered into Portfolio Management Agreement with
Massachusetts Financial Services Company. Under this Agreement, the Portfolio
Manager of each Series has full investment discretion and makes all determina-
tions with respect to the investment of a Series' assets and the purchase and
sale of portfolio securities and other investments. The Portfolio Management
Agreement may be terminated without penalty by the vote of the Board of Trustees
or the shareholders of a Series, by the Portfolio Manager, or by the Manager,
on 60 days' written notice by any party to a Portfolio Management Agreement and
will terminate automatically if assigned as that term is described in the
Investment Company Act of 1940. A description of the Portfolio Manager follows.
MASSACHUSETTS FINANCIAL SERVICES COMPANY
The Portfolio Manager to the Mid-Cap Growth Series, Research Series and Total
Return Series is Massachusetts Financial Services Company ("MFS"), located at
500 Boylston Street, Boston, Massachusetts 02116. MFS is America's oldest
mutual fund organization. MFS and its predecessor organizations have a history
of money management dating from 1924 and the founding of the first mutual fund
in the United States, Massachusetts Investors Trust. Net assets under the man-
agement of the MFS organization were approximately $70.2 billion on behalf of
approximately $2.7 million investor accounts as of December 31, 1997. As of such
date, the MFS organization managed approximately $45.7 billion of assets in
equity
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securities and $24.5 billion of assets in fixed income securities. MFS is
a subsidiary of Sun Life Assurance Company of Canada (U.S.) which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
Sun Life, a mutual life insurance company, is one of the largest international
life insurance companies and has been operating in the U.S. since 1895,
establishing a headquarters office in the U.S. in 1973. The executive officers
of MFS report to the Chairman of Sun Life.
Kevin R. Parke is the portfolio manager for the Research Series. Mr. Parke over-
sees the selection of portfolio securities made by various equity research
analysts employed by MFS. Mr. Parke is a Senior Vice President-Investments of
MFS and has been employed as a portfolio manager by MFS since 1985.
David M. Calabro heads a team of portfolio managers of MFS for the Total Return
Series. Mr. Calabro is a Vice President-Investments of MFS and manages the
equity portion of the Series along with Judith N. Lamb, a Vice President-Invest-
ments of MFS, Lisa B. Nurme, a Vice President-Investments of MFS and Maura
Shaughnessy, a Vice President-Investments of MFS. Geoffrey L. Kurinsky, a Senior
Vice President-Investment manages the fixed income portion of the Series and has
been employed as a portfolio manager by MFS since 1987. Mr. Calabro has been
employed as a portfolio manager by MFS since 1992. Ms. Lamb has been employed as
a portfolio manager by MFS since 1992. Ms. Nurme has been employed as a port-
folio manager by MFS since 1987. Ms. Shaughnessy has been employed as a port-
folio manager by MFS since 1991.
John W. Ballen and Mark Regan are the portfolio managers for the Mid-Cap Growth
Series. Mr. Ballen is a Senior Vice President-Investments and the Chief Equity
Officer of MFS and has been employed by MFS since 1984. Mr. Regan is a Vice
President-Investments at MFS and has been employed as a portfolio manager by MFS
since 1989.
MFS and the individuals named previously have served in similar capacities for
similar series of the Equi-Select Series Trust, the predecessor series of the
Mid-Cap Growth, Research and Total Return Series. Pursuant to the Portfolio
Management Agreement, the Manager (not the Trust) pays to MFS a monthly fee
equal to an annual rate of 0.40 % of first $300 million and 0.25% of average net
assets over and above $300 million for each of the Mid-Cap Growth, Research and
Total Return Series.
TOTAL EXPENSES FOR THE SERIES OF THE TRUST
The expenses of the ordinary operations of each Series are borne by the Manager
pursuant to Management Agreement. In addition to the management fee, the Trust
bears the expenses of taxes (if any) paid by a Series, the fees and expenses of
its independent trustees, any extraordinary expenses, such as any litigation or
indemnification expenses, as well as other expenses as described under "The
Manager." Any such Trust expenses directly attributable to a Series are charged
to that Series; other expenses are allocated among all the Series. As of the
date of this Prospectus, the Mid-Cap Growth, Research and Total Return Series
had not commenced operations and no expenses had been incurred by the Series.
DISTRIBUTOR
Directed Services, Inc. acts as distributor ("Distributor") of shares of the
Series, in addition to serving as Manager for the Trust. The Distributor's
address is 1001 Jefferson Street, Wilmington, Delaware 19801. The Distributor is
a registered broker-dealer and a member of the National Association of
Securities Dealers and acts as Distributor without remuneration from the Trust.
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Series is Bankers Trust Company. First Data Investors
Services Group of First Data Corporation provides certain administrative and
portfolio accounting services for all Series.
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes certain types of securities and investment
techniques used by one or more Series and enumerates potential risks associated
with these investments. The actual securities in which a series may invest are
described in "Investment Objectives and Policies."
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For more detailed information on these investment techniques, as well as
information on some types of securities in which some or all of the Series may
invest, including information on U.S. Government securities, debt securities
generally, variable and floating rate securities, reverse repurchase agreements,
lending portfolio securities, warrants, other investment companies, and short
sales, including short sales against the box, see the Statement of Additional
Information.
MORTGAGE-BACKED SECURITIES
MORTGAGE PASS-THROUGH SECURITIES
Many mortgage-backed securities are mortgage pass-through securities, which are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are made periodically, in effect
"passing through" periodic payments made by the individual borrowers on the
residential mortgage loans which underlie the securities (net of fees paid to
the issuer or guarantor of the securities and possibly others). Such instruments
differ from typical bonds because principal is repaid monthly over the term of
the loan rather than returned in a lump sum at maturity. Timely payment of
principal and interest on some mortgage pass-through securities may be
guaranteed by the full faith and credit of the U.S. Government, as in the case
of securities guaranteed by the Government National Mortgage Association, or
"GNMA," or guaranteed by agencies or instrumentalities of the U.S. Government,
as in the case of securities guaranteed by the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
which are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations and not by the full faith and credit of
the U.S. Government. For more information on GNMA certificates and FNMA and
FHLMC mortgage-backed obligations, see "Mortgage-Backed Securities" in the
Statement of Additional Information.
OTHER MORTGAGE-BACKED SECURITIES
Some Series may purchase mortgage-backed securities issued by financial
institutions such as commercial banks, savings and loan associations, mortgage
banks, and securities broker-dealers (or affiliates of such institutions
established to issue these securities) in the form of either collateralized
mortgage obligations ("CMOs") or mortgage-backed bonds. CMOs are obligations
fully collateralized directly or indirectly by a pool of mortgages on which
payments of principal and interest are dedicated to payment of principal and
interest on the CMOs. Payments are passed through to the holders, although not
necessarily on a pro rata basis, on the same schedule as they are received.
Mortgage-backed bonds are general obligations of the issuer fully collateralized
directly or indirectly by a pool of mortgages. The mortgages serve as collateral
for the issuer's payment obligations on the bonds but interest and principal
payments on the mortgages are not passed through either directly (as with GNMA
certificates and FNMA and FHLMC pass-through securities) or on a modified basis
(as with CMOs). Accordingly, a change in the rate of prepayments on the pool of
mortgages could change the effective maturity of a CMO but not that of a mort-
gage-backed bond (although, like many bonds, mortgage-backed bonds can provide
that they are callable by the issuer prior to maturity). Although the mortgage-
related securities securing these obligations may be subject to a government
guarantee or third-party support, the obligation itself is not so guaranteed.
Therefore, if the collateral securing the obligation is insufficient to make
payment on the obligation, a holder could sustain a loss.
RISKS OF MORTGAGE-BACKED SECURITIES
Although mortgage loans constituting a pool of mortgages, such as those
underlying GNMA certificates, may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because the mortgages will be subject to normal principal amortization and may
be prepaid prior to maturity. In the case of mortgage pass-through securities
such as GNMA certificates or FNMA and FHLMC mortgage-backed obligations, or
modified pass-through securities such as collateralized mortgage obligations
issued by various financial institutions, early repayment of principal arising
from prepayments of principal on the underlying mortgage loans due to the sale
of the underlying property, the refinancing of the loan, or foreclosure may
expose a Series to a lower rate of return upon reinvestment of the principal.
Prepayment rates vary widely and may be affected by changes in market interest
rates. In periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of the mortgage-backed
security.
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Conversely, when interest rates are rising, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the mortgage-backed
security. Accordingly, it is not possible to accurately predict the average life
of a particular pool. Reinvestment of prepayments may occur at higher or lower
rates than the original yield on the certificates. Therefore, the actual
maturity and realized yield on pass-through or modified pass-through mortgage-
backed securities will vary based upon the prepayment experience of the
underlying pool of mortgages.
With respect to GNMA certificates, although GNMA guarantees timely payment even
if homeowners delay or default, tracking the "pass-through" payments may, at
times, be difficult. Expected payments may be delayed due to the delays in
registering the newly traded paper securities. The custodian's policies for
crediting missed payments while errant receipts are tracked down may vary. Other
mortgage-backed securities such as those of FHLMC and FNMA trade in book-entry
form and are not subject to this risk of delays in timely payment of income.
OTHER ASSET-BACKED SECURITIES
Some Series may purchase other asset-backed securities (unrelated to mortgage
loans) such as "CARSSM" ("Certificates for Automobile Receivables") and Credit
Card Receivable Securities and any other asset-backed securities that may be
developed in the future. See the Statement of Additional Information for a
description of these instruments.
HIGH YIELD BONDS
Generally, high yield/high risk debt securities are those rated lower than Baa
or BBB, or, if not rated by Moody's or Standard & Poor's, of equivalent quality
and which are commonly referred to as "junk bonds." Investment in such
securities generally provides greater income and increased opportunity for
capital appreciation than investments in higher quality debt securities, but
they also typically entail greater potential price volatility and principal and
income risk.
In general, high yield bonds are not considered to be investment grade. They are
regarded as predominately speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in high
yield bond prices. In the case of high yield bonds structured as zero-coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market on which high yield bonds are traded is generally less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Series could sell a
high yield bond, and could adversely affect the daily net asset value of the
Series' shares. At times of less liquidity, it may be more difficult to value
the high yield bonds because such valuation may require more research, and
elements of judgment may play a greater role in the valuation because there is
less reliable, objective data available.
REPURCHASE AGREEMENTS
Repurchase agreements permit an investor to maintain liquidity and earn income
over periods of time as short as overnight. Repurchase agreements may be
characterized as loans collateralized by the underlying securities. In these
transactions, a Series purchases securities such as U.S. Treasury obligations
or U.S. Government securities (the "underlying securities") from a broker or
bank, which agrees to repurchase the underlying securities on a certain date or
on demand and at a fixed price calculated to produce a previously agreed-upon
return to the Series. If the broker or bank were to default on its repurchase
obligation and the underlying securities were sold for a lesser amount, the
Series would realize a loss, and may incur disposition costs in connection with
liquidating the collateral. In the event bankruptcy proceedings are commenced
with respect to the seller, realization of the collateral by a Series may be
delayed or limited, and a loss may be incurred if the collateral securing the
repurchase agreement declines in value during the bankruptcy proceedings.
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A Series may engage in repurchase transactions in accordance with guidelines
approved by the Board of Trustees of the Trust, which include monitoring the
creditworthiness of the parties with which the Series engages in repurchase
transactions, obtaining collateral at least equal in value to the repurchase
obligation, and marking the collateral to market on a daily basis. See the
Statement of Additional Information "Description of Securities and Investment
Techniques" for further information regarding repurchase agreements.
ILLIQUID SECURITIES
Illiquid securities include repurchase agreements maturing in more than seven
days, unregistered or restricted securities and any security which a Portfolio
Manager is unable to sell within seven days or less. Each Series may invest in
illiquid securities up to its illiquidity limit.
RESTRICTED SECURITIES
Restricted securities owned by a Series that are determined to be illiquid are
subject to that Series' illiquidity limitation. Restricted securities may be
sold only in privately negotiated transactions, in a public offering with
respect to which a registration statement is in effect under the Securities Act
of 1933, or in a transaction that is exempt from such registration. Where
registration is required, a Series may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Series may be permitted to sell a security
under an effective registration statement. If, during such a period adverse
market conditions were to develop, the Series might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities may be
priced at fair value as determined in good faith by the Series' Portfolio
Manager.
SHORT SALES
A short sale is a transaction in which a Series sells a security it does not own
in anticipation of a decline in market price. When a Series makes a short sale,
the proceeds it receives are retained by the broker until the Series replaces
the borrowed security. In order to deliver the security to the buyer, the Series
must arrange through a broker to borrow the security and, in so doing, the
Series becomes obligated to replace the security borrowed at its market price at
the time of replacement, whatever that price may be. The Series may have to pay
a premium to borrow the security. The Series must also pay any dividends or
interest payable on the security until the Series replaces the security.
The Series' obligation to replace the security borrowed in connection with the
short sale will be secured by collateral deposited with the broker, consisting
of cash or securities acceptable to the broker. In addition, with respect to any
short sale, other than short sales against the box, the Series will be required
to deposit collateral consisting of cash, cash items, or U.S. Government
securities in a segregated account with its custodian in an amount such that the
value of the sum of both collateral deposits is at all times equal to at least
100% of the current market value of the securities sold short. The deposits do
not necessarily limit the Series' potential loss on a short sale, which may
exceed the entire amount of the collateral.
A Series is not required to liquidate an existing short sale position solely
because a change in market values has caused one or more of these percentage
limitations to be exceeded. For more information on short sales, see the
Statement of Additional Information.
FOREIGN SECURITIES
Series may invest in equity securities of foreign issuers, including American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts") which are
described below. Some Series may invest in foreign branches of commercial banks
and foreign banks. See the "Banking Industry and Savings Industry Obligations"
discussion in the Statement of Additional Information for further description of
these securities.
Each Series is subject to the following guidelines for diversification of
foreign security investments. If a Series has less than 20% of its assets in
foreign issuers, then all of such investment may be in issuers located in one
country. If a Series has at least 20% but less than 40% of its assets in foreign
issuers, then such investment must be allocated to issuers located in at least
two different countries. Similarly, if a Series has at least 40% but less than
60% of its assets in foreign issuers, such investment must be allocated to at
least three different countries. Foreign investments must be allocated to at
least four different countries if
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at least 60% of a Series' assets is in foreign issuers, and to at least five
different countries if at least 80% is in foreign issuers. if at least. For
purposes of allocating a Series' investments, a company will be considered
located in the country in which it is domiciled, in which it is primarily
traded, from which it derives a significant portion of its revenues, or in
which a significant portion of its goods or services are produced.
Each Series may have no more than 25% of its
net assets invested in securities of issuers located in any one emerging market
country and no more than 50% of its assets invested in securities of any one
country, except that a Series may have additional investments of its net assets
invested in securities of issuers located in any one of the following countries:
Australia, Canada, France, Japan, the United Kingdom, or Germany. A Series'
investments in U.S. issuers are not subject to the foreign country diversifica-
tion guidelines.
Investments in foreign securities offer potential benefits not available solely
in securities of domestic issuers by offering the opportunity to invest in
foreign issuers that appear to offer growth potential, or in foreign countries
with economic policies or business cycles different from those of the United
States, or to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Series may invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, other foreign taxation, political or social instability, or diplomatic
developments that could adversely affect investments in those countries.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the United States. A Series
might have greater difficulty taking appropriate legal action with respect to
foreign investments in non-U.S. courts than with respect to domestic issuers in
U.S. courts.
In addition, transactions in foreign securities may involve greater time from
the trade date until settlement than domestic securities transactions and
involve the risk of possible losses through the holding of securities by
custodians and securities depositories in foreign countries.
"Sovereign Debt" consists of debt obligations of governmental issuers in
emerging market countries and industrialized countries. The sovereign debt
issued or guaranteed by certain emerging market governmental entities and
corporate issuers in which the Series may invest potentially involves a high
degree of risk and may be deemed the equivalent in terms of quality to high
risk, low rated securities (i.e., high yield bonds) and subject to many of the
same risks as such securities. Similarly, the Series may have difficulty
disposing of certain of these debt obligations because there may be a thin
trading market for such securities. In the event a governmental issuer defaults
on its obligations, the Series may have limited legal recourse against the
issuer or guarantor, if any. Remedies must, in some cases, be pursued in the
courts of the defaulting party itself, and the ability of the holder of foreign
government debt securities to obtain recourse may be subject to the political
climate in the relevant country. The issuers of the government debt securities
in which the Series may invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which has led to
defaults on certain obligations and the restructuring of certain indebtedness.
See "Description of Securities and Investment Techniques-High Yield Bonds" in
this Prospectus and "Debt Securities-Sovereign Debt" in the Statement of
Additional Information.
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Dividend and interest income from foreign securities may generally be subject to
withholding taxes by the country in which the issuer is located and may not be
recoverable by a Series or its investors.
ADRs are Depositary Receipts typically issued by a U.S. bank or trust company
which evidence ownership of underlying securities issued by a foreign cor-
poration. EDRs and GDRs are typically issued by foreign banks or trust compan-
ies, 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
U.S. 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. Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted. In
addition, the issuers of the securities underlying unsponsored Depositary
Receipts are not obligated to disclose material information in the United
States and, therefore, there may be less information available regarding such
issuers and there may not be a correlation between such information and the
market value of the Depositary Receipts. Depositary Receipts also involve the
risks of other investments in foreign securities.
INDEXED SECURITIES AND STRUCTURED NOTES
Indexed securities are securities whose value is linked to one or more
currencies, interest rates, commodities, or financial or commodity indexes.
An indexed security enables the investor to purchase a note whose coupons and/or
principal redemption are linked to the performance of an underlying asset.
Indexed securities may be positively or negatively indexed (i.e., their value
may increase or decrease if the underlying instrument appreciates). Indexed
securities may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself,
and present many of the same risks as investing in futures and options. Indexed
securities are also subject to credit risks associated with the issuer of the
security with respect to both principal and interest. Only securities linked to
one or more non-agricultural commodities or commodity indexes will be considered
a Hard Asset security.
Indexed securities may be publicly traded or may be two-party contracts (such
two-party agreements are referred to here collectively as structured notes).
When a Series purchases a structured note, a type of derivative, it will make a
payment of principal to the counterparty. Some structured notes have a
guaranteed repayment of principal while others place a portion (or all) of the
principal at risk. A Series will purchase structured notes only from counter-
parties rated A or better by Standard & Poor's, Moody's or another nationally
recognized statistical rating organization. The Portfolio Manager will monitor
the liquidity of structured notes under the supervision of the Board of
Trustees, and notes determined to be illiquid will be aggregated with other
illiquid securities for purposes of the limitation on illiquid investments.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS
Some Series may invest in gold bullion and coins and other precious metals
(silver or platinum) bullion and in futures contracts with respect to such
metals. In order to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended, each Series intends to
manage its metal investments and/or futures contracts on metals so that less
than 10% of the gross income of the Series for tax purposes during any fiscal
year (the current limit on so-called non-qualifying income) is derived from
these and other sources that produce such non-qualifying income.
Metals will not be purchased in any form that is not readily marketable, and
gold coins will be purchased for their intrinsic value only, i.e., coins will
not be purchased for their numismatic value. Any metals purchased by a Series
will be delivered to and stored with a qualified custodian bank. Metal invest-
ments do not generate interest or dividend income.
Metal investments are considered speculative and are affected by various world-
wide economic, financial, and political factors. Prices may fluctuate sharply
over short time periods due to changes in inflation expectations in various
countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and govern-
mental prohibitions or restriction on the private ownership of certain precious
metals or minerals. Furthermore, at the present time, there are
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four major producers of gold bullion: the Republic of South Africa, the United
States, Canada, and Australia. Political and economic conditions in these coun-
tries will have a direct effect on the mining and distribution of gold and,
consequently, on its price. Many of these risks also may affect the value of
securities of companies engaged in operations respecting gold and other precious
metals.
FUTURES CONTRACTS
Some Series may engage in futures contracts. They may purchase and sell
interest rate, stock index, gold and other futures contracts based upon other
financial instruments. They may also purchase and write options on such con-
tracts. For a general description of these futures contracts and options
thereon, including information on margin requirements, see the Statement of
Additional Information.
These Series may engage in such futures transactions as an adjunct to their
securities activities. The transactions in futures contracts must constitute
bona fide hedging or other strategies under regulations promulgated by the
Commodities Futures Trading Commission (the "CFTC"), under which a Series
engaging in futures transactions would not be a "commodity pool."
At the time a Series purchases a futures contract, an amount of cash and/or
securities equal to the fair market value less initial and variation margin of
the futures contract will be deposited in a segregated account with the Trust's
custodian to collateralize the position and thereby ensure that such futures
contract is covered. In addition, each Series will comply with certain
regulations of the CFTC to qualify for an exclusion from being a "commodity
pool," which require a Series to set aside cash and short-term obligations with
respect to long positions in a futures contract or a futures option. These
requirements are described in the Statement of Additional Information.
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS
There are several risks associated with the use of futures and futures options.
The value of a futures contract may decline. While a Series' transactions in
futures may protect the Series against adverse movements in the general level of
interest rates or other economic conditions, such transactions could also
preclude the Series from the opportunity to benefit from favorable movements in
the level of interest rates or other economic conditions. With respect to
transactions for hedging, there can be no guarantee that there will be
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on both
the hedged securities in a Series and the hedging vehicle so that the Series'
return might have been better if hedging had not been attempted. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures and futures options on securities,
including technical influences in futures trading and futures options, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. A decision as
to whether, when, and how to hedge involves the exercise of skill and judgment
and even a well conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected interest rate trends.
There can be no assurance that a liquid market will exist at a time when a
Series seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. The daily
limit governs only price movements during a particular trading day and therefore
does not limit potential losses because the limit may work to prevent the
liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses. Lack of a
liquid market for any reason may prevent the Series from liquidating an
unfavorable position and the Series would remain obligated to meet margin
requirements and continue to incur losses until the position is closed.
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Most Series will only enter into futures contracts or futures options which are
standardized and traded on a U.S. exchange or board of trade, or, in the case of
futures options, for which an established over-the-counter market exists. A
Series will not enter into a futures contract or purchase a futures option if
immediately thereafter the initial margin deposits for futures contracts held
by the Series plus premiums paid by it for open futures options positions, less
the amount by which any such positions are "in-the-money," would exceed 5% of
the Series' total assets.
Foreign markets may offer advantages such as trading in indexes that are not
currently traded in the United States. Foreign markets, however, may have
greater risk potential than domestic markets. Unlike trading on domestic
commodity exchanges, trading on foreign commodity markets is not regulated by
the CFTC and may be subject to greater risk than trading on domestic exchanges.
For example, some foreign exchanges are principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. Trading in foreign futures or foreign options
contracts may not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the CFTC's regulations, and the rules of the National
Futures Association and any domestic exchange, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by
the National Futures Association or any domestic futures exchange. Amounts
received for foreign futures or foreign options transactions may not be provided
the same protections as funds received in respect of transactions on United
States futures exchanges. A Series could incur losses or lose any profits that
had been realized in trading by adverse changes in the exchange rate of the
currency in which the transaction is denominated. Transactions on foreign
exchanges may include both commodities that are traded on domestic exchanges and
boards of trade and those that are not.
The Trust reserves the right to engage in other types of futures transactions in
the future and to use futures and related options for other than hedging
purposes to the extent permitted by regulatory authorities.
OPTIONS ON SECURITIES
Some Series may engage in transactions on options on securities, may purchase
and write put and call options on securities and on stock indexes at such times
as the Series' Portfolio Manager deems appropriate and consistent with the
Series' investment objective, may purchase and write put and call options on
securities, may write call and put options only if they are covered or secured,
and may purchase or sell options to effect closing transactions, may buy covered
listed put equity options and sell covered listed call equity options, including
options on stock indexes, may purchase protective puts, and may purchase calls
and puts other than protective puts. Some Series may engage in options
transactions not only on U.S. domestic markets but also on exchanges and other
markets outside the United States.
Series able to invest in options may enter into closing transactions in order
to terminate its obligations either as a writer or a purchaser of an option
prior to the expiration of the option. For a general description of purchasing
and writing options on securities and securities indexes, see "Options on
Securities and Securities Indexes" in the Statement of Additional Information.
RISKS OF OPTIONS TRANSACTIONS
The purchase and writing of options involves certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. If a put or call
option purchased by the Series is not sold when it has remaining value, and if
the market price of the underlying security, in the case of a put, remains
equal to or greater than the exercise price or, in the case of a call, remains
less than or equal to the exercise price, the Series will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security.
