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File No. 33-23512, 811-5629
Filed under Rule 497(c)
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NOTE
Following is a prospectus for the GCG TRUST which describes 22 Portfolio's.
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THE GCG TRUST
PROSPECTUS
MAY 1, 1999
MONEY MARKET FUND
Liquid Asset Series
BOND FUNDS
Limited Maturity Bond Series
Global Fixed Income Series
BALANCED FUND
Total Return Series
STOCK FUNDS
DOMESTIC
Equity Income Series
Fully Managed Series
Rising Dividends Series
Growth & Income Series
Growth Series
Value Equity Series
Research Series
Mid-Cap Growth Series
All-Growth Series
Growth Opportunities Series
Strategic Equity Series
Capital Appreciation Series
Small Cap Series
Real Estate Series
Hard Assets Series
INTERNATIONAL/GLOBAL
Managed Global Series
Developing World Series
Emerging Markets Series
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
FOR THE SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ
CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
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IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION,
WE REFER TO THE GCG TRUST AS "THE GCG TRUST," AND TO A SERIES OF
THE GCG TRUST INDIVIDUALLY AS A "PORTFOLIO" AND COLLECTIVELY AS THE
"PORTFOLIOS."
<TABLE>
<S> <C> <S> <C>
PAGE PAGE
INTRODUCTION Equity Income 52
Investing through your Variable Fully Managed 52
Contract 2 Rising Dividends 53
Why Reading this Prospectus is Growth & Income 53
Important 2 Growth 54
Types of Funds 2 Value Equity 54
General Risk Factors 3 Research 55
Mid-Cap Growth 55
PORTFOLIOS AT A GLANCE All-Growth 56
Liquid Asset 4 Growth Opportunities 56
Limited Maturity Bond 6 Strategic Equity 57
Global Fixed Income 8 Capital Appreciation 57
Total Return 10 Small Cap 58
Equity Income 12 Real Estate 58
Fully Managed 14 Hard Assets 59
Rising Dividends 16 Managed Global 59
Growth & Income 18 Developing World 60
Growth 20 Emerging Markets 60
Value Equity 22
Research 24 DESCRIPTION OF THE PORTFOLIOS
Mid-Cap Growth 26 Liquid Asset 61
All-Growth 28 Limited Maturity Bond 63
Growth Opportunities 30 Global Fixed Income 65
Strategic Equity 32 Total Return 68
Capital Appreciation 34 Equity Income 72
Small Cap 36 Fully Managed 74
Real Estate 38 Rising Dividends 76
Hard Assets 40 Growth & Income 78
Managed Global 42 Growth 80
Developing World 44 Value Equity 82
Emerging Markets 46 Research 84
Mid-Cap Growth 86
MORE INFORMATION All-Growth 89
A Word about Portfolio Diversity 48 Growth Opportunities 91
Additional Information about the Strategic Equity 93
Portfolios 48 Capital Appreciation 95
Non-Principal Investments and Small Cap 97
Strategies 48 Real Estate 99
Temporary Defensive Positions 48 Hard Assets 101
Portfolio Turnover 48 Managed Global 104
Legal Counsel 48 Developing World 106
Independent Auditors 48 Emerging Markets 109
Year 2000 49
OVERALL MANAGEMENT OF THE TRUST
FINANCIAL HIGHLIGHTS The Adviser 112
Liquid Asset 50 Advisory Fee 113
Limited Maturity Bond 50
Global Fixed Income 51 SHARE PRICE 114
Total Return 51 TAXES AND DISTRIBUTIONS 115
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AN INVESTMENT IN ANY PORTFOLIO OF THE GCG TRUST IS NOT A BANK DEPOSIT
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY.