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There can be no assurance that a liquid market will exist when a Series seeks to
close out an option position. Furthermore, if trading restrictions or suspen-
sions are imposed on the options markets, a Series may be unable to close
out a position. If a Series cannot effect a closing transaction, it will not be
able to sell the underlying security while the previously written option remains
outstanding, even though it might otherwise be advantageous to do so. Possible
reasons for the absence of a liquid secondary market on a national securities
exchange could include: insufficient trading interest, restrictions imposed by
national securities exchanges, trading halts or suspensions with respect to call
options or their underlying securities, inadequacy of the facilities of national
securities exchanges or the Options Clearing Corporation due to a high trading
volume or other event, and a decision by one or more national securities ex-
changes to discontinue the trading of call options or to impose restrictions on
types of orders.
Since option premiums paid or received by a Series, as compared to underlying
investments, are small in relation to the market value of such investments,
buying and selling put and call options offer large amounts of leverage. Thus,
the leverage offered by trading in options could result in the Series' net asset
value being more sensitive to changes in the value of the underlying securities.
FOREIGN CURRENCY TRANSACTIONS
A forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. A Series may either accept or make delivery of the currency at the
maturity of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. A Series
will engage in forward currency transactions in anticipation of or to protect
itself against fluctuations in currency exchange rates, as further described
in the Statement of Additional Information.
A Series will not enter into a forward contract with a term of greater than
one year. At the maturity of a forward contract, a Series may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. If the Series retains the portfolio security and engages in
an offsetting transaction, the Series will incur a gain or a loss to the extent
that there has been movement in forward contract prices. For more information
on closing a forward currency position, including information on associated
risks, see the Statement of Additional Information.
Forward contracts are not traded on regulated commodities exchanges. There can
be no assurance that a liquid market will exist when a Series seeks to close out
a forward currency position, in which case a Series might not be able to effect
a closing purchase transaction at any particular time. In addition, a Series
entering into a forward foreign currency contract incurs the risk of default by
the counter party to the transaction. While forward foreign currency contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
Although each Series values its assets daily in terms of U.S. dollars, they do
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Series may do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Series at one rate, while offering a lesser rate of exchange should the
Series desire to resell that currency to the dealer.
OPTIONS ON FOREIGN CURRENCIES
A Series may purchase call and put options on foreign currencies as a hedge
against changes in the value of the U.S. dollar (or another currency) in
relation to a foreign currency in which portfolio securities of the Series
may be denominated. For a general description and other information on options
on foreign currencies, see "Options on Foreign Currencies" in the Statement of
Additional Information. Hedging against a change in the value of a foreign
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions
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reduce or preclude the opportunity for gain if the value of the hedged currency
should change relative to the U.S. dollar. A Series will not speculate in
options on foreign currencies. A Series may invest in options on foreign
currency which are either listed on a domestic securities exchange or traded on
a recognized foreign exchange.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a Series will
purchase only exchange-traded options, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at
any particular time. In the event no liquid secondary market exists, it might
not be possible to effect closing transactions in particular options. If a
Series cannot close out an exchange-traded option which it holds, it would have
to exercise its option in order to realize any profit and would incur tran-
sactional costs on the sale of the underlying assets.
BORROWING
Leveraging by means of borrowing will exaggerate the effect of any increase or
decrease in the value of portfolio securities on a Series' net asset value;
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. The use of borrowing tends to result in a faster than average
movement, up or down, in the net asset value of the Series' shares. A Series
also may be required to maintain minimum average balances in connection with
such borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
Reverse repurchase agreements, short sales of securities, and short sales of
securities against the box will be included as borrowing subject to the
borrowing limitations described above, except those Series that are permitted to
engage in short sales of securities with respect to an additional 15% of the
Series' net assets in excess of the limits otherwise applicable to borrowing.
Securities purchased on a when-issued or delayed delivery basis will not be
subject to the Series' borrowing limitations to the extent that a Series
establishes and maintains liquid assets in a segregated account with the Trust's
custodian equal to the Series' obligations under the when-issued or delayed
delivery arrangement.
HARD ASSET SECURITIES
The production and marketing of Hard Assets may be affected by actions and
changes in governments. In addition, Hard Asset Companies and securities of hard
asset companies may be cyclical in nature. During periods of economic or
financial instability, the securities of some Hard Asset Companies may be
subject to broad price fluctuations, reflecting volatility of energy and basic
materials prices and possible instability of supply of various Hard Assets. In
addition, some Hard Asset Companies may also be subject to the risks generally
associated with extraction of natural resources, such as the risks of mining and
oil drilling, and the risks of the hazards associated with natural resources,
such as fire, drought, increased regulatory and environmental costs, and others.
Securities of Hard Asset Companies may also experience greater price fluctua-
tions than the relevant Hard Asset. In periods of rising Hard Asset prices,
such securities may rise at a faster rate, and, conversely, in time of falling
Hard Asset prices, such securities may suffer a greater price decline.
REAL ESTATE SECURITIES
Real estate securities include real estate investment trusts ("REITs") and other
companies in the real estate industry or companies with substantial real estate
investments. A Series investing in such real estate securities may be subject
to the risks associated with the direct ownership of real estate because of its
policy of concentration in the securities of companies which own, construct,
manage, or sell residential, commercial, or industrial real estate. These risks
include: declines in the value of real estate, adverse changes in the climate
for 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,
leveraging of interests in real estate, and increases in interest rates. The
value of securities of companies which service the real estate industry may also
be affected by such risks.
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In addition to the risks discussed above, REITs may be affected by any changes
in the value of the underlying property owned by the trusts or by the quality
of any credit extended. REITs are dependent upon management skill, are not
diversified, and are therefore subject to the risk of financing single or a
limited number of projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation, and the possibility of
failing to qualify for special tax treatment under Subchapter M of the Internal
Revenue Code of 1986 and to maintain an exemption under the Investment Company
Act of 1940. Finally, certain REITs may be self-liquidating in that a specific
term of existence is provided for in the trust document and such REITs run the
risk of liquidating at an economically inopportune time.
SWAPS
Swap agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard swap transaction, two parties agree to exchange the returns (or
differential in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
or in a "basket" of securities representing a particular index.
The use of swaps is a highly specialized activity which involved investment
techniques and risks different from those associated with ordinary portfolio
transactions. Whether the Series' use of swap agreements will be successful in
furthering its investment objective will depend on the Portfolio Manager's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Moreover, the Series bears the
risk of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. Swaps are
generally considered illiquid and will be aggregated with other illiquid
positions for purposes of the limitation on illiquid investments.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect the Series' ability to terminate existing
swap agreements or to realize amounts to be received under such agreements.
ZERO-COUPON BONDS
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option, to make current
interest payments on the bonds either in cash or in additional bonds. The values
of zero-coupon bonds and payment-in-kind bonds are subject to greater
fluctuation in response to changes in market interest rates than bonds which pay
interest currently, and may involve greater credit risk than such bonds.
Zero-coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero-
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide that the issuer thereof may, at its option, pay interest on such
bonds in cash or in the form of additional debt obligations. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Series will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other Series securities to
satisfy the Series' distribution obligations.
SMALL COMPANIES
Certain small- and mid-cap companies may present greater opportunities for
investment return, but may also involve greater risks. They may have limited
product lines, markets, or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and in limited
volume.
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As a result, the prices of these securities may fluctuate more than
prices of securities of larger, widely traded companies.
The Series are subject to investment restrictions that are described in the
Statement of Additional Information. Those investment restrictions so designated
and the investment objective of each Series are "fundamental policies" of the
Series, which means that they may not be changed without a majority vote of the
shareholders of the affected Series. Except for those restrictions specifically
identified as fundamental and each Series' investment objective, all other
investment policies and practices described in this Prospectus and the Statement
of Additional Information are not fundamental, meaning that the Board of Trus-
tees may change them without shareholder approval. The vote of a majority of
the outstanding voting securities of a Series means the vote, at an annual or
special meeting, of (a) 67% or more of the voting securities present at such
meeting, if the holders of more than 50% of the outstanding voting securities of
such Series are present or represented by proxy; or (b) more than 50% of the
outstanding voting securities of such Series, whichever is less.
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INVESTMENT RESTRICTIONS
The investment restrictions are stated in full in the Statement of Additional
Information, and a brief description of some of them follows. A Series will not,
with respect to 75% of its assets, invest more than 5% of its assets (taken at
market value at the time of such investment) in securities of any one issuer,
except that this restriction does not apply to U.S. Government securities. A
Series will not, with respect to 75% of its assets, invest more than 10% (taken
at market value at the time of such investment) of any one issuer's outstanding
voting securities, except that this restriction does not apply to U.S. Govern-
ment securities. No Series will concentrate more than 25% of its assets in any
particular industry, except that this restriction does not apply to U.S. Govern-
ment securities.
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PURCHASE OF SHARES
Shares of the Series may be offered for purchase by separate accounts of
insurance companies to serve as an investment medium for the Variable Contracts
issued by the insurance companies and to certain qualified pension and
retirement plans, as permitted under the federal tax rules relating to the
Series serving as investment mediums for Variable Contracts. Shares of the
Series are sold to insurance company separate accounts funding both variable
annuity contracts and variable life insurance contracts and may be sold to
insurance companies that are not affiliated. The Trust currently does not
foresee any disadvantages to Variable Contract Owners or other investors
arising from offering the Trust's shares to separate accounts of unaffiliated
insurers, separate accounts funding both life insurance policies and annuity
contracts, or certain qualified pension and retirement plans; however, due to
differences in tax treatment or other considerations, it is theoretically
possible that the interests of owners of various contracts or pension and
retirement plans participating in the Trust might at some time be in conflict.
However, the Board of Trustees and insurance companies whose separate accounts
invest in the Trust are required to monitor events in order to identify any
material conflicts between variable annuity contract owners and variable life
policy owners, between separate accounts of unaffiliated insurers, and between
various contract owners and pension and retirement plans. The Board of Trustees
will determine what action, if any, should be taken in the event of such a
conflict. If such a conflict were to occur, one or more insurance company
separate accounts might withdraw their investment in the Trust. This might
force the Trust to sell securities at disadvantageous prices.
Shares of each Series are sold at their respective net asset values (without a
sales charge) next computed after receipt of a purchase order by an insurance
company whose separate account invests in the Trust.
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NET ASSET VALUE
A Series' net asset value is determined by dividing the value of each Series'
net assets by the number of its shares outstanding. That determination is made
once each business day, Monday through Friday, at or about 4:00 p.m., New York
City time, on each day that the New York Stock Exchange is open for trading.
The Board of Trustees has established procedures to value each Series' assets
to determine net asset value. In general, these valuations are based on actual
or estimated market value, with special provisions for assets not having
readily available market quotations and short-term debt securities. The net
asset values per share of each Series will fluctuate in response to changes in
market conditions and other factors.
All other Series are valued as follows:
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last
reported sales price, or, if no sales are reported, the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market makers. In other cases, securities are valued
at their fair value as determined in good faith by the Board of Trustees,
although the actual calculations will be made by persons acting under the
direction of the Board and subject to the Board's review. Money market
instruments are valued at market value, except that instruments maturing in
sixty days or less may be valued using the amortized cost method of
valuation. The value of a foreign security is determined in its national
currency based upon the price on the foreign exchange as of its close of
business immediately preceding the time of valuation. Securities traded in over-
the-counter markets outside the United States are valued at the last available
price in the over-the-counter market prior to the time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity sixty days or less at their
date of acquisition valued under the amortized cost method), are normally valued
on the basis of quotes obtained from brokers and dealers or pricing services,
which take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. Debt obligations having
a maturity of sixty days or less may be valued at amortized cost unless the
Portfolio Manager believes that amortized cost does not approximate market
value.
When a Series writes a put or call option, the amount of the premium is included
in the Series' assets and an equal amount is included in its liabilities. The
liability thereafter is adjusted to the current market value of the option.
The premium paid for an option purchased by the Series is recorded as an asset
and subsequently adjusted to market value. Futures and options thereon which
are traded on commodities exchanges or boards of trade will be valued at their
closing settlement price on such exchange or board of trade. Foreign securities
quoted in foreign currencies generally are valued at appropriately translated
foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets in European and
Pacific Basin countries is normally completed well before 4:00 p.m., New York
City time. Trading on these exchanges may not take place on all New York busi-
ness days and in addition, trading takes place in various foreign markets on
days which are not business days in New York and on which the Trust's net asset
value is not calculated. As a result, the calculation of the net asset value of
a Series investing in foreign securities may not take place contemporaneously
with the determination of the prices of the securities included in the calcu-
lation. Further, under the Trust's procedures, the prices of foreign securities
are determined using information derived from pricing services and other
sources. Prices derived under these procedures will be used in determining daily
net asset value. Information that becomes known to the Trust or its agents after
the time that the net asset value is calculated on any business day may be
assessed in determining net asset value per share after the time of receipt of
the information, but will not be used to retroactively adjust the price of the
security so determined earlier or on a prior day. Events that may affect the
value of these securities that occur between the time their prices are deter-
mined and the time the Series' net asset value is determined may not be re-
flected in the calculation of net asset value of the Series unless the Manager
or the Portfolio Manager, acting under authority delegated by the Board of
Trustees, deems that the particular event would
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materially affect net asset value. In this event, the securities would
be valued at fair market value as determined in good faith by the Board of
Trustees of the Trust, although the actual calculations will be made by the
Manager or the Portfolio Manager acting under the direction of the Board and
subject to the Board's review.
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REDEMPTION OF SHARES
Shares of any Series may be redeemed on any business day. Redemptions are
effected at the per share net asset value next determined after receipt of the
redemption request by an insurance company whose separate account invests in
the Series. Redemption proceeds normally will be paid within seven days
following receipt of instructions in proper form. The right of redemption may
be suspended by the Trust or the payment date postponed beyond seven days when
the New York Stock Exchange is closed (other than customary weekend and holiday
closings) or for any period during which trading thereon is restricted because
an emergency exists, as determined by the SEC, making disposal of portfolio
securities or valuation of net assets not reasonably practicable, and whenever
the SEC has by order permitted such suspension or postponement for the
protection of shareholders. If the Board of Trustees should determine that it
would be detrimental to the best interests of the remaining shareholders of a
Series to make payment wholly or partly in cash, the Series may pay the
redemption price in whole or part by a distribution in kind of securities from
the portfolio of the Series, in lieu of cash, in conformity with applicable
rules of the SEC. If shares are redeemed in kind, the redeeming shareholder
might incur brokerage costs in converting the assets into cash.
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EXCHANGES
Shares of any one Series may be exchanged for shares of any of the other Series
described in this Prospectus. Exchanges are treated as a redemption of shares
of one Series and a purchase of shares of one or more of the other Series and
are effected at the respective net asset values per share of each Series on the
date of the exchange. The Trust reserves the right to modify or discontinue its
exchange privilege at any time without notice. Variable Contract Owners do not
deal directly with the Trust with respect to the purchase, redemption, or
exchange of shares of the Series, and should refer to the prospectus for the
applicable Variable Contract for information on allocation of premiums and on
transfers of account value among divisions of the pertinent insurance company
separate account that invest in the Series.
The Trust reserves the right to discontinue offering shares of one or more
Series at any time. In the event that a Series ceases offering its shares,
any investments allocated by an insurance company to such Series will be
invested in the Liquid Asset Series or any successor to such Series.
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PORTFOLIO TRANSACTIONS
BROKERAGE SERVICES
Pursuant to the Portfolio Management Agreements, the Portfolio Manager places
orders for the purchase and sale of portfolio investments for the Series'
accounts with brokers or dealers selected by the Portfolio Manager in its dis-
cretion. In executing transactions, the Portfolio Manager will attempt to obtain
the best execution for a Series, taking into account such factors as price (in-
cluding the applicable brokerage commission or dollar spread), size of order,
the nature of the market for the security, the timing of the transaction, the
reputation, the experience and financial stability of the broker dealer involv-
ed, the quality of the service, the difficulty of execution, execution capabili-
ties, and operational facilities of the firms involved, and the firm's risk in
positioning a block of securities. In transactions on stock exchanges in the
United States, payments of brokerage commissions are negotiated. In effecting
purchases and sales of portfolio securities in transactions on U.S. stock ex-
changes for the account of a Series, the Portfolio Manager may pay higher com-
mission rates than the lowest available when the Portfolio Manager believes it
is
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reasonable to do so in light of the value of the brokerage and research
services provided by the broker effecting the transaction. In the case of
securities traded on some foreign stock exchanges, brokerage commissions may be
fixed and the Portfolio Manager may be unable to negotiate commission rates for
these transactions. In the case of securities traded on the over-the-counter
markets, there is generally no stated commission, but the price includes an
undisclosed commission or markup.
Some securities considered for investment by the Series may also be considered
for other clients served by the Portfolio Manager and/or its affiliates. For
information on trade allocation, see "Portfolio Transactions and Brokerage--
Investment Decisions" in the Statement of Additional Information.
A Portfolio Manager may place orders for the purchase and sale of portfolio
securities with itself, acting as broker-dealer, or with a broker-dealer that
is an affiliate of the Portfolio Manager or the Trust where, in the judgment
of the Portfolio Manager, such firm will be able to obtain a price and
execution at least as favorable as other qualified brokers. SEC rules further
require that commission paid to such an affiliated broker-dealer or Portfolio
Manager by a Series on exchange transactions not exceed "usual and customary
brokerage commissions."
PORTFOLIO TURNOVER
For reporting purposes, each Series' portfolio turnover rate is calculated by
dividing the value of the lesser of purchases or sales of portfolio securities
for the fiscal year by the monthly average of the value of portfolio securities
owned by the Series during the fiscal year. In determining such portfolio
turnover, all securities whose maturities at the time of acquisition were one
year or less are excluded. A 100% portfolio turnover rate would occur, for
example, if all of the securities in the portfolio (other than short-term
securities) were replaced once during the fiscal year. The portfolio turnover
rate for each of the Series will vary from year to year, and depending on market
conditions, turnover could be greater in periods of unusual market movement and
volatility. A higher turnover rate would result in heavier brokerage commissions
or other transactional expenses which must be borne, directly or indirectly, by
a Series and ultimately by the Series' shareholders. Such transactions may
result in realization of taxable gains. The portfolio turnover rates for each
Series are presented in the data shown in "Financial Highlights" in this
Prospectus.
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DIVIDENDS AND DISTRIBUTIONS
For all other Series, net investment income will be paid annually. Any net
realized long-term capital gains (the excess of net long-term capital gains over
net short-term capital losses) for any Series will be declared and paid at least
once annually. Net realized short-term capital gains may be declared and paid
more frequently.
Any distributions made by any Series will be automatically reinvested in
additional shares of that Series, unless an election is made by a shareholder
to receive distributions in cash. Dividends or distributions by a Series other
than the Liquid Asset Series (which attempts to maintain a constant $1.00 per
share net asset value) will reduce the per share net asset value by the per
share amount so paid.
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FEDERAL INCOME TAX STATUS
Each Series intends to qualify each year and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, a Series generally expects not to be subject
to federal income tax if it meets certain source of income, diversification of
assets, income distribution, and other requirements, to the extent it
distributes its investment company taxable income and its net capital gains.
Distributions of investment company taxable income and net realized capital
gains are automatically reinvested in additional shares of the Series, unless
an election is made by a shareholder to receive distributions in cash. Tax
consequences to the Variable Contract Owners are described in the prospectuses
for the pertinent separate accounts.
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Certain requirements relating to the qualification of a Series as a regulated
investment company under the Code may limit the extent to which a Series will
be able to engage in transactions in options, futures contracts, or forward
contracts.
To comply with regulations under Section 817(h) of the Code, each Series
generally will be required to diversify its investments, so that on the last
day of each quarter of a calendar year, no more than 55% of the value of its
assets is represented by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented by any three
investments, and no more than 90% is represented by any four investments.
For this purpose, securities of a single issuer are treated as one investment
and each U.S. Government agency or instrumentality is treated as a separate
issuer. Any security issued, guaranteed, or insured (to the extent so
guaranteed or insured) by the United States or an agency or instrumentality of
the United States is treated as a security issued by the U.S. Government or its
agency or instrumentality, whichever is applicable. These regulations will
limit the ability of a Series to invest more than 55% of its assets in direct
obligations of the U.S. Treasury or in obligations which are deemed to be
issued by a particular agency or instrumentality of the U.S. Government. If a
Series fails to meet the diversification requirements under Code Section
817(h), income with respect to Variable Contracts invested in the Series at
any time during the calendar quarter in which the failure occurred could
become currently taxable to the owners of such Variable Contracts and income
for prior periods with respect to such Contracts also would be taxable, most
likely in the year of the failure to achieve the required diversification.
Other adverse tax consequences also could ensue. If a Series failed to qualify
as a regulated investment company, the results would be substantially the same
as a failure to meet the diversification requirements under Code Section 817(h).
In connection with the issuance of the regulations governing diversification
under Section 817(h) of the Code, the Treasury Department announced that it
would issue future regulations or rulings addressing the circumstances in
which a Variable Contract Owner's control of the investments of a separate
account may cause the contract owner, rather than the insurance company, to
be treated as the owner of the assets held by the separate account. If the
Variable Contract Owner is considered the owner of the securities underlying
the separate account, income and gains produced by those securities would be
included currently in the Variable Contract Owner's gross income. It is not
known what standards will be incorporated in future regulations or other
pronouncements.
In the event that unfavorable rules or regulations are adopted, there can be
no assurance that the Series will be able to operate as currently described
in the Prospectus, or that a Series will not have to change its investment
objectives, investment policies, or investment restrictions. While a Series'
investment objective is fundamental and may be changed only by a vote of a
majority of its outstanding shares, the Trustees have reserved the right to
modify the investment policies of a Series as necessary to prevent any such
prospective rules and regulations from causing the Variable Contract Owners
to be considered the owners of the Series underlying the separate accounts.
See "Taxation" in the Trust's Statement of Additional Information for more
information on taxes, including information on the taxation of distributions
from a Series. Reference is made to the prospectus or offering memorandum of the
applicable separate account for information regarding the federal income tax
treatment respecting a Variable Contract.
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OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on August 3, 1988,
and currently consists of twenty-four portfolios that are operational, three
of which are described in this Prospectus. Other portfolios may be offered by
means of a separate prospectus. The Board of Trustees may establish additional
portfolios in the future. The capitalization of the Trust consists solely of an
unlimited number of shares of beneficial interest with a par value of $0.001
each. When issued in accordance with the terms of the Trust's Agreement
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and Declaration of Trust ("Declaration of Trust"), shares of the Trust
are fully paid, freely transferable, and non-assessable by the Trust.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees, or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations
and thus should be considered remote.
VOTING RIGHTS
Shareholders of the Series are given certain voting rights. Each share of each
Series will be given one vote, unless a different allocation of voting rights
is required under applicable law for a mutual fund that is an investment medium
for variable insurance products.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
Series, or for the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies, or approving a contract for investment
advisory services. In the case of Variable Contracts, in accordance with current
laws, it is anticipated that an insurance company issuing a Variable Contract
funded by a Separate Account that invests in a Series and that is registered
with the SEC as a unit investment trust will request voting instructions from
Variable Contract Owners and will vote shares or other voting interests in the
separate account in proportion to the voting instructions received.
PERFORMANCE INFORMATION
The Trust may, from time to time, the current yield and total return of the
Series in advertisements and sales literature. In the case of Variable
Contracts, performance information for the Series will not be advertised or
included in sales literature unless accompanied by comparable performance
information for a separate account to which the Series offers their shares.
For the Series, any quotations of yield will be based on all
investment income per share earned during a given 30-day period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and will be computed by dividing net investment income by
the maximum public offering price per share on the last day of the period.
Quotations of average annual total return for any Series will be expressed in
terms of the average annual compounded rate of return on a hypothetical
investment in the Series over a period of one, five, or ten years
(or, if less, up to the life of the Series), will reflect the deduction of a
proportional share of Series expenses (on an annual basis), and will assume
that all dividends and distributions are reinvested when paid. Quotations of
total return may also be shown for other periods.
Quotations of yield or total return for the Series will not take into account
charges or deductions against any separate account to which the Series' shares
are sold or charges and deductions against the pertinent Variable Contract,
although comparable performance information for the separate account will take
such charges into account. Performance information for any Series reflects only
the performance of a hypothetical investment in the Series during the particular
time period on which the calculations are based. Performance information should
be considered in light of the Series' investment objectives and policies,
characteristics, and quality of the portfolios, and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future. For a description of the methods used to
determine yield and total return for the Series, see the Statement of
Additional Information.
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LEGAL COUNSEL
Sutherland, Asbill & Brennan LLP, 1275 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2404 serves as counsel to the Trust.
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INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116-5072 serves as
independent auditors of the Trust.
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FINANCIAL STATEMENTS
The Trust's audited financial statements dated as of December 31, 1997 for all
Series, including notes thereto, are incorporated by reference in the Statement
of Additional Information from the Trust's Annual Report dated as of December
31, 1997. Information in the financial statements for all Series for the years
ended December 31, 1997 1996, 1995, 1994 and 1993 has been audited by Ernst &
Young LLP. Information in the financial statements for all Series except the
Managed Global Series for the years ended December 31, 1992, 1991, 1990, and
1989 was audited by another independent auditor. These financial statements do
not include information on the Growth Opportunities, Developing World, Mid-Cap
Growth, Research, Total Return, Growth & Income, Value + Growth and Global
Fixed Income Series because the Series had not commenced operations on December
31, 1997.