1
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INTRODUCTION
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INVESTING THROUGH YOUR VARIABLE MONEY MARKET FUNDS. Money market
CONTRACT instruments (also known as cash
Shares of the portfolios of the investments) are debt securities
GCG Trust currently are sold to issued by governments,
segregated asset accounts corporations, banks, or other
("Separate Accounts") of insurance financial institutions.
companies as funding choices for
variable annuity contracts and BOND FUNDS. Bonds are debt
variable life insurance policies securities representing loans
("Variable Contracts"). Assets in from investors. A bond fund's
the Separate Account are invested share price - and therefore the
in shares of the portfolios based value of your investment - can
on your allocation instructions. rise or fall in value because
Not all portfolios described in of changing interest rates or
this prospectus may be available other factors.
under your Variable Contract. You
do not deal directly with the BALANCED FUNDS. A balanced fund
portfolios to purchase or redeem holds a mix of stocks, bonds,
shares. The accompanying Separate and sometimes, cash
Account prospectus describes your investments. A balanced fund
rights as a Variable Contract offers the convenience of
owner. We may sell shares of the investing in both stocks and
portfolios to qualified pension bonds through a single fund.
and retirement plans outside of
the separate account context. STOCK FUNDS. Stocks - which
represent shares of ownership
WHY READING THIS PROSPECTUS IS in a company - generally offer
IMPORTANT the greatest potential for long
This prospectus explains the term growth of principal. Many
investment objective, risks and stocks also provide regular
strategy of each of the portfolios dividends, which are generated
of the GCG Trust. Reading the by corporate profits. While
prospectus will help you to decide stocks have historically
whether a portfolio is the right provided the highest long-term
investment for you. We suggest returns, they have also
that you keep this prospectus and exhibited the greatest short-
the prospectus for the Separate term price fluctuations - so a
Account for future reference. stock fund has a higher risk of
losing value over the short
TYPES OF FUNDS term.
The portfolios are generally
classified among three major asset
classes: stock, bond and money
market.
MONEY MARKET BOND STOCK
FUNDS FUNDS FUNDS
|----------------------------------------------------------|
| LOWER <---------- RISK/RETURN ----------> HIGHER |
|----------------------------------------------------------|
2
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INTRODUCTION (CONTINUED)
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GENERAL RISK FACTORS for shorter-
Investing in the portfolios, as term bonds, moderate for
with an investment in any intermediate-term bonds, and
security, involves risk factors high for longer-term bonds. A
and special considerations. A bond's duration measures its
portfolio's risk is defined sensitivity to changes in
primarily by its principal interest rates. The longer
investment strategies. An the duration, the greater the
investment in a portfolio is not bond's price movement will be
insured against loss of principal. as interest rates change.
As with any mutual fund, there can
be no assurance that a portfolio o CREDIT RISK. A bond issuer
will achieve its investment (debtor) may fail to repay
objective. Investing in shares of interest and principal in a
a portfolio should not be timely manner. The price of a
considered a complete investment security a portfolio holds may
program. The share value of each fall due to changing economic,
portfolio (except for the Liquid political or market conditions
Asset Portfolio) will rise and or disappointing earnings
fall. Although the Liquid Asset results.
Portfolio seeks to preserve the
value of your investment at $1.00 o CALL RISK. During periods of
per share, it is still possible to falling interest rates, a bond
lose money. issuer may "call," or repay,
It is important to keep in mind its high yielding bond before
one of the main axioms of the bond's maturity date.
investing: The higher the risk of Forced to invest the
losing money, the higher the unanticipated proceeds at
potential reward. The lower the lower interest rates, a
risk, the lower the potential portfolio would experience a
reward. As you consider an decline in income.
investment in a portfolio, you
should take into account your o MATURITY RISK. Interest rate
personal tolerance for investment risk will affect the price of
risk. a fixed income security more
if the security has a longer
OVERALL RISK: maturity because changes in
interest rates are
o MANAGER RISK. A portfolio increasingly difficult to
manager of a portfolio may do predict over longer periods of
a mediocre or poor job in time. Fixed income securities
selecting securities. with longer maturities will
therefore be more volatile
RISK RELATED TO STOCK INVESTING: than other fixed income
securities with shorter
o MARKET AND COMPANY RISK. The maturities. Conversely, fixed
price of a security held by a income securities with shorter
portfolio may fall due to maturities will be less
changing economic, political volatile but generally provide
or market conditions or lower returns than fixed
disappointing earnings income securities with longer
results. Stock prices in maturities. The average
general may decline over short maturity of a portfolio's
or even extended periods. The fixed income investments will
stock market tends to be affect the volatility of the
cyclical, with periods when portfolio's share price.
stock prices generally rise
and periods when stock prices Because of these and other risks
generally decline. Further, that may be particular to a
even though the stock market portfolio, your investment could
is cyclical in nature, returns lose or not make any money.
from a particular stock market
segment in which a portfolio
invests may still trail
returns from the overall stock
market.