The information in the financial statements for the Managed Global Series is
presented as if the reorganization described under "Other Information-History
of the Managed Global Series" had always been in effect. Information in the
financial statements of the Managed Global Series for the period of October
21, 1992 (commencement of operations) to December 31, 1995 has been examined
by Ernst & Young LLP.
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YEAR 2000
Based on a study of its computer software systems and hardware, the Manager in
conjunction with an affiliate, Golden American Life Insurance Company ("Golden
American"), have determined their exposure to the Year 2000 change of the
century date issue. Some of these systems support certain trust operations.
The Manager believes its and Golden American's systems are or will be
substantially compliant by Year 2000 and has engaged external consultants to
validate this assumption. The Manager is in contact with the Trust's
Portfolio Managers and third party vendors to ensure that their systems will
be compliant by Year 2000. To the extent these Portfolio Managers and third
parties would be unable to transact business in the Year 2000 and thereafter,
the Trust's operations could be adversely affected.
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File Nos. 33-23512, 811-5629
Filed under Rule 497 (c)
THE GCG TRUST
1001 Jefferson Street, Suite 400
Wilmington, Delaware 19801
(302) 576-3400
Statement of Additional Information
The date of this Statement of Additional Information is
May 1, 1998
This Statement of Additional Information discusses twenty-three
portfolios (the "Series") of The GCG Trust (the "Trust"), which
is an open-end management investment company. The Series
described herein are as follows: the Multiple Allocation Series;
the Fully Managed Series; the Limited Maturity Bond Series; the
Hard Assets Series; the Real Estate Series; the All-Growth
Series; the Capital Appreciation Series; the Rising Dividends
Series; the Emerging Markets Series; the Value Equity Series; the
Strategic Equity Series; the Small Cap Series; the Managed Global
Series; the Liquid Asset Series; the Mid-Cap Growth Series, the
Research Series, the Total Return Series, the Growth & Income
Series, the Value + Growth Series, the Global Fixed Income
Series, the Growth Opportunities Series, the Developing World
Series and the Market Manager Series. The Series' Manager is
Directed Services, Inc. (the "Manager").
This Statement of Additional Information is intended to
supplement the information provided to investors in the
Prospectus of The GCG Trust dated May 1, 1998 (which
pertains to all Series other than the Market Manager Series) and
the Prospectus of the Market Manager Series dated May 1, 1998.
The Prospectuses have been filed with the Securities and Exchange
Commission as part of the Trust's Registration Statement.
Investors should note, however, that this Statement of Additional
Information is not itself a prospectus and should be read
carefully in conjunction with the Prospectuses and retained for
future reference. The contents of this Statement of Additional
Information are incorporated by reference in the Prospectuses in
their entirety. A copy of either Prospectus may be obtained free
of charge from the Trust at the address and telephone number
listed above.
MANAGER:
DIRECTED SERVICES, INC.
(800) 447-3644
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TABLE OF CONTENTS
Page
INTRODUCTION
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. Government Securities
Debt Securities
High Yield Bonds
Brady Bonds
Sovereign Debt
Mortgage-Backed Securities
GNMA Certificates
FNMA and FHLMC Mortgage-Backed Obligations
Collateralized Mortgage Obligations (CMOs)
Other Mortgage-Backed Securities
Other Asset-Backed Securities
Variable and Floating Rate Securities
Banking Industry and Savings Industry Obligations
Commercial Paper
Repurchase Agreements
Reverse Repurchase Agreements
Lending Portfolio Securities
Warrants
Other Investment Companies
Short Sales
Short Sales Against the Box
Futures Contracts and Options on Futures Contracts
General Description of Futures Contracts
Interest Rate Futures Contracts
Options on Futures Contracts
Stock Index Futures Contracts
Gold Futures Contracts
Limitations
Options on Securities and Securities Indexes
Purchasing Options on Securities
Writing Covered Call and Secured Put Options
Options on Securities Indexes
Over-the-Counter Options
General
When-Issued or Delayed Delivery Securities
Foreign Currency Transactions
Options on Foreign Currencies
Common Stock and Other Equity Securities
Convertible Securities
Currency Management
Dollar Roll Transactions
Equity and Debt Securities Issued or Guaranteed by
Supranational Organizations
Exchange Rate Related Securities
Geographical and Industry Concentration
Illiquid Securities
Restricted Securities
Lease Obligation Bonds
Small Companies
Strategic Transactions
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INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Multiple Allocation Series, the Fully Managed Series, the Limited
Maturity Bond Series, the Hard Assets Series, the Real Estate
Series, the All-Growth Series; the Capital Appreciation Series, the
Rising Dividends Series, the Emerging Markets Series, the
Value Equity Series, the Strategic Equity Series, the Small Cap
Series, the Managed Global Series, and the Liquid Asset Series
Total Return Series, Research Series, Mid-Cap Growth Series and
Global Fixed Income Series
Value + Growth Series
Growth & Income Series
Growth Opportunities and Developing World Series
Non-Fundamental Investment Restrictions
Rising Dividends Series, Emerging Markets Series, Value Equity
Series, Strategic Equity Series, Small Cap Series, Managed Global
Series and Market Manager Series
Total Return Series, Research Series, Mid-Cap Growth Series and
Global Fixed Income Series
Value + Growth Series
Growth & Income Series
Growth Opportunities and Developing World Series
MANAGEMENT OF THE TRUST
The Management Agreement
Distribution of Trust Shares
Purchases and Redemptions
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment Decisions
Brokerage and Research Services
NET ASSET VALUE
PERFORMANCE INFORMATION
TAXATION
Distributions
Other Taxes
OTHER INFORMATION
Capitalization
Voting Rights
Custodian and Other Service Providers
Independent Auditors
Counsel
Registration Statement
FINANCIAL STATEMENTS
APPENDIX 1: Description of Bond Ratings A-1
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INTRODUCTION
This Statement of Additional Information is designed to
elaborate upon information contained in the Prospectuses for the
Series, including the discussion of certain securities and
investment techniques. The more detailed information contained
herein is intended solely for investors who have read the
Prospectuses and are interested in a more detailed explanation of
certain aspects of some of the Series' securities and some
investment techniques. Some of the Series' investment techniques
are described only in the Prospectuses and are not repeated
herein. Captions and defined terms in this Statement of
Additional Information generally correspond to like captions and
terms in the Series' Prospectuses.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or are
guaranteed by, the U.S. Government, its agencies or
instrumentalities. Treasury bills, notes, and bonds are direct
obligations of the U.S. Treasury. Securities guaranteed by the
U.S. Government include: federal agency obligations guaranteed as
to principal and interest by the U.S. Treasury (such as GNMA
certificates, described in the section on "Mortgage-Backed
Securities," and Federal Housing Administration debentures). In
guaranteed securities, the payment of principal and interest is
unconditionally guaranteed by the U.S. Government, and thus they
are of the highest credit quality. Such direct obligations or
guaranteed securities are subject to variations in market value
due to fluctuations in interest rates, but, if held to maturity,
the U.S. Government is obligated to or guarantees to pay them in
full.
Securities issued by U.S. Government instrumentalities and
certain federal agencies are neither direct obligations of nor
guaranteed by the Treasury. However, they involve federal
sponsorship in one way or another: some are backed by specific
types of collateral; some are supported by the issuer's right to
borrow from the Treasury; some are supported by the discretionary
authority of the Treasury to purchase certain obligations of the
issuer; others are supported only by the credit of the issuing
government agency or instrumentality. These agencies and
instrumentalities include, but are not limited to, Federal Land
Banks, Farmers Home Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), Student Loan Mortgage Association, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, and Federal Home
Loan Banks.
Certain Series may also purchase obligations of the
International Bank for Reconstruction and Development, which,
while technically not a U.S. Government agency or
instrumentality, has the right to borrow from the participating
countries, including the United States.
DEBT SECURITIES
For any Series that does not specify any particular rating
criteria, that Series may invest in debt securities as stated in
each Series investment objectives and policies in the Prospectus.
Some Series may invest only in debt securities that are
investment grade, i.e., rated BBB or better by Standard & Poor's
Rating Group ("Standard & Poor's") and Baa or better by Moody's
Investors Service, Inc. ("Moody's"), or, if not rated by
Standard & Poor's or Moody's, of equivalent quality as determined
by the Portfolio Manager.
The investment return on a corporate debt security reflects
interest earnings and changes in the market value of the
security. The market value of corporate debt obligations may be
expected to rise and fall inversely with interest rates
generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest
or principal payments at the time called for by an instrument.
Bonds rated BBB or Baa, which are considered medium-grade
category bonds, do not have economic characteristics that provide
the high degree of security with respect to payment of principal
and interest associated with higher rated bonds, and generally
have some speculative characteristics. A bond will be placed in
this rating category where interest payments and principal
security appear adequate for the present, but economic
characteristics that provide longer
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term protection may be
lacking. Any bond, and particularly those rated BBB or Baa, may
be susceptible to changing conditions, particularly to economic
downturns, which could lead to a weakened capacity to pay
interest and principal.
New issues of certain debt securities are often offered on a
when-issued or firm-commitment basis; that is, the payment
obligation and the interest rate are fixed at the time the buyer
enters into the commitment, but delivery and payment for the
securities normally take place after the customary settlement
time. The value of when-issued securities or securities
purchased on a firm-commitment basis may vary prior to and after
delivery depending on market conditions and changes in interest
rate levels. However, the Series will not accrue any income on
these securities prior to delivery. The Series will maintain in
a segregated account with its custodian an amount of cash or high
quality debt securities equal (on a daily marked-to-market basis)
to the amount of its commitment to purchase the when-issued
securities or securities purchased on a firm-commitment basis.
Many securities of foreign issuers are not rated by Moody's
or Standard and Poor's; therefore, the selection of such issuers
depends, to a large extent, on the credit analysis performed or
used by the Series' Portfolio Manager.
HIGH YIELD BONDS
"High Yield Bonds" (which are commonly referred to as "junk
bonds"), are bonds rated lower than Baa or BBB, or, if not rated
by Moody's or Standard & Poor's, of equivalent quality. In
general, high yield bonds are not considered to be investment
grade, and investors should consider the risks associated with
high yield bonds before investing in the pertinent Series.
Investment in such securities generally provides greater income
and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically
entail greater price volatility and principal and income risk.
Investment in high yield bonds involves special risks in
addition to the risks associated with investments in higher rated
debt securities. High yield bonds are regarded as predominately
speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The high yield bond market
is relatively new, and many of the outstanding high yield bonds
have not endured a lengthy business recession. A long-term track
record on bond default rates, such as that for investment grade
corporate bonds, does not exist for the high yield market.
Analysis of the creditworthiness of issuers of debt securities,
and the ability of a Series to achieve its investment objective
may, to the extent of investment in high yield bonds, be more
dependent upon such creditworthiness analysis than would be the
case if the Series were investing in higher quality bonds.
High yield bonds may be more susceptible to real or
perceived adverse economic and competitive industry conditions
than investment grade bonds. The prices of high yield bonds have
been found to be less sensitive to interest rate changes than
higher rated investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield bond prices because
the advent of a recession could lessen the ability of a highly
leveraged company to make principal and interest payments on its
debt securities. If an issuer of high yield bonds defaults, in
addition to risking payment of all or a portion of interest and
principal, the Series may incur additional expenses to seek
recovery. In the case of high yield bonds structured as zero
coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and
therefore tend to be more volatile than securities which pay
interest periodically and in cash.
The secondary market on which high yield bonds are traded
may be less liquid than the market for higher grade bonds. Less
liquidity in the secondary trading market could adversely affect
the price at which the Series could sell a high yield bond, and
could adversely affect and cause large fluctuations in the daily
net asset value of the Series' shares. Adverse publicity and
investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield
bonds, especially in a thinly traded market. When secondary
markets for high yield bonds are less liquid than the market for
higher grade bonds, it may be more difficult to value the
securities because such valuation may require more research, and
elements of judgment may play a greater role in the valuation
because there is less reliable, objective data available.
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There are also certain risks involved in using credit
ratings for evaluating high yield bonds. For example, credit
ratings evaluate the safety of principal and interest payments,
not the market value risk of high yield bonds. Also, credit
rating agencies may fail to reflect subsequent events.
BRADY BONDS
"Brady Bonds," are created through the exchange of existing
commercial bank loans to sovereign entities for new obligations
in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Bonds are not considered U.S. Government
securities and are considered speculative. Brady Plan debt
restructuring have been implemented to date in several countries,
including Mexico, Venezuela, Argentina, Uruguay, Costa Rica,
Bulgaria, the Dominican Republic, Jordan, Nigeria, Bolivia,
Ecuador, Niger, Brazil, Peru, Panama, Poland and the Philippines
(collectively, the "Brady Countries"). It is expected that other
countries will undertake a Brady Plan debt restructuring in the
future. Brady Bonds have been issued only recently, and
accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various
currencies (although most are U.S. dollar-denominated) and they
are actively traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which
may be fixed rate par bonds or floating rate discount bonds, are
generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds which have the same maturity as the Brady
Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by
cash or securities in an amount that, in the case of fixed rate
bonds, is equal to at least one year of interest payments or, in
the case of floating rate bonds, initially is equal to at least
one year's interest payments based on the applicable interest
rate at the time and is adjusted at regular intervals thereafter.
Certain Brady Bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or
four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest
payments; (iii) the uncollateralized interest payments; and (iv)
any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal
repayments at final maturity fully collateralized by U.S.
Treasury zero coupon bonds (or comparable collateral denominated
in other currencies) and interest coupon payments collateralized
on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the
Venezuelan Brady Bonds and the Argentine Brady Bonds issued to
date have principal repayments at final maturity collateralized
by U.S. Treasury zero coupon bonds (or comparable collateral
denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for
Argentina) rolling-forward basis by securities held by the
Federal Reserve Bank of New York as collateral agent.
Brady Bonds involve various risk factors including residual
risk and the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady
Bonds. There can be no assurance that Brady Bonds in which the
Series may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the
Series to suffer a loss of interest or principal on any of its
holdings.
SOVEREIGN DEBT
Debt obligations known as "Sovereign debt" are debt
obligations of governmental issuers in emerging market countries
and industrialized countries. Some Series may invest in debt
obligations issued or guaranteed by a foreign government or any
of its political subdivisions, authorities, agencies, or
instrumentalities, or by supranational entities, which, at the
time of investment, are rated A or better by Standard & Poor's or
Moody's or, if not rated by Standard & Poor's or Moody's,
determined by the Portfolio Manager to be of equivalent quality.
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Certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. The issuer
or governmental authority that controls the repayment of
sovereign debt may not be willing or able to repay the principal
and/or pay interest when due in accordance with the terms of such
obligations. A governmental entity's willingness or ability to
repay principal and pay interest due in a timely manner may be
affected by, among other factors, its cash flow situation, the
extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size
of the debt service burden to the economy as a whole, the
government's dependence on expected disbursements from third
parties, the government's policy toward the International
Monetary Fund and the political constraints to which a government
may be subject. Governmental entities may also be dependent on
expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest
arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may
be conditioned on a debtor's implementation of economic reforms
or economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest
when due may result in the cancellation of such third parties'
commitments to lend funds to the government debtor, which may
further impair such debtor's ability or willingness to timely
service its debts. Holders of sovereign debt may be requested to
participate in the rescheduling of such debt and to extend
further loans to governmental entities. In addition, no
assurance can be given that the holders of commercial bank debt
will not contest payments to the holders of other foreign
government debt obligations in the event of default under their
commercial bank loan agreements.
The issuers of the government debt securities in which the
Series may invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which
led to defaults on certain obligations and the restructuring of
certain indebtedness. Restructuring arrangements have included,
among other things, reducing and rescheduling interest and
principal payments by negotiating new or amended credit
agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance
interest payments. There can be no assurance that the Brady
Bonds and other foreign government debt securities in which the
Series may invest will not be subject to similar restructuring
arrangements or to requests for new credit which may adversely
affect the Series' holdings. Furthermore, certain participants
in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore
have access to information not available to other market
participants.
MORTGAGE-BACKED SECURITIES
GNMA CERTIFICATES. Government National Mortgage Association
("GNMA") certificates are mortgage-backed securities representing
part ownership of a pool of mortgage loans on which timely
payment of interest and principal is guaranteed by the full faith
and credit of the U.S. Government. GNMA is a wholly owned U.S.
Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of
principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions,
commercial banks, and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Interests in pools of mortgage-backed securities differ from
other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal
payments at maturity or specified call dates. Instead, these
securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a
"pass-through" of the periodic payments made by the individual
borrowers on the residential mortgage loans, net of any fees paid
to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred.
Mortgage-backed securities issued by GNMA are described as
"modified pass-through" securities. These securities entitle the
holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment
dates, regardless of whether or not the mortgagor actually makes
the payment. Although GNMA guarantees timely payment even if
homeowners delay or default, tracking the "pass-through" payments
may, at times, be difficult. Expected payments may be delayed
due to the delays in registering the newly traded paper
securities. The custodian's policies for crediting
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missed
payments while errant receipts are tracked down may vary. Other
mortgage-backed securities, such as those of the Federal Home
Loan Mortgage Corporation ("FHLMC") and the Federal National
Mortgage Association ("FNMA"), trade in book- entry form and
should not be subject to the risk of delays in timely payment of
income.
Although the mortgage loans in the pool will have maturities
of up to 30 years, the actual average life of the GNMA
certificates typically will be substantially less because the
mortgages will be subject to normal principal amortization and
may be prepaid prior to maturity. Early repayments of principal
on the underlying mortgages may expose a Series to a lower rate
of return upon reinvestment of principal. Prepayment rates vary
widely and may be affected by changes in market interest rates.
In periods of falling interest rates, the rate of prepayment
tends to increase, thereby shortening the actual average life of
the GNMA certificates. Conversely, when interest rates are
rising, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the GNMA certificates.
Accordingly, it is not possible to accurately predict the average
life of a particular pool. Reinvestment of prepayments may occur
at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to
reinvest prepayments of principal at current rates, GNMA
certificates can be less effective than typical bonds of similar
maturities at "locking in" yields during periods of declining
interest rates, although they may have comparable risks of
decline in value during periods of rising interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-
related guarantors (i.e., not backed by the full faith and credit
of the U.S. Government) include the FNMA and the FHLMC. FNMA, a
federally chartered and privately owned corporation, issues pass-
through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment
of principal and interest, but this guarantee is not backed by
the full faith and credit of the U.S. Government. FNMA also
issues REMIC Certificates, which represent an interest in a trust
funded with FNMA Certificates. REMIC Certificates are guaranteed
by FNMA, and not by the full faith and credit of the U.S.
Government.
FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases
conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved
seller/servicers which include state and federally chartered
savings and loan associations, mutual savings banks, commercial
banks, credit unions, and mortgage bankers. FHLMC, a corporate
instrumentality of the United States, was created by Congress in
1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates
("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and ultimate collection of principal and maintains
reserves to protect holders against losses due to default. PCs
are not backed by the full faith and credit of the U.S.
Government. As is the case with GNMA certificates, the actual
maturity and realized yield on particular FNMA and FHLMC pass-
through securities will vary based on the prepayment experience
of the underlying pool of mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs). A CMO is a
hybrid between a mortgage-backed bond and a mortgage pass-through
security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a
different stated maturity. Actual maturity and average life will
depend upon the prepayment experience of the collateral. CMOs
provide for a modified form of call protection through a de facto
breakdown of the underlying pool of mortgages according to how
quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying investors, including
prepayments, is first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes
receive principal only after the first class has been retired.
An investor is partially guarded against a sooner-than-desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer")
issues multiple Series (e.g., A, B, C, Z) of CMO bonds ("Bonds").
Proceeds of the Bond offering are used to purchase mortgages or
mortgage pass-through
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certificates ("Collateral"). The
Collateral is pledged to a third-party trustee as security for
the Bonds. Principal and interest payments from the Collateral
are used to pay principal on the Bonds in the order A, B, C, Z.
The Series A, B, and C Bonds all bear current interest. Interest
on the Series Z Bond is accrued and added to the principal; a
like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are
paid in full, interest and principal on the Series Z Bond begin
to be paid currently. With some CMOs, the issuer serves as a
conduit to allow loan originators (primarily builders or savings
and loan associations) to borrow against their loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings
and loan institutions, private mortgage insurance companies,
mortgage bankers, and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans.
In addition, such issuers may be the originators and/or servicers
of the underlying mortgage loans as well as the guarantors of the
mortgage-backed securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in
the former pools. Timely payment of interest and principal of
these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit. The insurance and guarantees
are issued by governmental entities, private insurers, and the
mortgage poolers. Such insurance, guarantees, and the
creditworthiness of the issuers thereof will be considered in
determining whether a mortgage- backed security meets a Series'
investment quality standards. There can be no assurance that the
private insurers or guarantors can meet their obligations under
the insurance policies or guarantee arrangements.
Some Series may buy mortgage-backed securities without
insurance or guarantees, if the Portfolio Manager determines that
the securities meet a Series' quality standards. Although the
market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be
readily marketable. A Series will not purchase mortgage-backed
securities or any other assets which, in the opinion of the
Portfolio Manager, are illiquid if, as a result, the Series will
exceed its illiquidity cap. As new types of mortgage-backed
securities are developed and offered to investors, the Portfolio
Manager will, consistent with a Series' investment objectives,
policies, and quality standards, consider making investments in
such new types of mortgage-backed securities.
It is expected that governmental, government-related, or
private entities may create mortgage loan pools and other
mortgage-backed securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those
described above. As new types of mortgage-backed securities are
developed and offered to investors, investments in such new types
of mortgage-backed securities may be considered for the Series.
OTHER ASSET-BACKED SECURITIES
Asset-backed securities (unrelated to mortgage loans) are
securities such as "CARS/SM/" ("Certificates for Automobile
Receivables/SM/") and Credit Card Receivable Securities. The
Market Manager Series may not invest in these securities.
CARS/SM/ represent undivided fractional interests in a trust
("trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the
vehicles securing the contracts. Payments of principal and
interest on CARS/SM/ are "passed-through" monthly to certificate
holders, and are guaranteed up to certain amounts by a letter of
credit issued by a financial institution unaffiliated with the
trustee or originator of the trust. Underlying sales contracts
are subject to prepayment, which may reduce the overall return to
certificate holders. Certificate holders may also experience
delays in payment or losses on CARS/SM/ if the full amounts due on
underlying sales contracts are not realized by the trust because
of unanticipated legal or administrative costs of enforcing the
contracts, or because of depreciation, damage, or loss of the
vehicles securing the contracts, or other factors.
If consistent with its investment objective and policies, a
Series may invest in "Credit Card Receivable Securities." Credit
Card Receivable Securities are asset-backed securities backed by
receivables from revolving credit card agreements. Credit
balances on revolving credit card agreements ("Accounts") are
generally paid down
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more rapidly than are Automobile Contracts.
Most of the Credit Card Receivable Securities issued publicly to
date have been Pass-Through Certificates. In order to lengthen
the maturity of Credit Card Receivable Securities, most such
securities provide for a fixed period during which only interest
payments on the underlying Accounts are passed through to the
security holder and principal payments received on such Accounts
are used to fund the transfer to the pool of assets supporting
the related Credit Card Receivable Securities of additional
credit card charges made on an Account. The initial fixed period
usually may be shortened upon the occurrence of specified events
which signal a potential deterioration in the quality of the
assets backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life of
an issue of Credit Card Receivable Securities thus depends upon
the continued generation of additional principal amounts in the
underlying Accounts during the initial period and the non-
occurrence of specified events. The Tax Reform Act of 1986,
pursuant to which a taxpayer's ability to deduct consumer
interest in his or her federal income tax calculation was
completely phased out for taxable years beginning in 1991, as
well as competitive and general economic factors, could adversely
affect the rate at which new receivables are created in an
Account and conveyed to an issuer, shortening the expected
weighted average life of the related Credit Card Receivable
Security, and reducing its yield. An acceleration in
cardholders' payment rates or any other event which shortens the
period during which additional credit card charges on an Account
may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could have a similar effect on
the weighted average life and yield.
Credit card holders are entitled to the protection of a
number of state and federal consumer credit laws, many of which
give such holder the right to set off certain amounts against
balances owed on the credit card, thereby reducing amounts paid
on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
VARIABLE AND FLOATING RATE SECURITIES
Variable rate securities provide for automatic establishment
of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating rate securities provide for
automatic adjustment of the interest rate whenever some specified
interest rate index changes. The interest rate on variable or
floating rate securities is ordinarily determined by reference to
or is a percentage of a bank's prime rate, the 90-day U.S.
Treasury bill rate, the rate of return on commercial paper or
bank certificates of deposit, an index of short-term interest
rates, or some other objective measure.
Variable or floating rate securities frequently include a
demand feature entitling the holder to sell the securities to the
issuer at par value. In many cases, the demand feature can be
exercised at any time on 7 days' notice; in other cases, the
demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year. Some
securities which do not have variable or floating interest rates
may be accompanied by puts producing similar results and price
characteristics.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Series may invest in (i) certificates of deposit, time
deposits, bankers' acceptances, and other short-term debt
obligations issued by commercial banks and in (ii) certificates
of deposit, time deposits, and other short-term obligations
issued by savings and loan associations ("S&Ls"). Some Series
may invest in obligations of foreign branches of commercial banks
and foreign banks so long as the securities are U.S. dollar-
denominated, and some Series may also invest in obligations of
foreign branches of commercial banks and foreign banks if the
securities are not U.S. dollar-denominated. See "Foreign
Securities" discussion in The GCG Trust Prospectus for further
information regarding risks attending investment in foreign
securities.
Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, which are
normally drawn by an importer or exporter to pay for specific
merchandise, and which are "accepted" by a bank, meaning, in
effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed-time deposits are
bank obligations payable at a stated maturity date and bearing
interest at a fixed rate. Fixed-time deposits may be withdrawn
on demand by the investor, but may be subject to
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early withdrawal
penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual
restrictions on the right to transfer a beneficial interest in a
fixed-time deposit to a third party, because there is no market
for such deposits. A Series will not invest in fixed-time
deposits (i) which are not subject to prepayment or (ii) which
provide for withdrawal penalties upon prepayment (other than
overnight deposits), if, in the aggregate, more than 10% or 15%,
depending on the Series, of its assets would be invested in such
deposits, in repurchase agreements maturing in more than seven
days, and in other illiquid assets.
Obligations of foreign banks involve somewhat different
investment risks than those affecting obligations of U.S. banks,
which include: (i) the possibility that their liquidity could be
impaired because of future political and economic developments;
(ii) their obligations may be less marketable than comparable
obligations of U.S. banks; (iii) a foreign jurisdiction might
impose withholding taxes on interest income payable on those
obligations; (iv) foreign deposits may be seized or nationalized;
(v) foreign governmental restrictions, such as exchange controls,
may be adopted which might adversely affect the payment of
principal and interest on those obligations; and (vi) the
selection of those obligations may be more difficult because
there may be less publicly available information concerning
foreign banks and/or because the accounting, auditing, and
financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to
U.S. banks. Foreign banks are not generally subject to
examination by any U.S. Government agency or instrumentality.
Certain of the Series invest only in bank and S&L
obligations as specified in that Series' investment policies.
Other Series, except the Managed Global Series, will not invest
in obligations issued by a commercial bank or S&L unless:
(i) the bank or S&L has total assets of least $1 billion, or
the equivalent in other currencies, and the institution has
outstanding securities rated A or better by Moody's or Standard
and Poor's, or, if the institution has no outstanding
securities rated by Moody's or Standard & Poor's, it has, in
the determination of the Portfolio Manager, similar
creditworthiness to institutions having outstanding securities
so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are
insured by the FDIC or the Savings Association Insurance Fund
("SAIF"), as the case may be; and
(iii) in the case of a foreign bank, the security is, in the
determination of the Series' Portfolio Manager, of an
investment quality comparable with other debt securities which
may be purchased by the Series. These limitations do not
prohibit investments in securities issued by foreign branches
of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
The Managed Global Series will not invest in obligations
issued by a U.S. or foreign commercial bank or S&L unless:
(i) the bank or S&L has total assets of at least $10 billion
(U.S.), or the equivalent in other currencies, and the
institution has outstanding securities rated A or better by
Moody's or Standard & Poor's, or, if the institution has no
outstanding securities rated by Moody's or Standard &
Poor's, it has, in the determination of the Portfolio
Manager, similar creditworthiness to institutions having
outstanding securities so rated; and
(ii) in the case or a U.S. bank or S&L, its deposits are
insured by the FDIC or the SAIF, as the case may be.
COMMERCIAL PAPER
All of the Series may invest in commercial paper (including
variable amount master demand notes), denominated in U.S.
dollars, issued by U.S. corporations or foreign corporations.
Unless otherwise indicated in the investment policies for a
Series, a Series may invest in commercial paper (i) rated, at the
date of investment, Prime-1 or Prime-2 by Moody's or A-1 or A-2
by Standard & Poor's; (ii) if not rated by either Moody's or
Standard & Poor's, issued by a corporation having an outstanding
debt issue rated AA or better by Moody's or AA or better by
Standard & Poor's; or (iii) if not rated, are determined to be of
an investment quality comparable to rated commercial paper in
which a Series may invest.
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Commercial paper obligations may include variable amount
master demand notes. These notes are obligations that permit the
investment of fluctuating amounts at varying rates of interest
pursuant to direct arrangements between a Series, as lender, and
the borrower. These notes permit daily changes in the amounts
borrowed. The lender has the right to increase or to decrease
the amount under the note at any time up to the full amount
provided by the note agreement; and the borrower may prepay up to
the full amount of the note without penalty. Because variable
amount master demand notes are direct lending arrangements
between the lender and borrower, and because no secondary market
exists for those notes, such instruments will probably not be
traded. However, the notes are redeemable (and thus immediately
repayable by the borrower) at face value, plus accrued interest,
at any time. In connection with master demand note arrangements,
the Portfolio Manager will monitor, on an ongoing basis, the
earning power, cash flow, and other liquidity ratios of the
borrower and its ability to pay principal and interest on demand.
The Portfolio Manager also will consider the extent to which the
variable amount master demand notes are backed by bank letters of
credit. These notes generally are not rated by Moody's or
Standard & Poor's; the Series may invest in them only if the
Portfolio Manager believes that at the time of investment the
notes are of comparable quality to the other commercial paper in
which the Series may invest. Master demand notes are considered
by the Series to have a maturity of one day, unless the Portfolio
Manager has reason to believe that the borrower could not make
immediate repayment upon demand. See the Appendix for a
description of Moody's and Standard & Poor's ratings applicable
to commercial paper.
For purposes of limitations on purchases of restricted
securities, commercial paper issued pursuant to Section 4(2) of
the 1933 Act as part of a private placement that meets liquidity
standards under procedures adopted by the Board shall not be
considered to be restricted.
REPURCHASE AGREEMENTS
All Series may invest in repurchase agreements. The term of
such an agreement is generally quite short, possibly overnight or
for a few days, although it may extend over a number of months
(up to one year) from the date of delivery. The resale price is
in excess of the purchase price by an amount which reflects an
agreed-upon market rate of return, effective for the period of
time the Series is invested in the security. This results in a
fixed rate of return protected from market fluctuations during
the period of the agreement. This rate is not tied to the coupon
rate on the security subject to the repurchase agreement.
The Portfolio Manager to a Series monitors the value of the
underlying securities at the time the repurchase agreement is
entered into and at all times during the term of the agreement to
ensure that its value always equals or exceeds the agreed-upon
repurchase price to be paid to the Series. The Portfolio
Manager, in accordance with procedures established by the Board
of Trustees, also evaluates the creditworthiness and financial
responsibility of the banks and brokers or dealers with which the
Series enters into repurchase agreements.
A Series may engage in repurchase transactions in accordance
with guidelines approved by the Board of Trustees of the Trust,
which include monitoring the creditworthiness of the parties with
which a Series engages in repurchase transactions, obtaining
collateral at least equal in value to the repurchase obligation,
and marking the collateral to market on a daily basis.
A Series may not enter into a repurchase agreement having
more than seven days remaining to maturity if, as a result, such
agreements, together with any other securities that are not
readily marketable, would exceed that Series' limitation, either
10% or 15% of the net assets of the Series, depending on the
Series, on investing in illiquid securities. If the seller
should become bankrupt or default on its obligations to
repurchase the securities, a Series may experience delay or
difficulties in exercising its rights to the securities held as
collateral and might incur a loss if the value of the securities
should decline. A Series also might incur disposition costs in
connection with liquidating the securities.
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REVERSE REPURCHASE AGREEMENTS
A reverse repurchase agreement involves the sale of a
security by the Series and its agreement to repurchase the
instrument at a specified time and price. A Series will use the
proceeds of a reverse repurchase agreement to purchase other
money market instruments which either mature at a date
simultaneous with or prior to the expiration of the reverse
repurchase agreement or which are held under an agreement to
resell maturing as of that time. A Series will maintain a
segregated account consisting of cash and/or securities to cover
its obligations under reverse repurchase agreements. Under the
Investment Company Act of 1940, reverse repurchase agreements may
be considered to be borrowings by the seller; accordingly, a
Series will limit its investments in reverse repurchase
agreements consistent with the borrowing limits applicable to the
Series. See "Borrowing" for further information on these limits.
The use of reverse repurchase agreements by a Series creates
leverage which increases a Series' investment risk. If the
income and gains on securities purchased with the proceeds of
reverse repurchase agreements exceed the cost of the agreements,
the Series' earnings or net asset value will increase faster than
otherwise would be the case; conversely, if the income and gains
fail to exceed the costs, earnings or net asset value would
decline faster than otherwise would be the case.
LENDING PORTFOLIO SECURITIES
Some Series may lend portfolio securities to broker-dealers
or institutional investors for the purpose of realizing
additional income. A Series will only enter into this
transaction if (1) the loan is fully collateralized at all times
with U.S. Government securities, cash, or cash equivalents (cash,
U.S. Government securities, negotiable certificates of deposit,
bankers' acceptances, or letters of credit) maintained on a daily
marked-to-market basis, in an amount at least equal to the value
of the securities loaned; (2) it may at any time call the loan
and obtain the return of the securities loaned within five
business days; (3) it will receive any interest or dividends paid
on the loaned securities; and (4) the aggregate market value of
securities loaned will not at any time exceed 30% of the total
assets of the Series. As with other extensions of secured
credit, loans of portfolio securities involve some risk of loss
of rights in the collateral should the borrower fail financially.
Accordingly, the Series' Portfolio Manager will monitor the value
of the collateral, which will be marked-to- market daily, and
will monitor the creditworthiness of the borrowers. There is no
assurance that a borrower will return any securities loaned;
however, as discussed above, a borrower of securities from a
Series must maintain with the Series cash or U.S. Government
securities equal to at least 100% of the market value of the
securities borrowed. Voting rights attached to the loaned
securities may pass to the borrower with the lending of portfolio
securities; however, a Series lending such voting securities may
call them if important shareholder meetings are imminent. A
Series may only lend portfolio securities to entities that are
not affiliated with either the Manager or a Portfolio Manager.
WARRANTS
The holder of a warrant has the right to purchase a given
number of shares of a particular issuer at a specified price
until expiration of the warrant. Such investments can provide a
greater potential for profit or loss than an equivalent
investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying
securities, and are speculative investments. They pay no
dividends and confer no rights other than a purchase option. If
a warrant is not exercised by the date of its expiration, the
Series will lose its entire investment in such warrant.
OTHER INVESTMENT COMPANIES
All Series may invest in shares issued by other investment
companies. A Series is limited in the degree to which it may
invest in shares of another investment company in that it may
not, at the time of the purchase, (1) acquire more than 3% of the
outstanding voting shares of the investment company, (2) invest
more than 5% of the Series' total assets in the investment
company, or (3) invest more than 10% of the Series' total assets
in all investment company holdings. As a shareholder in any
investment company, a Series will bear its ratable share of the
investment company's expenses, including management fees in the
case of a management investment company.
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SHORT SALES
A short sale is a transaction in which the Series sells a
security it does not own in anticipation of a decline in market
price. A Series may make short sales to offset a potential
decline in a long position or a group of long positions, or if
the Series' Portfolio Manager believes that a decline in the
price of a particular security or group of securities is likely.
Under current income tax laws, any capital gains realized by
the Series from short sales will generally be treated and
distributed as short-term capital gains. If the price of the
security sold short increases between the time of the short sale
and the time the Series replaces the borrowed security, the
Series will incur a loss, and if the price declines during this
period, the Series will realize a capital gain. Any realized
gain will be decreased, and any incurred loss increased, by the
amount of transactional costs and any premium, dividend, or
interest which the Series may have to pay in connection with such
short sale.
SHORT SALES AGAINST THE BOX
A short sale "against the box" is a short sale where, at the
time of the short sale, the Series owns or has the immediate and
unconditional right, at no added cost, to obtain the identical
security. The Series would enter into such a transaction to
defer a gain or loss for Federal income tax purposes on the
security owned by the Series. Short sales against the box are
not subject to the percentage limitations on short sales
described in the prospectus.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL DESCRIPTION OF FUTURES CONTRACTS. A futures
contract provides for the future sale by one party and purchase
by another party of a specified amount of a particular financial
instrument (debt security) or commodity for a specified price at
a designated date, time, and place. Although futures contracts
by their terms require actual future delivery of and payment for
financial instruments, commodities futures contracts are usually
closed out before the delivery date. Closing out an open futures
contract position is effected by entering into an offsetting sale
or purchase, respectively, for the same aggregate amount of the
same financial instrument or commodities and the same delivery
date. Where a Series has sold a futures contract, if the
offsetting purchase price is less than the original futures
contract sale price, the Series realizes a gain; if it is more,
the Series realizes a loss. Where a Series has purchased a
futures contract, if the offsetting price is more than the
original futures contract purchase price, the Series realizes a
gain; if it is less, the Series realizes a loss.
INTEREST RATE FUTURES CONTRACTS. An interest rate futures
contract is an obligation traded on an exchange or board of trade
that requires the purchaser to accept delivery, and the seller to
make delivery, of a specified quantity of the underlying
financial instrument, such as U.S. Treasury bills and bonds, in a
stated delivery month, at a price fixed in the contract.
The Series may purchase and sell interest rate futures as a
hedge against adverse changes in debt instruments and other
interest rate sensitive securities held in the Series' portfolio.
As a hedging strategy a Series might employ, a Series would
purchase an interest rate futures contract when it is not fully
invested in long-term debt securities but wishes to defer their
purchase for some time until it can orderly invest in such
securities or because short-term yields are higher than long-term
yields. Such a purchase would enable the Series to earn the
income on a short-term security while at the same time minimizing
the effect of all or part of an increase in the market price of
the long-term debt security which the Series intends to purchase
in the future. A rise in the price of the long-term debt
security prior to its purchase either would be offset by an
increase in the value of the futures contract purchased by the
Series or avoided by taking delivery of the debt securities under
the futures contract.
A Series would sell an interest rate futures contract in
order to continue to receive the income from a long-term debt
security, while endeavoring to avoid part or all of the decline
in market value of that security which would accompany an
increase in interest rates. If interest rates did rise, a
decline in the value of the debt security held by the Series
would be substantially offset by the ability of the Series to
repurchase at a lower price the interest rate futures contract
previously sold. While the Series could sell the long-term debt
security and invest in a short-term
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security, ordinarily the
Series would give up income on its investment, since long-term
rates normally exceed short-term rates.
OPTIONS ON FUTURES CONTRACTS. A futures option gives the
Series the right, in return for the premium paid, to assume a
long position (in the case of a call) or short position (in the
case of a put) in a futures contract at a specified exercise
price prior to the expiration of the option. Upon exercise of a
call option, the purchaser acquires a long position in the
futures contract and the writer of the option is assigned the
opposite short position. In the case of a put option, the
converse is true. A futures option may be closed out (before
exercise or expiration) by an offsetting purchase or sale of a
futures option by the Series.
The Series may use options on futures contracts in
connection with hedging strategies. Generally these strategies
would be employed under the same market conditions in which a
Series would use put and call options on debt securities, as
described hereafter in "Options on Securities and Securities
Indexes."
STOCK INDEX FUTURES CONTRACTS. A "stock index" assigns
relative values to the common stock included in an index (for
example, the Standard & Poor's 500 Index of Composite Stocks or
the New York Stock Exchange Composite Index), and the index
fluctuates with changes in the market values of such stocks. A
stock index futures contract is a bilateral agreement to accept
or make payment, depending on whether a contract is purchased or
sold, of an amount of cash equal to a specified dollar amount
multiplied by the difference between the stock index value at the
close of the last trading day of the contract and the price at
which the futures contract is originally purchased or sold.
To the extent that changes in the value of a Series'
portfolio corresponds to changes in a given stock index, the sale
of futures contracts on that index ("short hedge") would
substantially reduce the risk to the portfolio of a market
decline and, by so doing, provide an alternative to a liquidation
of securities position, which may be difficult to accomplish in a
rapid and orderly fashion. Stock index futures contracts might
also be sold:
(1) when a sale of portfolio securities at that time would
appear to be disadvantageous in the long-term because such
liquidation would:
(a) forego possible price appreciation,
(b) create a situation in which the securities would be
difficult to repurchase, or
(c) create substantial brokerage commissions;
(2) when a liquidation of the portfolio has commenced or is
contemplated, but there is, in the Series' Portfolio Manager's
determination, a substantial risk of a major price decline
before liquidation can be completed; or
(3) to close out stock index futures purchase transactions.
Where a Series anticipates a significant market or market
sector advance, the purchase of a stock index futures contract
("long hedge") affords a hedge against not participating in such
advance at a time when the Series is not fully invested. Such
purchases would serve as a temporary substitute for the purchase
of individual stocks, which may then be purchased in an orderly
fashion. As purchases of stock are made, an amount of index
futures contracts which is comparable to the amount of stock
purchased would be terminated by offsetting closing sales
transactions. Stock index futures might also be purchased:
(1) if the Series is attempting to purchase equity positions in
issues which it had or was having difficulty purchasing at
prices considered by the Series' Portfolio Manager to be fair
value based upon the price of the stock at the time it
qualified for inclusion in the portfolio, or
(2) to close out stock index futures sales transactions.
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GOLD FUTURES CONTRACTS. A gold futures contract is a
standardized contract which is traded on a regulated commodity
futures exchange, and which provides for the future delivery of a
specified amount of gold at a specified date, time, and price.
When the Series purchases a gold futures contract it becomes
obligated to take delivery of and pay for the gold from the
seller, and when the Series sells a gold futures contract, it
becomes obligated to make delivery of precious metals to the
purchaser, in each case at a designated date and price. A Series
may be able to enter into gold futures contracts only for the
purpose of hedging its holdings or intended holdings of gold
stocks and gold bullion. The Series will not engage in these
contracts for speculation or for achieving leverage. The Series'
hedging activities may include purchases of futures contracts as
an offset against the effect of anticipated increases in the
price of gold or sales of futures contracts as an offset against
the effect of anticipated declines in the price of gold.
As long as required by regulatory authorities, each
investing Series will limit its use of futures contracts and
futures options to hedging transactions and other strategies as
described under the heading "Limitations" in this section, in
order to avoid being deemed a commodity pool. For example, a
Series might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the
value of the Series' securities or the price of the securities
which the Series intends to purchase. The Series' hedging may
include sales of futures contracts as an offset against the
effect of expected increases in interest rates and purchases of
futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be
used to reduce that Series' exposure to interest rate
fluctuations, a Series may be able to hedge its exposure more
effectively and perhaps at a lower cost by using futures
contracts and futures options. See the Prospectuses for a
discussion of other strategies involving futures and futures
options.
If a purchase or sale of a futures contract is made by a
Series, the Series is required to deposit with its custodian a
specified amount of cash and/or securities ("initial margin").
The margin required for a futures contract is set by the exchange
or board of trade on which the contract is traded and may be
modified during the term of the contract. The initial margin is
in the nature of a performance bond or good faith deposit on the
futures contract which is returned to the Series upon termination
of the contract, assuming all contractual obligations have been
satisfied. Each investing Series expects to earn interest income
on its initial margin deposits.
A futures contract held by a Series is valued daily at the
official settlement price of the exchange on which it is traded.
Each day the Series pays or receives cash, called "variation
margin" equal to the daily change in value of the futures
contract. This process is known as "marking to market." The
payment or receipt of the variation margin does not represent a
borrowing or loan by a Series but is settlement between the
Series and the broker of the amount one would owe the other if
the futures contract expired. In computing daily net asset
value, each Series will mark-to-market its open futures
positions.
A Series is also required to deposit and maintain margin
with respect to put and call options on futures contracts it
writes. Such margin deposits will vary depending on the nature
of the underlying futures contract (including the related initial
margin requirements), the current market value of the option, and
other futures positions held by the Series.
Although some futures contracts call for making or taking
delivery of the underlying securities, generally these
obligations are closed out prior to delivery by offsetting
purchases or sales of matching futures contracts (same exchange,
underlying security, and delivery month). If an offsetting
purchase price is less than the original sale price, the Series
realizes a capital gain, or if it is more, the Series realizes a
capital loss. Conversely, if an offsetting sale price is more
than the original purchase price, the Series realizes a capital
gain, or if it is less, the Series realizes a capital loss. The
transaction costs must also be included in these calculations.
LIMITATIONS. When purchasing a futures contract, a Series
must maintain with its custodian cash or securities (including
any margin) equal to the market value of such contract. When
writing a call option on a futures contract, the Series similarly
will maintain with its custodian, cash and/or securities
(including any margin) equal to the amount such option is "in-the-
money" until the option expires or is closed out by the Series.
A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price.
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A Series may not maintain open short positions in futures
contracts or call options written on futures contracts if, in the
aggregate, the market value of all such open positions exceeds
the current value of its portfolio securities, plus or minus
unrealized gains and losses on the open positions, adjusted for
the historical relative volatility of the relationship between
the Series and the positions. For this purpose, to the extent
the Series has written call options on specific securities it
owns, the value of those securities will be deducted from the
current market value of the securities portfolio.
In compliance with the requirements of the Commodity Futures
Trading Commission ("CFTC") under which an investment company may
engage in futures transactions, the Trust will comply with
certain regulations of the CFTC to qualify for an exclusion from
being a "commodity pool." The regulations require that the Trust
enter into futures and options (1) for "bona fide hedging"
purposes, without regard to the percentage of assets committed to
initial margin and options premiums, or (2) for other strategies,
provided that the aggregate initial margin and premiums required
to establish such positions do not exceed 5% of the liquidation
value of a Series' portfolio, after taking into account
unrealized profits and unrealized gains on any such contracts
entered into.
OPTIONS ON SECURITIES AND SECURITIES INDEXES
PURCHASING OPTIONS ON SECURITIES. An option on a security
is a contract that gives the purchaser of the option, in return
for the premium paid, the right to buy a specified security (in
the case of a call option) or to sell a specified security (in
the case of a put option) from or to the seller ("writer") of the
option at a designated price during the term of the option. A
Series may purchase put options on securities to protect holdings
in an underlying or related security against a substantial
decline in market value. Securities are considered related if
their price movements generally correlate to one another. For
example, the purchase of put options on debt securities held by a
Series would enable a Series to protect, at least partially, an
unrealized gain in an appreciated security without actually
selling the security. In addition, the Series would continue to
receive interest income on such security.
A Series may purchase call options on securities to protect
against substantial increases in prices of securities the Series
intends to purchase pending its ability to invest in such
securities in an orderly manner. A Series may sell put or call
options it has previously purchased, which could result in a net
gain or loss depending on whether the amount realized on the sale
is more or less than the premium and other transactional costs
paid on the put or call option which is sold.
WRITING COVERED CALL AND SECURED PUT OPTIONS. In order to
earn additional income on its portfolio securities or to protect
partially against declines in the value of such securities, a
Series may write covered call options. The exercise price of a
call option may be below, equal to, or above the current market
value of the underlying security at the time the option is
written. During the option period, a covered call option writer
may be assigned an exercise notice by the broker-dealer through
whom such call option was sold requiring the writer to deliver
the underlying security against payment of the exercise price.
This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a
closing purchase transaction. Closing purchase transactions will
ordinarily be effected to realize a profit on an outstanding call
option, to prevent an underlying security from being called, to
permit the sale of the underlying security, or to enable the
Series to write another call option on the underlying security
with either a different exercise price or expiration date or
both.
In order to earn additional income or to facilitate its
ability to purchase a security at a price lower than the current
market price of such security, a Series may write secured put
options. During the option period, the writer of a put option
may be assigned an exercise notice by the broker-dealer through
whom the option was sold requiring the writer to purchase the
underlying security at the exercise price.
A Series may write a call or put option only if the option
is "covered" or "secured" by the Series holding a position in the
underlying securities. This means that so long as the Series is
obligated as the writer of a call option, it will own the
underlying securities subject to the option or hold a call with
the same exercise price, the same exercise period, and on the
same securities as the written call. Alternatively, a Series may
maintain, in a segregated account with the Trust's custodian,
cash and/or securities with a value sufficient to meet its
obligation as writer of
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the option. A put is secured if the
Series maintains cash and/or securities with a value equal to the
exercise price in a segregated account, or holds a put on the
same underlying security at an equal or greater exercise price.