RISKS RELATED TO BOND INVESTING:
o INCOME RISK. A portfolio's
income may fall due to falling
interest rates. Income risk
is generally the greatest for
short-term bonds, and the
least for long-term bonds.
Changes in interest rates will
affect bond prices as well as
bond income.
o INTEREST RATE RISK. This is the
risk that bond prices overall
will decline over short or
even extended periods due to
rising interest rates.
Interest rate risk is
generally modest
3
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PORTFOLIOS AT A GLANCE
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LIQUID ASSET PORTFOLIO
INVESTMENT
OBJECTIVE High level of current income consistent with
the preservation of capital and liquidity
PRINCIPAL The Portfolio Manager strives to maintain a
INVESTMENT stable $1 per share net asset value and its
STRATEGY investment strategy focuses on safety of
principal, liquidity and yield, in order of
importance, to achieve this goal. The
management team implements its strategy
through a four-step investment process
designed to ensure adherence to regulatory
requirements.
Step One: The Portfolio Manager
actively maintains a formal Approved
List of high quality companies.
Step Two: Securities of Approved
List issuers that meet maturity
guidelines and are rated in one of the
two highest ratings category (or
determined to be of comparable quality
by the Portfolio Manager) are eligible
for investment
Step Three: Eligible securities are
reviewed to ensure that an investment
in such securities would not cause the
Portfolio to exceed its
diversification limits.
Step Four: The Portfolio Manager
makes yield curve positioning
decisions based on liquidity
requirements, yield curve analysis and
market expectations of future interest
rates
Money market funds are highly regulated by
Rule 2a-7 of the Investment Company Act of
1940, which sets forth specific maturity,
quality and diversification guidelines. The
Portfolio must adhere to procedures adopted by
the Board of Trustees pursuant to Rule 2a-7
and to Rule 2a-7 itself. Some of these
limitations include:
o QUALITY. At least 95% of the Portfolio's
investments must be rated in the highest
short-term ratings category and the
Portfolio Manager must make an independent
determination that each investment
represents minimal credit risk to the
Portfolio.
o MATURITY. The average maturity of the
portfolio may not exceed 90 days and the
maturity of any individual security may
not exceed 397 days.
o DIVERSIFICATION. Generally, at the time
of purchase, no more than 5% of total
assets may be invested in the securities
of a single issuer and no more than 10% of
total assets may be subject to demand
features or guarantees from a single
institution.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
LIQUID ASSET
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
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PORTFOLIOS AT A GLANCE (CONTINUED)
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PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INCOME RISK
o CREDIT RISK o INTEREST RATE RISK
AN INVESTMENT IN THE LIQUID ASSET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH THE PORTFOLIO
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT
AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE PORTFOLIO.
PERFORMANCE The value of your shares in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. ING Investment Management LLC
or its affiliate has managed the Portfolio
since August 13, 1996. Prior to that date,
different firms managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
LIQUID ASSET -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
7.75% 5.66% 3.13% 2.64% 3.89% 5.51% 5.01% 5.07% 5.13%
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 1/24/89 | | Quarter Ended |
| (INCEPTION)| | |
| Portfolio's Average | | 6/30/89... 2.19% |
| Annual Total Return 5.13% 4.88% 5.15% | | |
| | |--------------------|
| | | WORST QUARTER |
| | |--------------------|
| | | Quarter Ended |
| | | |
| | | 6/30/93... 0.63% |
| | | |
|-------------------------------------------------| |--------------------|
The Portfolio's 7-day yield as of December 31, 1998 was 4.64%. Call
toll free 1-800-366-0066 for the Portfolio's current 7-day yield.
5
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PORTFOLIOS AT A GLANCE (CONTINUED)
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LIMITED MATURITY BOND PORTFOLIO
INVESTMENT
OBJECTIVE Highest current income consistent with low
risk to principal and liquidity
As a secondary objective, the Portfolio 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.