Prior to exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series.
OPTIONS ON SECURITIES INDEXES. Call and put options on
securities indexes also may be purchased or sold by the Series
for the same purposes as the purchase or sale of options on
securities. Options on securities indexes are similar to options
on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual
purchase or sale of securities. In addition, securities index
options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price
fluctuations in a single security. When such options are
written, the Series is required to maintain a segregated account
consisting of cash, cash equivalents or high grade obligations or
the Series must purchase a like option of greater value that will
expire no earlier than the option sold. Purchased options may
not enable the Series to hedge effectively against stock market
risk if they are not highly correlated with the value of the
Series' portfolio securities. Moreover, the ability to hedge
effectively depends upon the ability to predict movements in the
stock market.
OVER-THE-COUNTER OPTIONS. Certain Series may write or
purchase options in privately negotiated domestic or foreign
transactions ("OTC Options"), as well as exchange-traded or
"listed" options. OTC Options can be closed out only by agreement
with the other party to the transaction, and thus any OTC Options
purchased by a Series will be considered an Illiquid Security. In
addition, certain OTC Options on foreign currencies are traded
through financial institutions acting as market-makers in such
options and the underlying currencies.
The staff of the SEC has taken the position that purchased over-
the-counter options and assets used to cover written over-the-
counter options are illiquid and, therefore, together with other
illiquid securities, cannot exceed a certain percentage of a
Series' assets (the "SEC illiquidity ceiling"). Except as
provided below, the Series intend to write over-the-counter
options only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York. Also, the
contracts which such Series have in place with such primary
dealers will provide that each Series has the absolute right to
repurchase any option it writes at any time at a price which
represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event
will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by the
Series for writing the option, plus the amount, if any, of the
option's intrinsic value (i.e., the amount that the option is in-
the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike
price of the option if the option is written out-of- money. A
Series will treat all or a part of the formula price as illiquid
for purposes of the SEC illiquidity ceiling. Certain Series may
also write over-the-counter options with non-primary dealers,
including foreign dealers, and will treat the assets used to
cover these options as illiquid for purposes of such SEC
illiquidity ceiling.
OTC Options entail risks in addition to the risks of exchange-
traded options. Exchange-traded options are in effect guaranteed
by the Options Clearing Corporation, while a Series relies on the
party from whom it purchases an OTC Option to perform if the
Series exercises the option. With OTC Options, if the transacting
dealer fails to make or take delivery of the securities or amount
of foreign currency underlying an option it has written, in
accordance with the terms of that option, the Series will lose
the premium paid for the option as well as any anticipated
benefit of the transaction. Furthermore, OTC Options are less
liquid than exchange-traded options.
GENERAL. If an option written by a Series expires
unexercised, the Series realizes a capital gain equal to the
premium received at the time the option was written. If an
option purchased by a Series expires unexercised, the Series
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option
of the same series (type, exchange, underlying security, exercise
price, and expiration). There can be no assurance, however, that
a closing purchase or sale transaction can be effected when the
Series desires.
A Series will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the
premium received from writing the option, or if it is more, the
Series will realize a capital loss. If the
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premium received from
a closing sale transaction is more than the premium paid to
purchase the option, the Series will realize a capital gain or,
if it is less, the Series will realize a capital loss. The
principal factors affecting the market value of a put or a call
option include supply and demand, interest rates, the current
market price of the underlying security in relation to the
exercise price of the option, the volatility of the underlying
security, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a
Series is recorded as an asset of the Series and subsequently
adjusted. The premium received for an option written by a Series
is included in the Series' assets and an equal amount is included
in its liabilities. The value of an option purchased or written
is marked to market daily and valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange
or no closing price is available, at the mean between the last
bid and asked prices.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
All Series except the Market Manager Series may purchase
securities on a when issued or delayed delivery basis if the
Series holds, and maintains until the settlement date in a
segregated account, cash and/or securities in an amount
sufficient to meet the purchase price, or if the Series enters
into offsetting contracts for the forward sale of other
securities it owns. Purchasing securities on a when-issued or
delayed delivery basis involves a risk of loss if the value of
the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in value
of the Series' other assets. Although a Series would generally
purchase securities on a when-issued basis or enter into forward
commitments with the intention of acquiring securities, the
Series may dispose of a when-issued or delayed delivery security
prior to settlement if the Portfolio Manager deems it appropriate
to do so. The Series may realize short-term profits or losses
upon such sales.
FOREIGN CURRENCY TRANSACTIONS
A forward currency contract is an obligation to purchase or
sell a currency against another currency at a future date and
price as agreed upon by the parties. A Series may either accept
or make delivery of the currency at the maturity of the forward
contract or, prior to maturity, enter into a closing transaction
involving the purchase or sale of an offsetting contract. A
Series will engage in forward currency transactions in
anticipation of or to protect itself against fluctuations in
currency exchange rates. A Series might sell a particular
currency forward, for example, when it wants to hold bonds or
bank obligations denominated in that currency but anticipates or
wishes to be protected against a decline in the currency against
the dollar. Similarly, it might purchase a currency forward to
"lock in" the dollar price of securities denominated in that
currency which it anticipated purchasing.
A Series may enter into forward foreign currency contracts
in two circumstances. When a Series enters into a contract for
the purchase or sale of a security denominated in a foreign
currency, the Series may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for a
fixed amount of dollars for the purchase or sale of the amount of
foreign currency involved in the underlying transactions, the
Series will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the
U.S. dollar and such foreign currency during the period between
the date on which the security is purchased or sold and the date
on which payment is made or received.
Second, when the Series' Portfolio Manager believes that the
currency of a particular foreign country may suffer a substantial
decline against the U.S. dollar, it may enter into a forward
contract for a fixed amount of dollars to sell the amount of
foreign currency approximating the value of some or all of the
Series' portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts
and the value of the securities involved will not generally be
possible since the future value of securities in foreign
currencies will change as a consequence of market movements in
the value of these securities between the date on which the
forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely
difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. None of the Series will enter into
such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate
the Series to deliver an amount of foreign currency in excess of
the value of the Series' portfolio securities or other assets
denominated in that currency.
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At the maturity of a forward contract, a Series may either
sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and terminate its
contractual obligation to deliver the foreign currency by
purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast the market value of a
particular portfolio security at the expiration of the contract.
Accordingly, if a decision is made to sell the security and make
delivery of the foreign currency, it may be necessary for the
Series to purchase additional foreign currency on the spot market
(and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the
Series is obligated to deliver.
If the Series retains the portfolio security and engages in
an offsetting transaction, the Series will incur a gain or a loss
(as described below) to the extent that there has been movement
in forward contract prices. Should forward prices decline during
the period between the Series' entering into a forward contract
for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the
Series will realize a gain to the extent that the price of the
currency it has agreed to sell exceeds the price of the currency
it has agreed to purchase. Should forward prices increase, the
Series will suffer a loss to the extent that the price of the
currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
Forward contracts are not traded on regulated commodities
exchanges. There can be no assurance that a liquid market will
exist when a Series seeks to close out a forward currency
position, and in such an event, a Series might not be able to
effect a closing purchase transaction at any particular time. In
addition, a Series entering into a forward foreign currency
contract incurs the risk of default by the counter party to the
transaction. The CFTC has indicated that it may in the future
assert jurisdiction over certain types of forward contracts in
foreign currencies and attempt to prohibit certain entities from
engaging in such foreign currency forward transactions.
For more information on forward currency contracts,
including limits upon the Series with respect to such contracts,
see "Foreign Currency Transactions" in The GCG Trust Prospectus.
OPTIONS ON FOREIGN CURRENCIES
A call option on a foreign currency gives the buyer the
right to buy, and a put option the right to sell, a certain
amount of foreign currency at a specified price during a fixed
period of time. Currently, options are traded on the following
foreign currencies on a domestic exchange: British Pound,
Canadian Dollar, German Mark, Japanese Yen, French Franc, and
Swiss Franc. A Series may enter into closing sale transactions
with respect to such options, exercise them, or permit them to
expire.
A Series may employ hedging strategies with options on
currencies before the Series purchases a foreign security
denominated in the hedged currency that the Series anticipates
acquiring, during the period the Series holds the foreign
security, or between the date the foreign security is purchased
or sold and the date on which payment therefor is made or
received.
In those situations where foreign currency options may not
be readily purchased (or where such options may be deemed
illiquid) in the currency in which the hedge is desired, the
hedge may be obtained by purchasing or selling an option on a
"surrogate" currency, i.e., a currency where there is tangible
evidence of a direct correlation in the trading value of the two
currencies. A surrogate currency is a currency that can act, for
hedging purposes, as a substitute for a particular currency
because the surrogate currency's exchange rate movements parallel
that of the primary currency. Surrogate currencies are used to
hedge an illiquid currency risk, when no liquid hedge instruments
exist in world currency markets for the primary currency.
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COMMON STOCK AND OTHER EQUITY SECURITIES
Common Stocks represent an equity (ownership) interest in a
corporation. This ownership interest generally gives a Series the
right to vote on measures affecting the company's organization
and operations.
Certain of the Series may also buy securities such as
convertible debt, preferred stock, warrants or other securities
exchangeable for shares of Common Stock. In selecting equity
investments for a Series, the Adviser or Portfolio Manager will
generally invest the Series' assets in industries and companies
that it believes are experiencing favorable demand for their
products and services and which operate in a favorable
competitive and regulatory climate.
CONVERTIBLE SECURITIES
A convertible security is a security that may be converted
either at a stated price or rate within a specified period of
time into a specified number of shares of Common Stock. By
investing in Convertible Securities, a Series seeks the
opportunity, through the conversion feature, to participate in
the capital appreciation of the Common Stock into which the
securities are convertible, while earning a higher fixed rate of
return than is available in Common Stocks.
CURRENCY MANAGEMENT
A Series' flexibility to participate in higher yielding debt
markets outside of the United States may allow the Series to
achieve higher yields than those generally obtained by domestic
money market funds and short-term bond investments. When a Series
invests significantly in securities denominated in foreign
currencies, however, movements in foreign currency exchange rates
versus the U.S. dollar are likely to impact the Series' share
price stability relative to domestic short-term income funds.
Fluctuations in foreign currencies can have a positive or
negative impact on returns. Normally, to the extent that the
Series is invested in foreign securities, a weakening in the U.S.
dollar relative to the foreign currencies underlying a Series'
investments should help increase the net asset value of the
Series. Conversely, a strengthening in the U.S. dollar versus the
foreign currencies in which a Series' securities are denominated
will generally lower the net asset value of the Series. Each
Series' Adviser or Portfolio Manager attempts to minimize
exchange rate risk through active Series management, including
hedging currency exposure through the use of futures, options and
forward currency transactions and attempting to identify bond
markets with strong or stable currencies. There can be no
assurance that such hedging will be successful and such
transactions, if unsuccessful, could result in additional losses
or expenses to a Series.
DOLLAR ROLL TRANSACTIONS
Certain Series seeking a high level of current income may
enter into dollar rolls or "covered rolls" in which the Series
sells securities (usually Mortgage-Backed Securities) and
simultaneously contracts to purchase, typically in 30 to 60 days,
substantially similar, but not identical securities, on a
specified future date. The proceeds of the initial sale of
securities in the dollar roll transactions may be used to
purchase long-term securities which will be held during the roll
period. During the roll period, the Series forgoes principal and
interest paid on the securities sold at the beginning of the roll
period. The Series is compensated by the difference between the
current sales price and the 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 cash equivalent securities position
that matures on or before the forward settlement date of the
dollar roll transaction. As used herein the term "dollar roll"
refers to dollar rolls that are not "covered rolls." At the end
of the roll commitment period, the Series may or may not take
delivery of the securities the Series has contracted to purchase.
The Series will establish a segregated account with its
custodian in which it will maintain cash, U.S. Government
Securities or other liquid high- grade debt obligations equal in
value at all times to its obligations in respect of dollar rolls,
and, accordingly, the Series will not treat such obligations as
senior securities for purposes of the 1940 Act. "Covered rolls"
are not subject to these segregation requirements. Dollar Roll
Transactions may be considered borrowings and are, therefore,
subject to the borrowing limitations applicable to the Series.
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EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY SUPRANATIONAL
ORGANIZATIONS
Series authorized to invest in securities of foreign issuers
may invest assets in equity and debt securities issued or
guaranteed by Supranational Organizations, such as obligations
issued or guaranteed by the Asian Development Bank, Inter-
American Development Bank, International Bank for Reconstruction
and Development (World Bank), African Development Bank, European
Coal and Steel Community, European Economic Community, European
Investment Bank and the Nordic Investment Bank.
EXCHANGE RATE RELATED SECURITIES
Certain of the Series may invest in securities which are
indexed to certain specific foreign currency exchange rates. The
terms of such security would provide that the principal amount or
interest payments are adjusted upwards or downwards (but not
below zero) at payment to reflect fluctuations in the exchange
rate between two currencies while the obligation is outstanding,
depending on the terms of the specific security. A Series will
purchase such security with the currency in which it is
denominated and will receive interest and principal payments
thereon in the currency, but the amount of principal or interest
payable by the issuer will vary in proportion to the change (if
any) in the exchange rate between the two specific currencies
between the date the instrument is issued and the date the
principal or interest payment is due. The staff of the SEC is
currently considering whether a mutual fund's purchase of this
type of security would result in the issuance of a "senior
security" within the meaning of the 1940 Act. The Trust believes
that such investments do not involve the creation of such a
senior security, but nevertheless undertakes, pending the
resolution of this issue by the staff, to establish a segregated
account with respect to such investments and to maintain in such
account cash not available for investment or U.S. Government
Securities or other liquid high quality debt securities having a
value equal to the aggregate principal amount of outstanding
securities of this type.
Investment in Exchange Rate-Related Securities entails
certain risks. There is the possibility of significant changes in
rates of exchange between the U.S. dollar and any foreign
currency to which an Exchange Rate-Related Security is linked. In
addition, there is no assurance that sufficient trading interest
to create a liquid secondary market will exist for a particular
Exchange Rate-Related Security due to conditions in the debt and
foreign currency markets. Illiquidity in the forward foreign
exchange market and the high volatility of the foreign exchange
market may from time to time combine to make it difficult to sell
an Exchange Rate-Related Security prior to maturity without
incurring a significant price loss.
GEOGRAPHICAL AND INDUSTRY CONCENTRATION
Where a Series invests at least 25% of its assets in Bank
Obligations, the Series' investments may be subject to greater
risk than a Series that does not concentrate in the banking
industry. In particular, Bank Obligations may be subject to the
risks associated with interest rate volatility, changes in
federal and state laws and regulations governing banking and the
inability of borrowers to pay principal and interest when due. In
addition, foreign banks present the risks of investing in foreign
securities generally and are not subject to reserve requirements
and other regulations comparable to those of U.S. Banks.
ILLIQUID SECURITIES
Illiquid securities are securities that are not readily
marketable, including, where applicable: (1) Repurchase
Agreements with maturities greater than seven calendar days; (2)
time deposits maturing in more than seven calendar days; (3) to
the extent a liquid secondary market does not exist for the
instruments, futures contracts and options thereon; (4) certain
over-the-counter options, as described in the Statement of
Additional Information; (5) certain variable rate demand notes
having a demand period of more than seven days; and (6) securities
the disposition of which is restricted under Federal securities laws
(excluding Rule 144A Securities, described below).
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RESTRICTED SECURITIES
The Series may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act")
("restricted securities"), including those that can be offered
and sold to "qualified institutional buyers" under Rule 144A
under the 1933 Act ("Rule 144A securities"). The Trust's Board of
Trustees confirms based upon information and recommendations
provided by the Portfolio Manager that a specific Rule 144A
security is liquid and thus not subject to the limitation on
investing in illiquid investments. The Board of Trustees has
adopted guidelines and has delegated to the Portfolio Manager the
daily function of determining and monitoring the liquidity of
Rule 144A securities. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
This investment practice could have the effect of decreasing the
level of liquidity in the Series to the extent that qualified
institutional buyers become for a time uninterested in purchasing
Rule 144A securities held in the investment Series. Subject to
limitation on investments in illiquid investments and subject to
the diversification requirements of the Internal Revenue Code of
1986, as amended (the "Code"), the Series may also invest in
restricted securities that may not be sold under Rule 144A, which
presents certain risks. As a result, the Series might not be able
to sell these securities when the Portfolio Manager wishes to do
so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available.
Therefore, judgment may at times play a greater role in valuing
these securities than in the case of unrestricted securities
LEASE OBLIGATION BONDS
Lease Obligation Bonds are mortgages on a facility that is
secured by the facility and are paid by a lessee over a long
term. The rental stream to service the debt as well as the
mortgage are held by a collateral trustee on behalf of the public
bondholders. The primary risk of such instrument is the risk of
default. Under the lease indenture, the failure to pay rent is an
event of default. The remedy to cure default is to rescind the
lease and sell the assets. If the lease obligation is not readily
marketable or market quotations are not readily available, such
lease obligations will be subject to a Series' limit on Illiquid
Securities.
SMALL COMPANIES
Certain of the Series may invest in small companies, some of
which may be unseasoned. Such companies may have limited product
lines, markets, or financial resources and may be dependent on a
limited management group. While the markets in securities of such
companies have grown rapidly in recent years, such securities may
trade less frequently and in smaller volume than more widely held
securities. The values of these securities may fluctuate more
sharply than those of other securities, and a Series may
experience some difficulty in establishing or closing out
positions in these securities at prevailing market prices. There
may be less publicly available information about the issuers of
these securities or less market interest in such securities
than in the case of larger companies, and it may take a longer
period of time for the prices of such securities to reflect the
full value of their issuers' underlying earnings potential or
assets.
Some securities of smaller issuers may be restricted as to
resale or may otherwise be highly illiquid. The ability of a
Series to dispose of such securities may be greatly limited, and
a Series may have to continue to hold such securities during
periods when the Adviser or a Portfolio Manager would otherwise
have sold the security. It is possible that the Adviser or a Sub-
Adviser or its affiliates or clients may hold securities issued
by the same issuers, and may in some cases have acquired the
securities at different times, on more favorable terms, or at
more favorable prices, than a Series which it manages.
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for
each of the Series as stated elsewhere in the Prospectus and Statement
of Additional Information of the Trust, certain of the Series may,
but are not required to, utilize various investment strategies as
described in this Appendix to hedge various market risks, to manage
the effective maturity or duration of Fixed Income Securities, or to
seek potentially higher returns. Utilizing these investment
strategies, the Series may purchase and sell, to the extent not
otherwise limited or restricted for such Series, exchange-listed
and over-the-counter put and call options on securities, equity
and fixed income indexes and other financial instruments,
purchase and sell financial futures contracts and options
thereon, enter into various Interest Rate Transactions such as
swaps, caps, floors or collars, and enter into various currency
transactions such as currency forward contracts,
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currency futures
contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic
Transactions").
Strategic Transactions may be used to attempt to protect
against possible changes in the market value of securities held
in or to be purchased for the Series resulting from securities
markets or currency exchange rate fluctuations, to protect the
Series' unrealized gains in the value of its Series securities,
to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the
Series, or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to seek
potentially higher returns, although no more than 5% of the
Series' assets will be used as the initial margin or purchase
price of options for Strategic Transactions entered into for
purposes other than "bona fide hedging" positions as defined in
the regulations adopted by the Commodity Futures Trading
Commission. Any or all of these investment techniques may be used
at any time, as use of any Strategic Transaction is a function of
numerous variables including market conditions. The ability of
the Series to utilize these Strategic Transactions successfully
will depend on the Adviser's or Portfolio Manager's ability to
predict, which cannot be assured, pertinent market movements. The
Series will comply with applicable regulatory requirements when
utilizing Strategic Transactions. Strategic Transactions
involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk
management or Series management purposes.
INVESTMENT RESTRICTIONS
Each Series' investment objective as set forth under "Investment
Objectives and Policies" in the Prospectus, together with the
investment restrictions set forth below. These are broken into
two sections for different groups of Series into fundamental and
non-fundamental policies. Fundamental policies and restrictions
of each Series may not be changed with respect to any Series
without the approval of a majority of the outstanding voting
shares of that Series. The vote of a majority of the outstanding
voting securities of a Series means the vote, at an annual or
special meeting, of the lesser of (a) 67% or more of the voting
securities present at such meeting, if the holders of more than
50% of the outstanding voting securities of such Series are
present or represented by proxy; or (b) more than 50% of the
outstanding voting securities of such Series. Non-fundamental
policies and restrictions may be changed by a vote of the Board
of Trustees and without shareholder approval, consistent with the
Investment Company Act of 1940 and changes in relevant SEC interpretations.
FUNDAMENTAL INVESTMENT RESTRICTIONS
FOR THE MULTIPLE ALLOCATION SERIES, THE FULLY MANAGED SERIES, THE
LIMITED MATURITY BOND SERIES, THE HARD ASSETS SERIES, THE REAL
ESTATE SERIES, THE ALL-GROWTH SERIES; THE CAPITAL APPRECIATION
SERIES, THE RISING DIVIDENDS SERIES, THE EMERGING MARKETS SERIES,
THE VALUE EQUITY SERIES, THE STRATEGIC EQUITY SERIES, THE SMALL
CAP SERIES, THE MANAGED GLOBAL SERIES, THE MARKET MANAGER SERIES,
AND THE LIQUID ASSET SERIES:
Under these restrictions, a Series may not:
(1) Invest in a security if, with respect to 75% of its total
assets, more than 5% of the total assets (taken at market value
at the time of such investment) would be invested in the
securities of any one issuer, except that this restriction does
not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, and except
that this restriction shall not apply to the Market Manager
Series;
(2) Invest in a security if, with respect to 75% of its assets,
it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any one
issuer, except securities issued or guaranteed by the U.S.
Government, or its agencies or instrumentalities;
(3) Invest in a security if more than 25% of its total assets
(taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular
industry, except that this restriction does not apply: (a) to
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (or repurchase agreements with
respect thereto), (b) with respect to the Liquid Asset Series,
to securities or
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obligations issued by U.S. banks, (c) with
respect to the Market Manager Series, to options on stock
indexes issued by eligible broker-dealers or banks, as
described in the Market Manager Series' Prospectus; (d) with
respect to the Managed Global Series, to securities issued or
guaranteed by foreign governments or any political subdivisions
thereof, authorities, agencies, or instrumentalities (or
repurchase agreements with respect thereto); and (e) to the
Real Estate Series, which will normally invest more than 25% of
its total assets in securities of issuers in the real estate
industry and related industries, or to the Hard Assets Series,
which will normally invest more than 25% of its total assets in
the group of industries engaged in hard assets activities,
provided that such concentration for these two Series is
permitted under tax law requirements for regulated investment
companies that are investment vehicles for variable contracts;
(4) Purchase or sell real estate, except that a Series may
invest in securities secured by real estate or real estate
interests or issued by companies in the real estate industry or
which invest in real estate or real estate interests;
(5) Purchase securities on margin (except for use of short-term
credit necessary for clearance of purchases and sales of
portfolio securities), except a Series engaged in transactions
in options, futures, and options on futures may make margin
deposits in connection with those transactions, except that
effecting short sales will be deemed not to constitute a margin
purchase for purposes of this restriction, and except that the
Hard Assets Series may, consistent with its investment
objective and subject to the restrictions described in the
Prospectus and in the Statement of Additional Information,
purchase securities on margin;
(6) Lend any funds or other assets, except that a Series may,
consistent with its investment objective and policies:
(a) invest in debt obligations, even though the purchase of
such obligations may be deemed to be the making of loans;
(b) enter into repurchase agreements; and
(c) lend its portfolio securities in accordance with
applicable guidelines established by the Securities and
Exchange Commission and any guidelines established by the
Board of Trustees;
(7) Issue senior securities, except insofar as a Series may be
deemed to have issued a senior security by reason of borrowing
money in according with that Series' borrowing policies, and
except, for purposes of this investment restriction, collateral
or escrow arrangements with respect to the making of short
sales, purchase or sale of futures contracts or related
options, purchase or sale of forward currency contracts,
writing of stock options, and collateral arrangements with
respect to margin or other deposits respecting futures
contracts, related options, and forward currency contracts are
not deemed to be an issuance of a senior security;
(8) Act as an underwriter of securities of other issuers,
except, when in connection with the disposition of portfolio
securities, a Series may be deemed to be an underwriter under
the federal securities laws;
(9) With respect to the Multiple Allocation, Fully Managed,
Limited Maturity Bond, Hard Assets, Real Estate, All-Growth,
Capital Appreciation and Liquid Asset Series, make short sales
of securities, except short sales against the box, and except
that this restriction shall not apply to the Multiple
Allocation, Hard Assets, All-Growth or Capital Appreciation
Series, which may engage in short sales within the limitations
described in the Prospectus and in the Statement of Additional
Information;
(10) Borrow money or pledge, mortgage, or hypothecate its
assets, except that a Series may: (a) borrow from banks, but
only if immediately after each borrowing and continuing
thereafter there is asset coverage of 300%; and (b) enter into
reverse repurchase agreements and transactions in options,
futures, options on futures, and forward currency contracts as
described in the Prospectus and in the Statement of Additional
Information. (The deposit of assets in escrow in connection
with the writing of covered put and call options and the
purchase of securities on a "when-issued" or delayed delivery
basis and collateral arrangements with respect to initial or
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variation margin and other deposits for futures contracts,
options on futures contracts, and forward currency contracts
will not be deemed to be pledges of a Series' assets);
(11) With respect to the Multiple Allocation, Fully Managed,
Limited Maturity Bond, Hard Assets, Real Estate, All-Growth,
Capital Appreciation, and Liquid Asset Series, invest in
securities that are illiquid because they are subject to legal
or contractual restrictions on resale, in repurchase agreements
maturing in more than seven days, or other securities which in
the determination of the Portfolio Manager are illiquid if, as
a result of such investment, more than 10% of the total assets
of the Series, except for the All-Growth Series, more than 15%
of the total assets of the Series, (taken at market value at
the time of such investment) would be invested in such
securities;
(12) purchase or sell commodities or commodities contracts
(which, for the purpose of this restriction, shall not include
foreign currency or forward foreign currency contracts),
except:
(a) any Series may engage in interest rate futures contracts,
stock index futures contracts, futures contracts based on
other financial instruments, and on options on such futures
contracts;
(b) the Multiple Allocation and Strategic Equity Series may
engage in futures contracts on gold; and
(d) this restriction shall not apply to the Managed Global
and the Hard Assets Series.
(13) With respect to all Series except the Managed Global
Series, invest in puts, calls, straddles, spreads, or any
combination thereof, provided that this restriction does not
apply to puts that are a feature of variable or floating rate
securities or to puts that are a feature of other corporate
debt securities, and except that any Series may engage in
transactions in options, futures contracts, and options on
futures.
FOR THE TOTAL RETURN SERIES, RESEARCH SERIES, MID-CAP GROWTH
SERIES AND GLOBAL FIXED INCOME SERIES:
A Series may not:
(1) With respect to 75% of its total assets, purchase the
securities of any issuer if such purchase would cause more than
5% of the value of a Series total assets to be invested in
securities of any one issuer (except securities issued or
guaranteed by the U.S. Government or any agency or
instrumentality thereof), or purchase more than 10% of the
outstanding voting securities of any one issuer; provided that
this restriction shall not apply to the Global Fixed Income
Series or the Mid-Cap Growth Series;
(2) invest more than 25% of the value of the Series total
assets in the securities of companies engaged in any one
industry (except securities issued by the U.S. Government, its
agencies and instrumentalities);
(3) borrow money except from banks as a temporary measure for
extraordinary or emergency purposes or by entering into reverse
repurchase agreements (each Series of the Trust is required to
maintain asset coverage (including borrowings) of 300% for all
borrowings), except Global Fixed Income Series may also borrow
to enhance income;
(4) make loans to other persons, except loans of portfolio
securities and except to the extent that the purchase of debt
obligations in accordance with its investment objectives and
policies or entry into repurchase agreements may be deemed to
be loans;
(5) purchase or sell any commodity contract, except that each
Series may purchase and sell futures contracts based on debt
securities, indexes of securities, and foreign currencies and
purchase and write options on securities, futures contracts
which it may purchase, securities indexes, and foreign
currencies and purchase forward contracts. (Securities
denominated in gold or other precious metals or whose value is
determined by the value of gold or other precious metals are
not considered to be commodity contracts.) The Mid-Cap Growth,
Research and Total Return Series reserve the freedom of action
to hold and to sell real estate or mineral leases,
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commodities
or commodity contracts acquired as a result of the ownership of
securities. The Mid-Cap Growth, Research and Total Return
Series will not purchase securities for the purpose of
acquiring real estate or mineral leases, commodities or
commodity contracts (except for options, futures contracts,
options on futures contracts and forward contracts).
(6) underwrite securities of any other company, although it may
invest in companies that engage in such businesses if it does
so in accordance with policies established by the Trust's Board
of Trustees, and except to the extent that the Series may be
considered an underwriter within the meaning of the Securities
Act of 1933, as amended, in the disposition of restricted
securities;
(7) purchase or sell real estate, although it may purchase and
sell securities which are secured by or represent interests in
real estate, mortgage-related securities, securities of
companies principally engaged in the real estate industry and
participation interests in pools of real estate mortgage loans,
and it may liquidate real estate acquired as a result of
default on a mortgage; and
(8) issue any class of securities which is senior to a Series
shares of beneficial interest except as permitted under the
Investment Company Act of 1940 or by order of the SEC.
FOR THE VALUE + GROWTH SERIES:
The Series may not:
(1) purchase or sell commodities or commodity contracts, or
interests in oil, gas, or other mineral leases, or other
mineral exploration or development programs, although it may
invest in companies that engage in such businesses to the
extent otherwise permitted by the Series investment policies
and restrictions and by applicable law, except as required in
connection with otherwise permissible options, futures and
commodity activities as described elsewhere in the Prospectus
and this Statement;
(2) purchase or sell real estate, although it may invest in
securities secured by real estate or real estate interests, or
issued by companies, including real estate investment trusts,
that invest in real estate or real estate interests;
(3) make short sales or purchases on margin, although it may
obtain short-term credit necessary for the clearance of
purchases and sales of its portfolio securities and except as
required in connection with permissible options, futures, short
selling and leverage activities as described elsewhere in the
Prospectus and this Statement (the short sale restriction is
non-fundamental);
(4) with respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. Government
and its agencies and instrumentalities) if immediately after
and as a result of such investment more than 5% of the total
assets of a Series would be invested in such issuer. There are
no limitations with respect to the remaining 25% of its total
assets, except to the extent other investment restrictions may
be applicable.
(5) mortgage, hypothecate, or pledge any of its assets as
security for any of its obligations, except as required for
otherwise permissible borrowings (including reverse repurchase
agreements), short sales, financial options and other hedging
activities;
(6) make loans to other persons, except loans of portfolio
securities and except to the extent that the purchase of debt
obligations in accordance with its investment objectives and
policies or entry into repurchase agreements may be deemed to
be loans;
(7) borrow money, except from banks for temporary or emergency
purposes or in connection with otherwise permissible leverage
activities, and then only in an amount not in excess of 5% of
the Series total assets (in any case as determined at the
lesser of acquisition cost or current market value and
excluding collateralized reverse repurchase agreements);
(8) underwrite securities of any other company, although it may
invest in companies that engage in such businesses if it does
so in accordance with policies established by the Trust's Board
of Trustees, and except to the
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extent that the Series may be
considered an underwriter within the meaning of the Securities
Act of 1933, as amended, in the disposition of restricted
securities;
(9) invest more than 25% of the value of the Series total
assets in the securities of companies engaged in any one
industry (except securities issued by the U.S. Government, its
agencies and instrumentalities);
(10) issue senior securities, as defined in the 1940 Act,
except that this restriction shall not be deemed to prohibit
the Series from making any otherwise permissible borrowings,
mortgages or pledges, or entering into permissible reverse
repurchase agreements, and options and futures transactions;
(11) own, directly or indirectly, more than 25% of the voting
securities of any one issuer or affiliated person of the
issuer; and
(12) purchase the securities of other investment companies,
except as permitted by the 1940 Act or as part of a merger,
consolidation, acquisition of assets or similar reorganization
transaction.
FOR THE GROWTH & INCOME SERIES:
The Series may not:
(1) issue any class of securities which is senior to the Series
shares of beneficial interest, except that the Series may
borrow money to the extent contemplated by Restriction 3 below;
(2) purchase securities on margin (but a Series may obtain such
short-term credits as may be necessary for the clearance of
transactions). (Margin payments or other arrangements in
connection with transactions in short sales, futures contracts,
options, and other financial instruments are not considered to
constitute the purchase of securities on margin for this
purpose);
(3) borrow more than one-third of the value of its total assets
less all liabilities and indebtedness (other than such
borrowings) not represented by senior securities;
(4) underwrite securities of any other company, although it may
invest in companies that engage in such businesses if it does
so in accordance with policies established by the Trust's Board
of Trustees, and except to the extent that the Series may be
considered an underwriter within the meaning of the Securities
Act of 1933, as amended, in the disposition of restricted
securities;
(5) as to 75% of the Series total assets, purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result: (i) more than 5% of the
Series total assets (taken at current value) would then be
invested in securities of a single issuer, or (ii) more than
25% of the Series total assets (taken at current value) would
be invested in a single industry;
(6) invest in securities of any issuer if any officer or
Trustee of the Trust or any officer or director of the
Portfolio Manager owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers, Trustees and
directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer; and
(7) make loans to other persons, except loans of portfolio
securities and except to the extent that the purchase of debt
obligations in accordance with its investment objectives and
policies or entry into repurchase agreements may be deemed to
be loans.
FOR THE GROWTH OPPORTUNITIES AND DEVELOPING WORLD SERIES:
A Series may not:
(1) With respect to 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. Government
and its agencies and instrumentalities) if immediately after
and as a result of such investment more
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than 5% of the total
assets of a Series would be invested in such issuer. There are
no limitations with respect to the remaining 25% of its total
assets, except to the extent other investment restrictions may
be applicable.
(2) Make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objective and
policies, (b) through the lending of up to 30% of its portfolio
securities as described above and in its Prospectus, or (c) to
the extent the entry into a repurchase agreement or a reverse
dollar roll transaction is deemed to be a loan.
(3) (a) Borrow money, except for temporary or emergency
purposes from a bank, or pursuant to reverse repurchase
agreements or dollar roll transactions for a Series that uses
such investment techniques and then not in excess of one-third
of the value of its total assets (at the lower of cost or fair
market value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least
300% of all borrowings (excluding any fully collateralized
reverse repurchase agreements and dollar roll transactions the
Series may enter into), and no additional investments may be
made while any such borrowings are in excess of 10% of total
assets.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with permissible borrowings and permissible forward
contracts, futures contracts, option contracts or other hedging
transactions.
(4) Except as required in connection with permissible hedging
activities, purchase securities on margin or underwrite
securities. (This does not preclude a Series from obtaining
such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities.)
(5) Buy or sell real estate or commodities or commodity
contracts; however, a Series, to the extent not otherwise
prohibited in the Prospectus or this Statement of Additional
Information, may invest in securities secured by real estate or
interests therein or issued by companies which invest in real
estate or interests therein, including real estate investment
trusts, and may purchase or sell currencies (including forward
currency exchange contracts), futures contracts and related
options generally as described in the Prospectus and this
Statement of Additional Information.
(6) Invest in securities of other investment companies, except
to the extent permitted by the Investment Company Act and
discussed in the Prospectus or this Statement of Additional
Information, or as such securities may be acquired as part of a
merger, consolidation or acquisition of assets.
(7) Invest more than 25% of the value of the Series total
assets in the securities of companies engaged in any one
industry (except securities issued by the U.S. Government, its
agencies and instrumentalities);
(8) Issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed
to prohibit a Series from (a) making any permitted borrowings,
mortgages or pledges, or (b) entering into permissible
repurchase and dollar roll transactions.
(9) Invest in commodities, except for futures contracts or
options on futures contracts if, as a result thereof, more than
5% of a Series' total assets (taken at market value at the time
of entering into the contract) would be committed to initial
deposits and premiums on open futures contracts and options on
such contracts.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
FOR THE RISING DIVIDENDS SERIES, EMERGING MARKETS SERIES, VALUE
EQUITY SERIES, STRATEGIC EQUITY SERIES, SMALL CAP SERIES, MANAGED
GLOBAL SERIES AND MARKET MANAGER SERIES:
A Series may not:
(1) Make short sales of securities, except short sales against
the box (this restriction shall not apply to the Strategic
Equity, Small Cap, and Managed Global Series, which may make
short sales within the limitations described in the Prospectus
and elsewhere in this Statement of Additional Information); and
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(2) Invest in securities that are illiquid because they are
subject to legal or contractual restrictions on resale, in
repurchase agreements maturing in more than seven days, or
other securities which in the determination of the Portfolio
Manager are illiquid if, as a result of such investment, more
than 15% of the net assets of the Series (taken at market value
at the time of such investment) would be invested in such
securities.
FOR THE MANAGED GLOBAL SERIES:
The Series may not:
Purchase or sell commodities or commodities contracts (which,
for the purpose of this restriction, shall not include foreign
currency or forward foreign currency contracts or futures
contracts on currencies), except that the Series may engage in
interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments, and in
options on such futures contracts.
FOR THE TOTAL RETURN SERIES, RESEARCH SERIES, MID-CAP GROWTH
SERIES AND GLOBAL FIXED INCOME SERIES:
A Series may not:
(1) invest more than 10% (except 15% with respect to the Global
Fixed Income Series, Mid-Cap Growth Series and Total Return
Series) of the net assets of a Series (taken at market value)
in illiquid securities, including repurchase agreements
maturing in more than seven days;
(2) purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and
sales of securities, and except that it may make margin
payments in connection with options, futures contracts, options
on futures contracts and forward foreign currency contracts and
in connection with swap agreements;
(3) make short sales of securities unless such Series owns an
equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short; and
(4) make investments for the purpose of gaining control of a
company's management.
FOR THE VALUE + GROWTH SERIES:
The Series may not:
(1) except as required in connection with otherwise permissible
options and futures activities, invest more than 5% of the
value of the Series total assets in rights or warrants (other
than those that have been acquired in units or attached to
other securities), or invest more than 2% of its total assets
in rights or warrants that are not listed on the New York or
American Stock Exchange;
(2) participate on a joint basis in any trading account in
securities, although the Portfolio Manager may aggregate orders
for the sale or purchase of securities with other accounts it
manages to reduce brokerage costs or to average prices;
(3) invest, in the aggregate, more than 10% of its net assets
in illiquid securities;
(4) purchase or write put, call, straddle or spread options
except as described in the Prospectus or Statement of
Additional Information;
(5) purchase or retain in the Series portfolio any security if
any officer, trustee or shareholder of the issuer is at the
same time an officer, trustee or employee of the Trust or of
its Portfolio Manager and such person owns
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beneficially more
than 1/2 of 1% of the securities and all such persons owning
more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of the issuer;
(6) invest in real estate limited partnerships or invest more
than 10% of the value of its total assets in real estate
investment trusts;
(7) buy or sell physical commodities;
(8) invest or engage in arbitrage transactions;
(9) invest more than 40% of its total assets in the securities
of companies operating exclusively in one foreign country;
(10) purchase securities of other open-end investment
companies;
(11) under normal market conditions, invest less than 65% of
its total assets in companies listed on a nationally recognized
securities exchange or traded on the National Association of
Securities Dealers Automated Quotation System.
(12) purchase the securities of any company for the purpose of
exercising management or control;
(13) purchase more than 10% of the outstanding voting
securities of any one issuer; and
(14) invest more than 5% of the value of its total assets in
securities of any issuer which has not had a record, together
with its predecessors, of at least three years of continuous
operations.
FOR THE GROWTH & INCOME SERIES:
The Series may not:
(1) invest in warrants (other than warrants acquired by the
Series as a part of a unit or attached to securities at the
time of purchase) if, as a result, such investment (valued at
the lower of cost or market value) would exceed 5% of the value
of the Series net assets, provided that not more than 2% of the
Series net assets may be invested in warrants not listed on the
New York or American Stock Exchanges;
(2) purchase or sell commodities or commodity contracts, except
that the Series may purchase or sell financial futures
contracts, options on financial futures contracts, and futures
contracts, forward contracts, and options with respect to
foreign currencies, and may enter into swap transactions;
(3) purchase securities restricted as to resale if, as a
result, (i) more than 10% of the Series total assets would be
invested in such securities, or (ii) more than 5% of the Series
total assets (excluding any securities eligible for resale
under Rule 144A under the Securities Act of 1933) would be
invested in such securities;
(4) invest in (a) securities which at the time of such
investment are not readily marketable, (b) securities
restricted as to resale, and (c) repurchase agreements maturing
in more than seven days, if, as a result, more than 15% of the
Series net assets (taken at current value) would then be
invested in the aggregate in securities described in (a), (b),
and (c) above;
(5) invest in securities of other registered investment
companies, except by purchases in the open market involving
only customary brokerage commissions and as a result of which
not more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition;
(6) invest in real estate limited partnerships;
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(7) purchase any security if, as a result, the Series would
then have more than 5% of its total assets (taken at current
value) invested in securities of companies (including
predecessors) less than three years old;
(8) purchase or sell real estate or interests in real estate,
including real estate mortgage loans, although it may purchase
and sell securities which are secured by real estate and
securities of companies, including limited partnership
interests, that invest or deal in real estate and it may
purchase interests in real estate investment trusts. (For
purposes of this restriction, investments by a Series in
mortgage-backed securities and other securities representing
interests in mortgage pools shall not constitute the purchase
or sale of real estate or interests in real estate or real
estate mortgage loans.);
(9) make investments for the purpose of exercising control or
management;
(10) invest in interests in oil, gas or other mineral
exploration or development programs or leases, although it may
invest in the common stocks of companies that invest in or
sponsor such programs;
(11) acquire more than 10% of the voting securities of any
issuer;
(12) invest more than 15%, in the aggregate, of its total
assets in the securities of issuers which, together with any
predecessors, have a record of less than three years continuous
operation and securities restricted as to resale (including any
securities eligible for resale under Rule 144A under the
Securities Act of 1933); or
(13) purchase or sell puts, calls, straddles, spreads, or any
combination thereof, if, as a result, the aggregate amount of
premiums paid or received by the Series in respect of any such
transactions then outstanding would exceed 5% of its total
assets.
FOR THE GROWTH OPPORTUNITIES AND DEVELOPING WORLD SERIES:
A Series may not:
(1) Invest, in the aggregate, more than 15% of its net assets
in illiquid securities, including (under current SEC
interpretations) restricted securities (excluding liquid Rule
144A-eligible restricted securities), securities which are not
otherwise readily marketable, repurchase agreements that mature
in more than seven days and over-the-counter options (and
securities underlying such options) purchased by a Series.
(2) Invest in any issuer for purposes of exercising control or
management of the issuer.
(3) Except as described in the Prospectus and this Statement of
Additional Information, acquire or dispose of put, call,
straddle or spread options subject to the following conditions
(a) such options are written by other persons, and
(b) the aggregate premiums paid on all such options which are
held at any time do not exceed 5% of the Series' total
assets.
(4) Except as described in the Prospectus and this Statement of
Additional Information, engage in short sales of securities.
(5) Purchase more than 10% of the outstanding voting
securities of any one issuer.
If a percentage restriction is adhered to at the time of
investment, a subsequent increase or decrease in a percentage
resulting from a change in the values of assets will not
constitute a violation of that restriction, except as otherwise
noted.
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MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the
direction of the Board of Trustees according to the applicable
laws of the Commonwealth of Massachusetts and the Trust's Agreement
and Declaration of Trust. The Trustees are J. Michael Earley, R.
Barbara Gitenstein, Robert A. Grayson, Elizabeth J. Newell, Stanley
B. Seidler, and Roger B. Vincent. The Executive Officers of the
Trust are Barnett Chernow, Myles R. Tashman, and Mary Bea Wilkinson.
Trustees and Executive Officers of the Trust, their business
addresses, and principal occupations during the past five years
are:
NAME AND ADDRESS POSITION BUSINESS AFFILIATIONS AND
WITH THE PRINCIPAL OCCUPATIONS
TRUST
Barnett Chernow Vice Executive Vice President,
Golden American Life President Golden American Life
Insurance Co. Insurance Company; Executive
1001 Jefferson Street Vice President, Directed
Wilmington, DE 19801 Services, Inc.; Executive Vice
President, First Golden American
Life Insurance Company of New
York; formerly,Senior Vice
President and Chief
Financial Officer, Reliance
Insurance Company, August
1977 to July 1993. Age 48.
J. Michael Earley Trustee President, and Chief
665 Locust Street Executive Officer, Bankers
Des Moines, IA 50309 Trust Company, Des Moines,
Iowa since July 1992;
President and Chief
Executive Officer, Mid-
America Savings Bank,
Waterloo, Iowa from April,
1987 to June, 1992. Age 51.
R. Barbara Gitenstein Trustee Trustee Provost, Drake
Provost Office University since July 1992;
202 Old Main Assistant Provost, State
Drake University University of New York from
2507 University August, 1991 to July, 1992;
Avenue Associate Provost, State
Des Moines, IA 50311- University of New York -
4505 Oswego from January, 1989 to
August, 1991. Age 49.
Robert A. Grayson Trustee Co-founder, Grayson
Grayson Associates Associates, Inc.; Adjunct
108 Loma Media Road Professor of Marketing, New
Santa Barbara, CA York University School of
93103 Business Administration;
former Director, The Golden
Financial Group, Inc.;
former Senior Vice
President, David & Charles
Advertising. Age 70.
Myles R. Tashman Secretary Executive Vice President,
Golden American Life Secretary and General Counsel,
Insurance Co. Golden American Life Insurance
1001 Jefferson Street Company; Director, Executive Vice
Wilmington, DE 19801 President, Secretary and General
Counsel, Directed Services, Inc.;
Director, Executive Vice
President, Secretary and General
Counsel, First Golden American Life
Insurance Company of New York;
formerly, Senior Vice President
and General Counsel, United Pacific
Life Insurance Company (1986-
1993). Age 55.
30
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<PAGE>
Stanley B. Seidler Trustee President, Iowa Periodicals,
P.O. Box. 1297 Inc. since 1990 and
3301 McKinley Avenue President, Excell Marketing
Des Moines, IA 50321 L.C. since 1994. Age 69.
Mary Bea Wilkinson Treasurer Senior Vice President & Treasurer,
Golden American Life First Golden American Life Insurance
Insurance Co. Company of New York; Senior Vice
1001 Jefferson Street President and Treasurer, Golden
Wilmington, DE 19801 American Life Insurance Co.;
and President and Treasurer,
Directed Services, Inc.
October 1993 to December
1996; Assistant Vice
President, CIGNA Insurance
Companies, August 1993 to
October 1993; various
positions with United
Pacific Life Insurance
Company, January 1987 to
July 1993, and was Vice
President and Controller
upon leaving. Age 41.
Roger B. Vincent Trustee President, Springwell
Springwell Corporation; Director
Corporation Petralone, Inc.; formerly,
230 Park Avenue, Managing Director Bankers
New York, NY 10169 Trust Company. Age 52.
Elizabeth J. Newell Trustee President and Chief
KRAGIE/NEWELL, Inc. Executive Officer of
2633 Fleur Drive KRAGIE/NEWELL, Inc. Age 51
Des Moines, IA 50321
As of December 31, 1997, none of the Trustees directly owns
shares of the Series. In addition, as of December 31, 1997, the
Trustees and Officers as a group owned Variable Contracts that
entitled them to give voting instructions with respect to less
than one percent of the outstanding shares of each Series in the
aggregate.
Each Trustee of the Trust who is not an interested person of the Trust or
Manager or Portfolio Manager receives a fee of $6,000 for each Trustees'
meeting attended and any expenses incurred in attending such meetings or
carrying out their responsibilities as Trustees of the Trust. With respect to
the period ended December 31, 1997, the Trust paid Trustees' Fees aggregating
$105,000. The following table shows 1997 compensation by Trustee.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Total
Aggregate Retirement Estimated Compensation
Compensation Benefits Accrued Annual From Registrant
Name of Person, From As Part of Fund Benefits Upon and Fund Complex
Position Registrant Expenses Retirement Paid to Trustees
J. Michael Earley, $ 9,000 N/A N/A $ 21,750
Trustee
R. Barbara Gitenstein, $ 9,000 N/A N/A $ 21,000
Trustee
Robert A. Grayson $ 24,000 N/A N/A $ 24,000
Trustee
Stanley B. Seidler, $ 9,000 N/A N/A $ 21,000
Trustee
Elizabeth J. Newell $ 6,000 N/A N/A $ 12,000
Trustee
Roger B. Vincent $ 24,000 N/A N/A $ 24,000
Trustee
M. Norvell Young $ 24,000 N/A N/A $ 24,000
Trustee
</TABLE>
31
The table below lists each Variable Contract Owner who owns
a Variable Contract that entitles the owner to give voting
instructions with respect to 5% or more of the shares of the
Series as of March 31, 1998. The address for each record owner
is c/o Golden American Life Insurance Company, 1001 Jefferson
Avenue, Wilmington, DE 19801.