PRINCIPAL The Portfolio invests primarily in a
INVESTMENT diversified portfolio of limited maturity debt
STRATEGY securities. At the time of purchase, the debt
securities generally will mature in seven
years or less. The average maturity of the
Portfolio generally will not exceed five
years, although, in periods of rapidly rising
interest rates the Portfolio Manager may
shorten maturities to one year or less.
To achieve the Portfolio's objective, the
Portfolio Manager:
o manages the Portfolio's maturities
o analyzes technical data in order to
determine which investment choices offer
the best value
o over-weights or under-weights the sectors
in which the Portfolio may invest relative
to the benchmark based on sector analysis
and market opportunities
o selects securities with positive credit
fundamentals, liquidity and relative value
within sectors
The Portfolio Manager selects debt instruments
from the following broad sectors:
o U.S. Treasury o U.S. Government
securities Agency securities
o corporate securities o mortgage-backed
securities
o asset-backed o money market
securities securities
Eligible security types include corporate
securities, U.S. treasury securities, U.S.
Government Agency securities, variable or
floating rate securities, mortgage-backed
securities, asset-backed securities, dollar-
denominated foreign securities, money market
securities, reverse repurchase agreements,
shares of other investment companies, futures,
options and options on futures, sovereign
debt, supranational organizations and real
estate investment trusts (REITS).
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
LIMITED MATURITY BOND
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
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6
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PORTFOLIOS AT A GLANCE (CONTINUED)
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PRINCIPAL Any investment involves the possibility that you will lose
RISKS money or not make money. An investment in the Portfolio is
subject to the following principal risks described under
"Introduction - General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o CALL RISK o INCOME RISK
o CREDIT RISK
PERFORMANCE The value of your share in a portfolio will
The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. ING Investment Management LLC
or its affiliate has managed the Portfolio
since August 13, 1996. Prior to that date,
different firms managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
LIMITED MATURITY BOND -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
7.87% 11.27% 4.84% 6.20% -1.19% 11.72% 4.32% 6.67% 6.86%
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 1/24/89 | | |
| (INCEPTION)| | 6/30/89... 4.93% |
| Portfolio's Average | | |
| Annual Total Return 6.86% 5.59% 6.80% | |--------------------|
| Merrill Lynch 1-5 Year | | WORST QUARTER |
| Corporate/Government | |--------------------|
| Bond Index 7.68% 6.28% 7.92% | | Quarter Ended |
| | | |
| | | 3/31/94...(1.04)% |
| | | |
|-------------------------------------------------| |--------------------|
The Merrill Lynch 1-5 Year Corporate/Government Bond Index is
comprised of intermediate-term U.S. government securities and
investment-grade corporate debt securities.
7
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PORTFOLIOS AT A GLANCE (CONTINUED)
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GLOBAL FIXED INCOME PORTFOLIO
INVESTMENT
OBJECTIVE High total return
PRINCIPAL
INVESTMENT The Portfolio invests primarily in high-grade debt
STRATEGY securities, both foreign and domestic, and related
foreign currency transactions. The Portfolio
primarily invests in:
o obligations issued or guaranteed by foreign
national governments, or their agencies,
instrumentalities or political subdivisions
o U.S. Government securities
o debt securities issued or guaranteed by
supranational organizations, considered to be
"government securities"
o non-government foreign and domestic debt
securities, including corporate debt securities,
bank obligations, mortgage-backed or asset-backed
securities, and repurchase agreements
The Portfolio Manager allocates the Portfolio's
investments among those markets, companies and
currencies that offer the most attractive combination
of high income and principal stability.
In evaluating investments for the Portfolio, the
Portfolio Manager analyzes relative yields and the
appreciation potential of securities in particular
markets, world interest rates and monetary trends,
economic, political and financial market conditions 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 Portfolio is non-diversified and, when compared
with other funds, may invest a greater portion of its
assets in a particular issuer. A non-diversified
portfolio has greater exposure to the risk of default
or the poor earnings of the issuer.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
GLOBAL FIXED INCOME
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
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PORTFOLIOS AT A GLANCE (CONTINUED)
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PRINCIPAL Any investment involves the possibility that you will
RISKS lose money or not make money. An investment in the
Portfolio is subject to the following principal risks
described under "Introduction - General Risk Factors":
o MANAGER RISK o CREDIT RISK
o INCOME RISK o CALL RISK
o INTEREST RATE RISK
An investment in the Portfolio is subject to the
following additional principal risks described under
"Description of the Portfolios - Global Fixed Income
Portfolio":
o FOREIGN INVESTMENT AND CURRENCY RISK
o EMERGING MARKET RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Global Fixed Income
Portfolio became available to investors on
August 17, 1998, performance information on
previous full years is not available. Baring
International Investment Limited has managed
the Portfolio since its inception.
9
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PORTFOLIOS AT A GLANCE (CONTINUED)
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TOTAL RETURN PORTFOLIO
INVESTMENT Above-average income (compared to a portfolio
OBJECTIVE entirely invested in equity securities)
consistent with the prudent employment of
capital. A secondary goal is the reasonable
opportunity for growth of capital and income.
PRINCIPAL
INVESTMENT The Portfolio is a "balanced fund," and
STRATEGY invests in a combination of equity and fixed
income securities. The Portfolio normally
invests:
o at least 40%, but not more than 75%, of
its assets in common stocks and related
equity securities
o at least 25% of its assets in non-
convertible fixed income securities
EQUITY PORTION. The Portfolio Manager uses a
bottom-up, as opposed to a top-down,
investment style in managing the Portfolio.
This means that securities are selected based
on fundamental analysis performed by the
Portfolio Manager and its group of equity
research analysts and not selected based on
the industry in which they belong.
While the Portfolio may invest in all types of
equity securities, the Portfolio Manager
generally purchases equity securities of
companies that it believes are undervalued in
the market relative to their long-term
potential. The equity securities of these
companies may be undervalued because they are
temporarily out of favor in the market or the
market has overlooked them. The Portfolio
focuses on undervalued equity securities
issued by companies with relatively large
market capitalizations (i.e., market
capitalizations of $5 billion or more).
FIXED INCOME PORTION. The Portfolio invests
in securities that pay a fixed interest rate,
which include:
o U.S. government o corporate bonds
securities
o mortgage-backed and asset-backed
securities
In selecting fixed income investments for the
Portfolio, the Portfolio Manager assesses the
three-month outlook for various segments of
the fixed income markets.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
TOTAL RETURN
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
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10
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PORTFOLIOS AT A GLANCE (CONTINUED)
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This three-month
"horizon" outlook is used as a tool in making
or adjusting the Portfolio's asset allocations
to various segments of the fixed income
markets.
The Portfolio may invest up to 20% of its
assets in U.S. Government securities, mortgage
pass-through securities, American Depositary
Receipts and foreign securities (including in
emerging or developing markets) and lower
rated fixed income securities.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money.
An investment in the Portfolio is subject to
the following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o INCOME RISK o CREDIT RISK
o CALL RISK o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Total Return Portfolio":
o ALLOCATION RISK o UNDERVALUED SECURITIES RISK
o CONVERTIBLE o HIGH YIELD BOND RISK
SECURITIES RISK
o EMERGING MARKET o FOREIGN INVESTMENT AND
RISK CURRENCY RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Total Return Portfolio
became available to investors on August 17,
1998, performance information on previous full
years is not available. Massachusetts
Financial Services Company has managed the
Portfolio since its inception.
11
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PORTFOLIOS AT A GLANCE (CONTINUED)
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EQUITY INCOME PORTFOLIO
(FORMERLY, THE MULTIPLE ALLOCATION PORTFOLIO)
INVESTMENT
OBJECTIVE Substantial dividend income as well as long-
term growth of capital
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its assets in the common stocks of well-
STRATEGY established companies paying above-average
dividends. The Portfolio Manager typically
employs a "value" approach in selecting
investments. The Portfolio Manager's in-house
research team seeks companies that appear to
be undervalued by various measures and may be
temporarily out of favor, but have good
prospects for capital appreciation and
dividend growth.