NAME SERIES PERCENTAGE
- ----- ------ ----------
David & Anita Swann Market Manager 13.17%
Charitable Remainder
Trust
Darald Libby Market Manager 8.22%
Charitable Remainder
Unit Trust
George Berman Market Manager 7.32%
Charitable Remainder
Trust
Sanford Lugar Market Manager 5.89%
In addition, as of December 31, 1997 the General Account of
Golden American owned 9.83% of the shares of the Emerging Markets
Series and Security Equity Life owned beneficially 30.83% of the
shares of the Limited Maturity Bond Series.
THE MANAGEMENT AGREEMENT
Directed Services, Inc. ("DSI" or the "Manager") serves as
Manager to the Series pursuant to a Management Agreement (the
"Management Agreement") between the Manager and the Trust. DSI's
address is 1001 Jefferson Street, Suite 400, Wilmington, Delaware
19801. DSI is a New York corporation that is a wholly owned
subsidiary of Equitable of Iowa Companies ("Equitable of Iowa"),
which, in turn, is a subsidiary of ING Groep, N.V. ("ING"). DSI
is registered with the Securities and Exchange Commission as an
investment adviser and a broker-dealer. The Trust currently
offers the shares of its operating Series to, among others,
separate accounts of Golden American Life Insurance Company
("Golden American") to serve as the investment medium for
Variable Contracts issued by Golden American. DSI is the
principal underwriter and distributor of the Variable Contracts
issued by Golden American. Golden American is a stock life
insurance company organized under the laws of the State of
Delaware. Prior to December 30, 1993, Golden American was a
Minnesota corporation. Golden American is an indirect wholly
owned subsidiary of Equitable of Iowa.
Pursuant to the Management Agreement, the Manager, subject
to the direction of the Board of Trustees, is responsible for
providing all supervisory, management, and administrative
services reasonably necessary for the operation of the Trust and
its Series other than the investment advisory services performed
by the Portfolio Managers. These services include, but are not
limited to, (i) coordinating at the Manager's expense for all
Series all matters relating to the operation of the Series,
including any necessary coordination among the Series' Portfolio
Managers, Custodian, Dividend Disbursing Agent, Portfolio
Accounting Agent (including pricing and valuation of the Series'
portfolios), accountants, attorneys, and other parties performing
services or operational functions for the Trust; (ii) providing
the Trust and the Series, at the Manager's expense, with the
services of a sufficient number of persons competent to perform
such administrative and clerical functions as are necessary to
ensure compliance with federal securities laws and to provide
effective supervision and administration of the Trust; (iii)
maintaining or supervising the maintenance by third parties
selected by the Manager of such books and records of the Trust
and the Series as may be required by applicable federal or state
law; (iv) preparing or supervising the preparation by third
parties selected by the Manager of all federal, state, and local
tax returns and reports of the Trust relating to the Series
required by applicable law; (v) preparing and filing and
arranging for the distribution of proxy materials and
32
<PAGE>
<PAGE>
periodic
reports to shareholders of the Series as required by applicable
law in connection with the Series; (vi) preparing and arranging
for the filing of such registration statements and other
documents with the Securities and Exchange Commission and other
federal and state regulatory authorities as may be required by
applicable law in connection with the Series; (vii) taking such
other action with respect to the Trust, as may be required by
applicable law, including without limitation the rules and
regulations of the SEC and other regulatory agencies; and (viii)
providing the Trust at the Manager's expense, with adequate
personnel, office space, communications facilities, and other
facilities necessary for operation of the Series contemplated in
the Management Agreement. Other responsibilities of the Manager
are described in the Prospectus.
The Manager shall make its officers and employees available
to the Board of Trustees and Officers of the Trust for
consultation and discussions regarding the supervision and
administration of the Series.
Pursuant to the Management Agreement, the Manager is
authorized to exercise full investment discretion and make all
determinations with respect to the investment of a Series' assets
and the purchase and sale of portfolio securities for one or more
Series in the event that at any time no Portfolio Manager is
engaged to manage the assets of such Series.
The Management Agreement shall continue in effect until
October 24, 1999, and from year to year thereafter, provided such
continuance after August 13, 1998 is approved annually by (i) the
holders of a majority of the outstanding voting securities of the
Trust or by the Board of Trustees, and (ii) a majority of the
Trustees who are not parties to such Management Agreement or
"interested persons" (as defined in the Investment Company Act of
1940 (the "1940 Act")) of any such party. The Management
Agreement, dated October 24, 1997, was approved by shareholders at
a meeting held on October 9, 1997, and was approved by the Board of
Trustees, including the Trustees who are not parties to the
Management Agreement or interested persons of such parties, at a
meeting held on August 19, 1997. The Management Agreement may be
terminated without penalty by vote of the Trustees or the
shareholders of the Series or by the Manager, on 60 days' written
notice by either party to the Management Agreement, and will
terminate automatically if assigned as that term is described in
the 1940 Act.
Prior to October 24, 1997, DSI served as the manager to the
Trust pursuant to a Management Agreement dated August 13, 1996,
and prior to August 13, 1996, DSI served as manager to the
Trust pursuant to a Management Agreement dated October 1, 1993.
Gross fees paid to the Manager under the Management
Agreement (pursuant to which the Manager provides all services
reasonably necessary for the operation of the Trust) for the
fiscal year ended December 31, 1997 were as follows: Multiple
Allocation Series -- $2,635,937; Strategic Equity Series --
$349,342; Fully Managed Series -- $1,489,989; Limited Maturity
Bond Series -- $454,759; Hard Assets Series -- $462,391; Real
Estate Series -- $610,484; All-Growth Series -- $730,308; Capital
Appreciation Series -- $1,664,222; Rising Dividends Series --
$1,794,223; Emerging Markets Series -- $845,128; Liquid Asset
Series -- $289,064; Small Cap Series -- $472,567; Value Equity
Series -- $591,757; Managed Global Series -- $1,238,851 and Market
Manager Series -- 63,228. Gross fees paid to the Manager under
the Management Agreement (pursuant to which the Manager provides
all services reasonably necessary for the operation of the Trust)
for the fiscal year ended December 31, 1996 were as follows:
Multiple Allocation Series -- $2,892,936; Strategic Equity Series --
$195,979; Fully Managed Series -- $1,266,104; Limited Maturity
Bond Series -- $497,345; Hard Assets Series - - $362,600; Real
Estate Series -- $371,844; All-Growth Series -- $910,039; Capital
Appreciation Series -- $1,335,410; Rising Dividends Series --
$989,772; Emerging Markets Series -- $791,005; Liquid Asset
Series -- $240,479; Small Cap Series -- $180,699 and Value Equity
Series -- $379,126. Gross fees paid to the Manager under the
Management Agreement (pursuant to which the Manager provides all
services reasonably necessary for the operation of the Trust) for
the fiscal year ended December 31, 1995 were as follows: Multiple
Allocation Series -- $3,056,095; Strategic Equity Series
(commencement of operation October 2, 1995) -- $11,085; Fully
Managed Series -- $1,102,160; Limited Maturity Bond Series --
$516,872; Hard Assets Series - - $291,869; Real Estate Series --
$347,823; All-Growth Series -- $832,889; Capital Appreciation
Series -- $1,055,352; Rising Dividends Series -- $641,200;
Emerging Markets Series -- $817,859; Liquid Asset Series --
$254,546; and Value Equity Series -- $108,140. The management
fee payable to the Manager for the Market Manager Series for the
fiscal year ending December 31, 1995 was waived in part ($6,748)
by the Manager and paid in part ($44,976) by the Series.
33
<PAGE>
<PAGE>
For the period from September 1, 1996 to December 31, 1996
the Managed Global Series paid the Manager fees of $349,038. For
the period from January 1 through August 30, 1996 and the fiscal
year ended December 31, 1995, the predecessor of the
Managed Global Series of the Series paid management fees of
$211,615, and $293,930, respectively.
The Trust, DSI, and each Portfolio Manager entered into
Portfolio Management Agreements dated and effective as of October
24, 1997. The Portfolio Management Agreements were approved by
the Trustees of the Trust at a meeting held on August 19, 1997 and
were approved by shareholders of each Series of the Trust at a
meeting held on October 9, 1997.
Pursuant to the separate Portfolio Management Agreements,
the Manager (and not the Trust) pays each Portfolio Manager for
its services a monthly fee at annual rates which are expressed as
percentages of the average daily net assets of each Series. For
the fiscal year ending December 31, 1997, the Manager (and not the
Trust) paid the Portfolio Managers the following amounts:
Zweig Advisors Inc. -- $1,339,369 for the Multiple Allocation
Series and $200,373 for the Strategic Equity Series; T. Rowe
Price Associates, Inc.-- $757,091 for the Fully Managed Series;
Putnam Investment Management, Inc. -- $462,738 for the Emerging
Markets Series and $664,883 for the Managed Global Series;
Van Eck Associates Corp. -- $234,949 for the Hard Assets
Series; Chancellor LGT Asset Management Inc. -- $845,622
for the Capital Appreciation Series; Kayne Anderson
Investment Management, L.P. -- $911,678 for the Rising Dividends
Series; EII Realty Securities, Inc. -- $310,198 for the Real
Estate Series; Eagle Asset Management, Inc. -- $301,429 for the
Value Equity Series; and Pilgrim Baxter & Associated, Ltd. --
$396,195 for the All-Growth Series; Equitable Investment Services,
Inc. -- $84,766 for Liquid Assets Series, $198,601 for Limited
Maturity Bond Series and $31,614 for Market Manager Series; and
Fred Alger Management, Inc. -- $240,119 for Small Cap Series.
For the fiscal year ended December 31, 1996, the Manager (and
not the Trust) paid the Portfolio Managers the following amounts:
Zweig Advisors Inc. -- $1,458,329 for the Multiple Allocation Series
and $98,793 for the Strategic Equity Series ; T. Rowe Price
Associates, Inc.-- $638,243 for the Fully Managed Series; Bankers
Trust Company -- $395,503 for the Emerging Markets Series and
$28,992 for the Market Manager Series; Van Eck Associates Corp.
- - -- $182,786 for the Hard Assets Series; Chancellor LGT Asset
Management Inc. -- $673,180 for the Capital Appreciation Series;
Kayne Anderson Investment Management, L.P. -- $498,776 for the
Rising Dividends Series; EII Realty Securities, Inc. --
$187,447 for the Real Estate Series; Eagle Asset Management, Inc.
- - -- $191,117 for the Value Equity Series; and Warburg, Pincus
Counsellors, Inc. -- $458,750 for the All-Growth Series. For
the fiscal period of September 1, 1996 to December 31, 1996 the
Manager (and not the Trust) paid Warburg, Pincus Counsellors,
Inc. $170,010 on behalf of the Managed Global Series. For the
fiscal period January 1, 1996 to August 31, 1996, Warburg, Pincus
Counsellors, Inc. received $317,424 from the predecessor and the
Managed Global Series. For the fiscal period of January 1, 1996 to
August 12, 1996 the Manager paid Bankers Trust Company $44,413
for the Liquid Asset Series and $135,897 for the Limited Maturity
Bond Series. For the fiscal period of August 13, 1996 to
December 31, 1996 the Manager paid Equitable Investment Services,
Inc.$28,206 for the Liquid Asset Series and $79,768 for the
Limited Maturity Bond Series. For the fiscal year ended December
31, 1995, the Manager (and not the Trust) paid the Portfolio
Managers the following amounts: Zweig Advisors Inc. --
$1,623,170 for the Multiple Allocation Series and $5,543 for the
Strategic Equity Series (operation commencement from October 2,
1995); T. Rowe Price Associates, Inc. -- $552,676 for the Fully
Managed Series; Bankers Trust Company -- $222,697 for the Limited
Maturity Bond Series, $410,190 for the Emerging Markets Series,
$76,360 for the Liquid Asset Series and $22,410 for the Market
Manager Series; Van Eck Associates Corp. -- $150,474 for the
Hard Assets Series; Chancellor LGT Asset Management, Inc. --
$559,368 for the Capital Appreciation Series; Kayne, Anderson
Investment Management, L.P. -- $325,429 for the Rising Dividends
Series; EII Realty Securities, Inc. --$174,495 for the Real
Estate Series; Eagle Asset Management, Inc. -- $54,070 for the
Value Equity Series; and Warburg, Pincus Counsellors, Inc. --
$417,408 for the All-Growth Series.
34
<PAGE>
<PAGE>
For the fiscal year ended December 31, 1995 the
predecessor of the Managed Global Series paid portfolio
management fees of $440,770.
DISTRIBUTION OF TRUST SHARES
Directed Services, Inc. ("DSI") serves as the Series'
Distributor. DSI is not obligated to sell a specific amount of
the Series' shares. DSI bears all expenses of providing
distribution services including the costs of sales presentations,
mailings, advertising, and any other marketing efforts by DSI in
connection with the distribution or sale of the shares.
PURCHASES AND REDEMPTIONS
For information on purchase and redemption of shares, see
"Purchase of Shares" and "Redemption of Shares" in the
Prospectuses. The Trust may suspend the right of redemption of
shares of any Series and may postpone payment beyond seven days
for any period: (i) during which the New York Stock Exchange is
closed other than customary weekend and holiday closing or during
which trading on the New York Stock Exchange is restricted; (ii)
when the Securities and Exchange Commission determines that a
state of emergency exists which may make payment or transfer not
reasonably practicable; (iii) as the Securities and Exchange
Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any other time when the Trust
may, under applicable laws and regulations, suspend payment on
the redemption of its shares. If the Board of Trustees should
determine that it would be detrimental to the best interests of
the remaining shareholders of a Series to make payment wholly or
partly in cash, the Series may pay the redemption price in whole
or in part by a distribution in kind of securities from the
portfolio of the Series, in lieu of cash, in conformity with
applicable rules of the Securities and Exchange Commission. If
shares are redeemed in kind, the redeeming shareholder might
incur brokerage costs in converting the assets into cash.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Series are made by the
Portfolio Manager of each Series. Each Portfolio Manager has
investment advisory clients other than the Series. A particular
security may be bought or sold by a Portfolio Manager for certain
clients even though it could have been bought or sold for other
clients at the same time. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security,
in which event each day's transactions in such security are,
insofar as possible, allocated between such clients in a manner
deemed fair and reasonable by the Portfolio Manager. Although
there is no specified formula for allocating such transactions,
the various allocation methods used by the Portfolio Manager, and
the results of such allocations, are subject to periodic review
by the Trust's Manager and Board of Trustees. There may be
circumstances when purchases or sales of portfolio securities for
one or more clients will have an adverse effect on other clients.
The Portfolio Manager for a Series may receive research
services from many broker-dealers with which the Portfolio
Manager places the Series' portfolio transactions. These
services, which in some cases may also be purchased for cash,
include such matters as general economic and security market
reviews, industry and company reviews, evaluations of securities,
and recommendations as to the purchase and sale of securities.
Some of these services may be of value to the Portfolio Manager
and its affiliates in advising its various clients (including the
Series), although not all of these services are necessarily
useful and of value in managing a Series.
BROKERAGE AND RESEARCH SERVICES
The Portfolio Manager for a Series places all orders for the
purchase and sale of portfolio securities, options, and futures
35
<PAGE>
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contracts for a Series through a substantial number of brokers
and dealers or futures commission merchants. In executing
transactions, the Portfolio Manager will attempt to obtain the
best execution for a Series taking into account such factors as
price (including the applicable brokerage commission or dollar
spread), size of order, the nature of the market for the
security, the timing of the transaction, the reputation,
experience and financial stability of the broker-dealer involved,
the quality of the service, the difficulty of execution and
operational facilities of the firms involved, and the firm's risk
in positioning a block of securities. In transactions on stock
exchanges in the United States, payments of brokerage commissions
are negotiated. In effecting purchases and sales of portfolio
securities in transactions on United States stock exchanges for
the account of the Trust, the Portfolio Manager may pay higher
commission rates than the lowest available when the Portfolio
Manager believes it is reasonable to do so in light of the value
of the brokerage and research services provided by the broker
effecting the transaction, as described below. In the case of
securities traded on some foreign stock exchanges, brokerage
commissions may be fixed and the Portfolio Manager may be unable
to negotiate commission rates for these transactions. In the
case of securities traded on the over-the-counter markets, there
is generally no stated commission, but the price includes an
undisclosed commission or markup. There is generally no stated
commission in the case of fixed income securities, which are
generally traded in the over-the-counter markets, but the price
paid by the Series usually includes an undisclosed dealer
commission or mark-up. In underwritten offerings, the price paid
by the Series includes a disclosed, fixed commission or discount
retained by the underwriter or dealer. Transactions on U.S.
stock exchanges and other agency transactions involve the payment
by the Series of negotiated brokerage commissions. Such
commissions vary among different brokers. Also, a particular
broker may charge different commissions according to such factors
as the difficulty and size of the transaction.
It has for many years been a common practice in the
investment advisory business for advisers of investment companies
and other institutional investors to receive research services
from broker-dealers which execute portfolio transactions for the
clients of such advisers. Consistent with this practice, the
Portfolio Manager for a Series may receive research services from
many broker-dealers with which the Portfolio Manager places the
Series' portfolio transactions. These services, which in some
cases may also be purchased for cash, include such matters as
general economic and security market reviews, industry and
company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services
may be of value to the Portfolio Manager and its affiliates in
advising its various clients (including the Series), although not
all of these services are necessarily useful and of value in
managing a Series. The advisory fee paid by the Series to the
Portfolio Manager is not reduced because the Portfolio Manager
and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act
of 1934, the Portfolio Manager may cause a Series to pay a broker-
dealer, which provides "brokerage and research services" (as
defined in the Act) to the Portfolio Manager, a disclosed
commission for effecting a securities transaction for the Series
in excess of the commission which another broker-dealer would
have charged for effecting that transaction.
A Portfolio Manager may place orders for the purchase and
sale of exchange-listed portfolio securities with a broker-dealer
that is an affiliate of the Portfolio Manager where, in the
judgment of the Portfolio Manager, such firm will be able to
obtain a price and execution at least as favorable as other
qualified brokers.
Pursuant to rules of the Securities and Exchange Commission,
a broker-dealer that is an affiliate of the Manager or a
Portfolio Manager or, if it is also a broker-dealer, the
Portfolio Manager may receive and retain compensation for
effecting portfolio transactions for a Series on a national
securities exchange of which the broker-dealer is a member if the
transaction is "executed" on the floor of the exchange by another
broker which is not an "associated person" of the affiliated
broker-dealer or Portfolio Manager, and if there is in effect a
written contract between the Portfolio Manager and the Trust
expressly permitting the affiliated broker-dealer or Portfolio
Manager to receive and retain such compensation. The Portfolio
Management Agreements provide that each Portfolio Manager may
retain compensation on transactions effected for a Series in
accordance with the terms of these rules.
Securities and Exchange Commission rules further require
that commissions paid to such an affiliated broker-dealer or
Portfolio Manager by a Series on exchange transactions not exceed
"usual and customary brokerage commissions." The rules define
"usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other
36
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<PAGE>
brokers in
connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange
during a comparable period of time." The Board of Trustees has
adopted procedures for evaluating the reasonableness of
commissions paid to broker-dealers that are affiliated with
Portfolio Managers or to Portfolio Managers that are broker-
dealers and will review these procedures periodically.
Watermark Securities, Inc., Zweig Securities Corp., KA
Associates, Inc., Raymond James & Associates, Inc., and Fred
Alger & Company, Incorporated are registered broker-dealers,
and each is an affiliate of a Portfolio Manager. Certain
affiliates of Robert Fleming Holdings Limited and Jardine
Fleming Group Limited are broker-dealers affiliated with T.
Rowe Price Associates, Inc. Any of the above firms may
retain compensation on transactions effected for a Series
in accordance with these rules and procedures.
For the fiscal year ended December 31, 1997, the Multiple
Allocation Series, Strategic Equity Series, Fully Managed Series,
Limited Maturity Bond Series, Emerging Markets Series, Liquid
Asset Series, Market Manager Series, Hard Assets Series, Real
Estate Series, Capital Appreciation Series, Rising Dividends
Series, Value Equity Series, Managed Global Series, All-
Growth Series and Small Cap Series paid brokerage commissions
of $315,130, $82,710, $113,636, $0, $614,405, $0, $0, $249,483,
$112,726, $174,820, $163,515, $219,706, $811,015, $231,719, and
$150,934, respectively. The Multiple Allocation Series and
Strategic Equity Series paid brokerage commissions of $33,263
and $1,788 (10.55% and 2.16% of its total brokerage commissions),
respectively, to Zweig Securities. The Value Equity Series paid
brokerage commissions of $13,239 (6.03% of its total brokerage
commissions) to Raymond James & Associates, Inc. The Hard Assets
Series paid brokerage commissions of $900 (0.36% of its total
brokerage commissions) to Raymond James & Associates, Inc. The
Small Cap Series paid brokerage commissions of $150,041 (99.41% of
its total brokerage commissions) to Fred Alger.
For the fiscal year ended December 31, 1996, the Multiple
Allocation Series, Strategic Equity Series, Fully Managed Series,
Limited Maturity Bond Series, Emerging Markets Series, Liquid
Asset Series, Market Manager Series, Hard Assets Series, Real
Estate Series, Capital Appreciation Series, Rising Dividends
Series, Value Equity Series, Managed Global Series, and All-
Growth Series paid brokerage commissions of $472,297, $55,015,
$127,213, $0, $541,589, $0, $0, $138,086, $52,435, $188,794,
$72,044, $121,872,$191,843, and $333,960, respectively. The
Multiple Allocation Series paid brokerage commissions of $42,834
(9.07% of its total brokerage commissions) to Zweig Securities.
The Value Equity Series paid brokerage commissions of $2,550
(2.09% of its total brokerage commissions) to Raymond James &
Associates, Inc. The Capital Appreciation Series paid brokerage
commissions of $1,920 (1.02% of its total brokerage commissions)
to Raymond James & Associates, Inc. The Fully Managed Series
paid brokerage commissions of $150 (0.12% of its total brokerage
commissions) to Raymond James & Associates, Inc. The Hard Assets
Series paid brokerage commissions of $150 (0.11% of its total
brokerage commissions) to Raymond James & Associates, Inc. The
Small Cap Series paid brokerage commissions of $33,058 (78.34% of
its total brokerage commissions) to Fred Alger. The Emerging
Markets Series paid brokerage commissions of $64,131 and $2,113
(11.84% and 0.39% of its total brokerage commissions) to Jardine
Fleming and Robert Fleming, respectively. The Managed Global
Series paid brokerage commissions of $3,041 (1.59% of its total
brokerage commissions) to Jardine Fleming. The Strategic Equity
Series paid brokerage commissions of $435 (0.79% of its total
brokerage commissions) to Zweig Securities.
For the fiscal year ended December 31, 1995, the Multiple
Allocation Series, Strategic Equity Series (operation
commencement from October 2, 1995), Fully Managed Series, Limited
Maturity Bond Series, Emerging Markets Series, Liquid Asset
Series, Market Manager Series, Hard Assets Series, Real Estate
Series, Capital Appreciation Series, Rising Dividends Series,
Value Equity Series and All-Growth Series paid brokerage
commissions of $519,963, $10,355, $321,876, $0, $600,724, $0,
$1,575, $40,242, $113,534, $235,075, $82,924, $59,789 and
$193,100, respectively. The Multiple Allocation Series paid
brokerage commissions of $86,365 (16.61% of its total brokerage
commissions) to Watermark Securities, Inc. The Market Manager
Series paid brokerage commissions of $1,425 (90.48% of its total
brokerage commissions) to BT Brokerage Corporation. The Value
Equity Series paid brokerage commissions of $240 (0.40% of its
total brokerage commissions) to Raymond James & Associates, Inc.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectuses,
the Series' net asset value per share for the purpose of pricing
purchase and redemption orders is determined at or about 4:00
P.M., New York City time, on each day the New York Stock Exchange
is open for trading, exclusive of federal holidays.
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The Liquid Asset Series' portfolio securities are valued
using the amortized cost method of valuation. This involves
valuing a security at cost on the date of acquisition and
thereafter assuming a constant accretion of a discount or
amortization of a premium to maturity, regardless of the impact
of fluctuating interest rates on the market value of the
instrument. While this method provides certainty in valuation,
it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Series
would receive if it sold the instrument. During such periods the
yield to investors in the Series may differ somewhat from that
obtained in a similar investment company which uses available
market quotations to value all of its portfolio securities.
The Securities and Exchange Commission's regulations require
the Liquid Asset Series to adhere to certain conditions. The
Trustees, as part of their responsibility within the overall duty
of care owed to the shareholders, are required to establish
procedures reasonably designed, taking into account current
market conditions and the Series' investment objectives, to
stabilize the net asset value per share as computed for the
purpose of distribution and redemption at $1.00 per share. The
Trustees' procedures include a requirement to periodically
monitor, as appropriate and at such intervals as are reasonable
in light of current market conditions, the relationship between
the amortized cost value per share and the net asset value per
share based upon available indications of market value. The
Trustees will consider what steps should be taken, if any, in the
event of a difference of more than 1/2 of 1% between the two.
The Trustees will take such steps as they consider appropriate
(e.g., selling securities to shorten the average portfolio
maturity) to minimize any material dilution or other unfair
results which might arise from differences between the two. The
Series also is required to maintain a dollar-weighted average
portfolio maturity of 90 days or less, to limit its investments
to instruments having remaining maturities of 13 months or less
(except securities held subject to repurchase agreements having
13 months or less to maturity) and to invest only in securities
determined by the Portfolio Manager under procedures established
by the Board of Trustees to be of high quality with minimal
credit risks.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the current yield
and effective yield of its Liquid Asset Series, the yield of the
remaining Series, and the total return of all Series in
advertisements or sales literature. In the case of Variable
Contracts, performance information for the Series will not be
advertised or included in sales literature unless accompanied by
comparable performance information for a separate account to
which the Series offer their shares.
Current yield for Liquid Asset Series will be based on the
change in the value of a hypothetical investment (exclusive of
capital charges) over a particular seven-day period, less a pro-
rata share of Series expenses accrued over that period (the "base
period"), and stated as a percentage of the investment at the
start of the base period (the "base period return"). The base
period return is then annualized by multiplying by 365/7, with
the resulting yield figure carried to at least the nearest
hundredth of one percent. "Effective yield" for the Liquid Asset
Series assumes that all dividends received during an annual
period have been reinvested. Calculation of "effective yield"
begins with the same "base period return" used in the calculation
of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
Effective Yield = [ ( (Base Period Return) + 1 ) ^ 365/7 ] - 1
Quotations of yield for the remaining Series will be based
on all investment income per share earned during a particular 30-
day period (including dividends and interest and calculated in
accordance with a standardized yield formula adopted by the
Securities and Exchange Commission), less expenses accrued during
the period ("net investment income"), and are computed by
dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following
formula:
YIELD = 2 [((a-b)/cd + 1 )^6 - 1 ]
where,
a = dividends and interest earned during the period,
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b = expenses accrued for the period (net of
reimbursements),
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends, and
d = the maximum offering price per share on the last day
of the period.
Quotations of average annual total return for a Series will
be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in the Series over certain
periods that will include periods of one, five, and ten years
(or, if less, up to the life of the Series), calculated pursuant
to the following formula: P (1 + T)n = ERV (where P = a
hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). Quotations of total return may also be
shown for other periods. All total return figures reflect the
deduction of a proportional share of Series expenses on an annual
basis, and assume that all dividends and distributions are
reinvested when paid.
For the period of January 3, 1989 (inception of the Trust)
to December 31, 1997 and for the five- and one-year periods ended
December 31, 1997 the average annual total return for each Series
was as follows: 9.91%, 10.78%, and 17.44% for the Multiple
Allocation Series; 9.37%, 10.08%, and 15.27% for the Fully Managed
Series; 6.79%, 5.46%, and 6.67% for the Limited Maturity Bond
Series; 5.53%, 4.14%, and 5.87% for the All-Growth Series;
12.59%, 19.29%, and 22.79% for the Real Estate Series; 9.93%,
19.20%, and 6.22% for the Hard Assets Series; and 5.16%, 4.38%,
and 5.07% for the Liquid Asset Series. For the period of May 4,
1992 (inception of the Capital Appreciation Series) to December 31,
1997 and for the five- and one-year period ended December 31,
1997, the average total return for the Capital Appreciation
Series was 16.61%, 16.56%, and 28.95%. For the period of October
1, 1993 (inception of the Rising Dividends and Emerging Markets
Series) to December 31, 1997 and for the one-year period ended
December 31, 1997, the average total return for the Rising Dividends
Series was 19.48% and 29.82% and the average annual total return
for the Emerging Markets Series was -1.89% and -9.37%. For the
period of November 14, 1994 (inception of the Market Manager
Series) to December 31, 1997 and for the one-year period ended
December 31, 1997, the average total return for the Market Manager
Series was 24.62% and 33.82%. For the period of January 1, 1995
(inception of the Value Equity Series) to December 31, 1997 and for
the one-year period ended December 31, 1997, the average total return
for the Value Equity Series was 24.01% and 27.28%. For the period
of October 2, 1995 (inception of the Strategic Equity Series) to
December 31, 1997 and for the one-year period ended December 31, 1997,
the average total return for the Strategic Equity Series was 18.92%
and 23.16%. For the period ended January 3, 1996 (inception for
the Small Cap Series) to December 31, 1997, and for the one-year period
ended December 31, 1997 the total return for the Small Cap Series was
15.17% and 10.32%.
The Managed Global Series is a successor to the Managed
Global Account of Separate Account D of Golden American. As of
September 3, 1996, the investment-related assets of the Managed
Global Account of Separate Account D were transferred to a newly
created division of Separate Account B of Golden American.
Simultaneously, Separate Account B exchanged the investment-
related assets for shares of the Managed Global Series, a newly
created Series of the Trust. The following information regarding
average total return is restated from the Managed Global Account
of Separate Account D. The total return figures reflect the
deduction of certain expenses, including the management fees,
custodian fees, fees of the Board of Governors of Separate
Account D, and other expenses. For the period of October 21,
1992 (commencement of operations) to December 31, 1997 and for
the five- and one-year period ended December 31, 1997, the
average total return for the Managed Global Series was 4.46%,
4.61% and 12.17%, respectively.
Each Series may be categorized as to its market
capitalization make-up ("large cap," mid cap" or "small cap")
with regard to the market capitalization of the issuers whose
securities it holds. A Series average or median market
capitalization may also be cited. Certain other statistical
measurements may be used to provide measures of a Series'
characteristics. Some of these statistical measures include
without limitation: median or average P/E ratios, duration and
beta. Median and average P/E ratios are measures describing the
relationship between the price of a Series' various securities
and their earnings per share. Duration is a weighted-average
term-to-maturity of the bond's cash flows, the weights being the
present value of each cash flow as a percentage of the bond's
full price.
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Beta is a historical measure of a portfolio's market
risk; a Beta of 1.10 indicates that the portfolio's returns
tended to be 10% higher (lower) than the market return during
periods in which market returns were positive (negative).
Performance information for a Series may be compared, in
advertisements, sales literature, and reports to shareholders to:
(i) the Standard & Poor's 500 Stock Index ("S&P 500"), the Dow
Jones Industrial Average ("DJIA"), the Lehman Brothers Government
Bond Index, the Donoghue Money Market Institutional Averages, the
Lehman Brothers Government Corporate Index, the Salomon High
Yield Index, or other indexes that measure performance of a
pertinent group of securities, (ii) other groups of mutual funds
tracked by Lipper Analytical Services, Inc., a widely used
independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by
other services, companies, publications, or persons who rank
mutual funds on overall performance or other criteria; and (iii)
the Consumer Price Index (measure for inflation) to assess the
real rate of return from an investment in the Series. Unmanaged
indexes may assume the reinvestment of dividends but generally do
not reflect deductions for administrative and management costs
and expenses.
Reports and promotional literature may also contain other
information including (i) the ranking of any Series derived from
rankings of mutual funds or other investment products tracked by
Lipper Analytical Services, Inc. or by other rating services,
companies, publications, or other persons who rank mutual funds
or other investment products on overall performance or other
criteria, and (ii) the effect of tax deferred compounding on a
Series' investment returns, or returns in general, which may be
illustrated by graphs, charts, or otherwise, and which may
include a comparison, at various points in time, of the return
from an investment in a Series (or returns in general) on a tax-
deferred basis (assuming one or more tax rates) with the return
on a taxable basis.
In addition, reports and promotional literature may contain
information concerning the Manager, the Portfolio Managers, or
affiliates of the Trust, the Manager, or the Portfolio Managers,
including (i) performance rankings of other mutual funds managed
by a Portfolio Manager, or the individuals employed by a
Portfolio Manager who exercise responsibility for the day-to-day
management of a Series, including rankings of mutual funds
published by Morningstar, Inc., Value Line Mutual Fund Survey, or
other rating services, companies, publications, or other persons
who rank mutual funds or other investment products on overall
performance or other criteria; (ii) lists of clients, the number
of clients, or assets under management; and (iii) information
regarding services rendered by the Manager to the Trust,
including information related to the selection and monitoring of
the Portfolio Managers. Reports and promotional literature may
also contain a description of the type of investor for whom it
could be suggested that a Series is intended, based upon each
Series' investment objectives.
In the case of Variable Contracts, quotations of yield or
total return for a Series will not take into account charges and
deductions against any Separate Accounts to which the Series
shares are sold or charges and deductions against the life
insurance policies or annuity contracts issued by Golden
American, although comparable performance information for the
Separate Account will take such charges into account.
Performance information for any Series reflects only the
performance of a hypothetical investment in the Series during the
particular time period on which the calculations are based.
Performance information should be considered in light of the
Series' investment objective or objectives and investment
policies, the characteristics and quality of the portfolios, and
the market conditions during the given time period, and should
not be considered as a representation of what may be achieved in
the future.
TAXATION
The following discussion summarizes certain U.S. federal tax
considerations incident to an investment in a Series.
Each Series intends to qualify annually and to elect to be
treated as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code").
To qualify as a regulated investment company, each Series
generally must, among other things: (i) derive in each taxable
year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, and gains from the
sale or other disposition of stock, securities or foreign
currencies, or other income derived
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with respect to its business
of investing in such stock, securities, or currencies (to satisfy
this requirement, it is intended that the Series investing in
gold and other commodities will be managed so that the gross
income derived from its investments in gold and other commodities
and future contracts on gold and other commodities, when combined
with any other gross income of the Series which is not derived
from qualifying sources, will not exceed 10% of the Series' gross
income during any fiscal year); (ii) diversify its holdings so that,
at the end of each quarter of the taxable year, (a) at least 50% of
the market value of the Series' assets is represented by cash, cash
items, U.S. Government securities, the securities of other regulated
investment companies, and other securities, with such other
securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the
Series' total assets and 10% of the outstanding voting securities
of such issuer, and (b) not more than 25% of the value of its
total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other
regulated investment companies), or of two or more issuers which
the Series controls (as that term is defined in the relevant
provisions of the Code) and which are determined to be engaged in
the same or similar trades or businesses or related trades or
businesses; and (iii) distribute at least 90% of its investment
company taxable income (which includes, among other items,
dividends, interest, and net short-term capital gains in excess
of any net long-term capital losses) each taxable year.
A Series qualifying as a regulated investment company
generally will not be subject to U.S. federal income tax on its
investment company taxable income and net capital gains (any net
long-term capital gains in excess of the net short-term capital
losses), if any, that it distributes to shareholders. Each
Series intends to distribute to its shareholders, at least
annually, substantially all of its investment company taxable
income and any net capital gains.
Generally, regulated investment companies, like the Series,
must distribute amounts on a timely basis in accordance with a
calendar year distribution requirement in order to avoid a
nondeductible 4% excise tax. Generally, to avoid the tax, a
regulated investment company must distribute during each calendar
year, an amount at least equal to the sum of (i) 98% of its
ordinary income (not taking into account any capital gains or
losses) for the calendar year, (ii) 98% of its capital gains in
excess of its capital losses (adjusted for certain ordinary
losses) for the twelve-month period ending on October 31 of the
calendar year, and (iii) all ordinary income and capital gains
for previous years that were not distributed during such years.
To avoid application of the excise tax, each Series intends to
make its distributions in accordance with the calendar year
distribution requirement. A distribution is treated as paid on
December 31 of the calendar year if it is declared by a Series in
October, November, or December of that year to shareholders of
record on a date in such a month and paid by the Series during
January of the following calendar year. Such distributions are
taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in
which the distributions are received. The excise tax provisions
described above do not apply to a regulated investment company,
like a Series, all of whose shareholders at all times during the
calendar year are (i) segregated asset accounts of life insurance
companies where the shares are held in connection with variable
contracts or (ii) tax-exempt retirement trusts described in Code
Section 401(a). (For this purpose, any shares of a Series
attributable to an investment in the Series not exceeding
$250,000 made in connection with the organization of the Series
shall not be taken into account.) Accordingly, if this condition
regarding the ownership of shares of a Series is met, the excise
tax will be inapplicable to that Series.
Some of the Series may invest in stocks of foreign companies
that are classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign company is classified
as a PFIC if at least one-half of its assets constitutes
investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as
having been realized ratably over the period during which a
Series held the PFIC stock. A Series itself will be subject to
tax on the portion, if any, of the excess distribution that is
allocated to a Series' holding period in prior taxable years (an
interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though a
Series distributes the corresponding income to shareholders.
Excess distributions include any gain
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from the sale of PFIC stock
as well as certain distributions from a PFIC. All excess
distributions are taxable as ordinary income.
A Series may be able to elect alternative tax treatment with
respect to PFIC stock. Under an election that currently may be
available, a Series generally would be required to include in its
gross income its share of the earnings of a PFIC on a current
basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed
above, relating to the taxation of excess distributions, would
not apply. In addition, another election may be available that
would involve marking to market a Series' PFIC stock at the end
of each taxable year (and on certain other dates prescribed in
the Code), with the result that unrealized gains are treated as
though they were realized although any such gains recognized will
be ordinary income rather than capital gain. If this election
were made, tax at the Series level under the PFIC rules would be
eliminated, but a Series could, in limited circumstances, incur
nondeductible interest charges. A Series' intention to qualify
annually as a regulated investment company may limit a Series'
elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among
other things, the character of gains, the amount of gain or loss
and the timing of the recognition of income with respect to PFIC
stock, as well as subject a Series itself to tax on certain
income from PFIC stock, the amount that must be distributed to
shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC
stock.
Certain options, futures contracts, and forward contracts in
which a Series may invest are "Section 1256 contracts." Gains or
losses on Section 1256 contracts generally are considered 60%
long-term and 40% short-term capital gains or losses; however,
foreign currency gains or losses arising from certain Section
1256 contracts may be treated as ordinary income or loss. Also,
Section 1256 contracts held by a Series at the end of each
taxable year (and at certain other times as prescribed pursuant
to the Code) are "marked to market" with the result that
unrealized gains or losses are treated as though they were
realized.
Generally, the hedging transactions undertaken by a Series
may result in "straddles" for U.S. federal income tax purposes.
The straddle rules may affect the character of gains (or losses)
realized by a Series. In addition, losses realized by a Series
on positions that are part of a straddle may be deferred under
the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such
losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences to
a Series of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term
capital gain realized by a Series which is taxed as ordinary
income when distributed to shareholders.
A Series may make one or more of the elections available
under the Code which are applicable to straddles. If a Series
makes any of the elections, the amount, character and timing of
the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the election(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to shareholders,
and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared
to a fund that did not engage in such hedging transactions.
Income received by a Series from sources within a foreign
country may be subject to withholding and other taxes imposed by
that country. Tax conventions between certain countries and the
U.S. may reduce or eliminate such taxes.
Under the Code, gains or losses attributable to fluctuations
in exchange rates which occur between the time a Series of the
Trust accrues income or other receivables or accrues expenses or
other liabilities denominated in a foreign
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currency and the time
that Series actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated
in a foreign currency and on disposition of certain futures
contracts, forward contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and
the date of disposition also are treated as ordinary gain or
loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the
amount of a Series' investment company taxable income to be
distributed to its shareholders as ordinary income.
To comply with regulations under Section 817(h) of the Code,
each Series of the Trust generally will be required to diversify
its investments so that on the last day of each quarter of a
calendar year, no more than 55% of the value of its assets is
represented by any one investment, no more than 70% is
represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is
represented by any four investments. For additional information
on the application of the asset diversification requirements
under Code Section 817(h), and the asset diversification
requirements applicable to regulated investment companies,
potential investors in the Market Manager Series should see
"Federal Income Tax Status" in the Market Manager Series'
Prospectus.
Generally, securities of a single issuer are treated as one
investment and obligations of each U.S. Government agency and
instrumentality (such as the Government National Mortgage
Association) are treated for purposes of Section 817(h) as issued
by separate issuers.
In connection with the issuance of the diversification
regulations, the Treasury Department announced that it would
issue future regulations or rulings addressing the circumstances
in which a variable contract owner's control of the investments
of a separate account may cause the contract owner, rather than
the insurance company, to be treated as the owner of the assets
held by the separate account. If the variable contract owner is
considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be
included currently in the contract owner's gross income. Among
the areas in which Treasury has indicated informally that it is
concerned that there may be too much contract owner control is
where a mutual fund (or series) underlying a separate account
invests solely in securities issued by companies in a specific
industry.
These future rules and regulations proscribing investment
control may adversely affect the ability of certain Series of the
Trust to operate as described in this Prospectus. There is,
however, no certainty as to what standards, if any, Treasury will
ultimately adopt.
In the event that unfavorable rules, regulations or
positions are adopted, there can be no assurance that the Series
will be able to operate as currently described in the Prospectus,
or that a Series will not have to change its investment objective
or objectives, investment policies, or investment restrictions.
While a Series' investment objective is fundamental and may be
changed only by a vote of a majority of its outstanding shares,
the Trustees have reserved the right to modify the investment
policies of a Series as necessary to prevent any such prospective
rules, regulations and positions from causing the Variable
Contract Owners to be considered the owners of the assets
underlying the Separate Accounts.
The requirements applicable to a Series' qualification as a
regulated investment company and its compliance with the
diversification test under Code Section 817(h) may limit the
extent to which a Series will be able to engage in transactions
in options, futures contracts or forward contracts, investments
in precious metals, and in short sales.
Debt securities purchased by the Series (such as zero coupon
bonds) may be treated for U.S. Federal income tax purposes as
having original issue discount. Original issue discount is
treated as interest for Federal income tax purposes and can
generally be defined as the excess of the stated redemption price
at maturity over the issue price. Original issue discount,
whether or not cash payments actually are received by the Series,
is treated for Federal income tax purposes as income earned by
the Series, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original
issue discount included in the income of the Series each year is
determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest.
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In addition, debt securities may be purchased by the Series
at a discount which exceeds the original issue discount remaining
on the securities, if any, at the time the Series purchased the
securities. This additional discount represents market discount
for income tax purposes. Treatment of market discount varies
depending upon the maturity of the debt security. Generally, in
the case of any debt security having a fixed maturity date of
more than one year from the date of issue and having market
discount, the gain realized on disposition will be treated as
ordinary income to the extent it does not exceed the accrued
market discount on the security (unless the Series elects for all
its debt securities having a fixed maturity date of more than one
year from the date of issue to include market discount in income
in tax years to which it is attributable). Generally, market
discount accrues on a daily basis. For any debt security having
a fixed maturity date of not more than one year from the date of
issue, special rules apply which may require in some
circumstances the ratable inclusion of income attributable to
discount at which the bond was acquired as calculated under the
Code. The Series may be required to capitalize, rather than
deduct currently, part or all of any net direct interest expense
on indebtedness incurred or continued to purchase or carry any
debt security having market discount (unless the Series makes the
election to include market discount currently).
DISTRIBUTIONS
Distributions of investment company taxable income (which
includes among other items, interest, dividends, and net realized
short-term capital gains in excess of net realized long-term
capital losses) and of net realized capital gains, whether
received in cash or additional shares are includable in the gross
income of the shareholder. Distributions of investment company
taxable income are treated as ordinary income for tax purposes.
Net capital gains designated as capital gains dividends by a
Series will, to the extent distributed, be treated as long-term
capital gains regardless of the length of time a shareholder may
have held the shares. Capital gains dividends may be taxed at one
of several different rates. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by a Series in
October, November, or December of that year to shareholders of
record on a date in such a month and paid by the Series during
January of the following calendar year. Such distributions will
be taxable to shareholders in the calendar year in which they are
declared, rather than the calendar year in which they are
received. Distributions received by tax-exempt shareholders will
not be subject to federal income tax to the extent permitted
under the applicable tax exemption.
OTHER TAXES
Distributions may also be subject to additional state, local
and foreign taxes, depending on each shareholder's particular
situation. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them
of an investment in a Series. Depending upon the nature and
extent of a Series' contacts with a state or local jurisdiction,
the Series may be subject to the tax laws of such jurisdiction if
it is regarded under applicable law as doing business in, or as
having income derived from, the jurisdiction.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established
under an Agreement and Declaration of Trust dated August 3, 1988
and currently consists of twenty-four Series. The twenty-three
Series that are discussed in this Statement of Additional
Information and accompanying prospectuses and a Series that is
described in an additional prospectus and statement of additional
information are operational. The capitalization of the Trust
consists of an unlimited number of shares of beneficial interest
with a par value of $0.001 each. The Board of Trustees may
establish additional Series (with different investment objectives
and fundamental policies) at any time in the future.
Establishment and offering of additional Series will not alter
the rights of the Trust's shareholders, the Separate Accounts.
When issued in accordance with the terms of the Agreement and
Declaration of Trust, shares are fully paid, redeemable, freely
transferable, and non-assessable by the Trust. Shares do not
have preemptive rights or subscription rights. In liquidation of
a Series of the Trust, each shareholder is entitled to receive
his or her pro rata share of the net assets of that Series.
On January 31, 1992, the name of the Trust was changed to
The GCG Trust. Prior to that change, the name of the Trust was
The Specialty Managers Trust.
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VOTING RIGHTS
Shareholders of the Series are given certain voting rights.
Each share of each Series will be given one vote, unless a
different allocation of voting rights is required under
applicable law for a mutual fund that is an investment medium for
variable insurance products.
Massachusetts business trust law does not require the Trust
to hold annual shareholder meetings, although special meetings
may be called for a specific Series, or for the Trust as a whole,
for purposes such as electing or removing Trustees, changing
fundamental policies, or approving a contract for investment
advisory services. The Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if,
at any time, fewer than a majority of the Trustees have been
elected by the shareholders of the Trust. In addition, the
Agreement and Declaration of Trust provides that the holders of
not less than two-thirds of the outstanding shares or other
voting interests of the Trust may remove a person serving as
Trustee either by declaration in writing or at a meeting called
for such purpose. The Trust's shares do not have cumulative
voting rights. The Trustees are required to call a meeting for
the purpose of considering the removal of a person serving as
Trustee, if requested in writing to do so by the holders of not
less than 10% of the outstanding shares of the Trust. The Trust
is required to assist in shareholders' communications.
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Series is Bankers Trust Company, 280
Park Avenue, New York, New York 10017. First Data Investors
Services Group of First Data Corporation, One Exchange Place, 4th
Floor, Boston, MA 02109, provides administrative and portfolio
accounting services for all Series.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116-
5072, serves as independent auditors for the Trust.
COUNSEL
Sutherland, Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW,
Washington, D.C. 20004-2440 serves as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the
Prospectuses do not contain all the information included in the
Trust's Registration Statement filed with the Securities and
Exchange Commission under the Securities Act of 1933 with respect
to the securities offered by the Prospectus. Certain portions of
the Registration Statement have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission.
The Registration Statement, including the exhibits filed
therewith, may be examined at the offices of the Securities and
Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectuses as to
the contents of any contract or other documents referred to are
not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other documents filed as an
exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Trust's audited financial statements dated as of
December 31, 1997 for all Series except The Fund For Life Series,
including notes thereto, are incorporated by reference in this
Statement of Additional Information from the Trust's Annual Report
dated as of December 31, 1997.
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APPENDIX 1: DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc.'s ("Moody's")
description of its bond ratings:
Aaa - judged to be the best quality; they carry the
smallest degree of investment risk. Aa - judged to be of
high quality by all standards; together with the Aaa group,
they comprise what are generally known as high grade bonds.
A - possess many favorable investment attributes and are to
be considered as "upper medium grade obligations." Baa -
considered as medium grade obligations, i.e., 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. Ba - judged to have speculative elements; their
future cannot be considered as well assured. B - generally
lack characteristics of the desirable investment. 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 - speculative in a high degree; often in
default. C - lowest rate class of bonds; regarded as having
extremely poor prospects.
Moody's also applies numerical indicators 1, 2, and 3
to rating categories. The modifier 1 indicates that the
security is in the higher end of its rating category; 2
indicates a mid-range ranking; and 3 indicates a ranking
toward the lower end of the category.
Excerpts from Standard & Poor's Rating Group ("S&P")
description of its bond ratings:
AAA - highest grade obligations; capacity to pay
interest and repay principal is extremely strong. AA - also
qualify as high grade obligations; a very strong capacity to
pay interest and repay principal and differs from AAA issues
only in small degree. A - regarded as upper medium grade;
they have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. BBB -
regarded as having an adequate capacity to pay interest and
repay principal; whereas it normally exhibits adequate
protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity than in higher rated categories - this group is the
lowest which qualifies for commercial bank investment. BB,
B, CCC, CC, C- predominately speculative with respect to
capacity to pay interest and repay principal in accordance
with terms of the obligation: BB indicates the lowest degree
of speculation and C the highest.
S&P applies indicators "+", no character, and "-" to its
rating categories. The indicators show relative standing
within the major rating categories.
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