In selecting investments, the Portfolio
Manager generally looks for companies with the
following:
o an established operating history
o above-average dividend yield relative to
the S&P 500
o low price/earnings ratio relative to the
S&P 500
o a sound balance sheet and other positive
financial characteristics
o low stock price relative to a company's
underlying value as measured by assets,
cash flow or business franchises
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Equity Income Portfolio":
o VALUE INVESTING RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
EQUITY INCOME
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
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<<LOWER RISK HIGHER RISK>>
12
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PORTFOLIOS AT A GLANCE (CONTINUED)
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PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. T. Rowe Price Associates,
Inc. has managed the Portfolio since March 1,
1999. Prior to that date, different firms
managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
EQUITY INCOME -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
4.74% 20.02% 1.88% 11.13% -1.18% 18.93% 8.77% 17.44% 8.26%
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 1/24/89 | | |
| (INCEPTION)| | 3/31/91... 8.42% |
| Portfolio's Average | | |
| Annual Total Return 8.26% 10.21% 9.75% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 28.58% 24.05% 18.51% | |--------------------|
| Lehman Brothers Inter- | | Quarter Ended |
| mediate Government/ | | |
| Corporate Bond Index 8.44% 6.60% 8.47% | | 3/31/92...(4.00)% |
| 40% S&P/60% Lehman | | |
| Index 16.56% 13.58% 12.49% | |--------------------|
| |
|-------------------------------------------------|
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks. The Lehman Brothers
Intermediate Government/Corporate Bond Index
comprises of intermediate-term U.S. government
securities and investment-grade corporate debt
securities.
13
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
FULLY MANAGED PORTFOLIO
INVESTMENT Over the long term, a high total investment
OBJECTIVE return, consistent with the preservation of
capital and with prudent investment risk
PRINCIPAL The Portfolio invests primarily in the common
INVESTMENT stocks of established companies the Portfolio
STRATEGY Manager believes to have above-average
potential for capital growth. Common stocks
typically make up at least half of the
Portfolio's total assets. The Portfolio may
also invest in other securities, including
convertibles, warrants, preferred stocks,
corporate and government debt, foreign
securities, futures, and options, in keeping
with its objective.
The Portfolio's approach differs from that of
many other stock funds. The Portfolio Manager
works as hard to reduce risk as to maximize
gains and may realize gains rather than lose
them in market declines. In addition, the
Portfolio Manager searches for the best
risk/reward values among all types of
securities. The portion of the Portfolio
invested in a particular type of security,
such as common stocks, results largely from
case-by-case investment decisions, and the
size of the Portfolio's cash reserve may
reflect the Portfolio Manager's ability to
find companies that meet valuation criteria
rather than his market outlook.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o CALL RISK o INCOME RISK
o MARKET AND COMPANY o CREDIT RISK
RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Fully Managed Portfolio":
o VALUE INVESTING RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
FULLY MANAGED
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
14
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. T. Rowe Price Associates,
Inc. has managed the Portfolio since January
1, 1995. Prior to that date, a different firm
managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
FULLY MANAGED -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
-3.18% 28.93% 6.23% 7.59% -7.27% 20.80% 16.36% 15.27% 5.98%
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 1/24/89 | | |
| (INCEPTION)| | 3/31/91... 9.92% |
| Portfolio's Average | | |
| Annual Total Return 5.89% 9.73% 9.02% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 28.58% 24.05% 18.51% | |--------------------|
| Lehman Brothers Inter- | | Quarter Ended |
| mediate Government/ | | |
| Corporate Bond Index 9.47% 7.30% 9.2% | | 9/30/90..(10.81)% |
| 60% S&P/40% Lehman | | |
| Index 20.62% 17.35% 14.81% | |--------------------|
| |
|-------------------------------------------------|
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks. The Lehman Brothers
Intermediate Government/Corporate Bond Index
comprises of intermediate-term U.S. government
securities and investment-grade corporate debt
securities.
15
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
RISING DIVIDENDS PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation. A secondary objective
is dividend income.
PRINCIPAL
INVESTMENT The Rising Dividends Portfolio invests in high-
STRATEGY quality equity securities, most of which meet
all of the following quality criteria:
o regular dividend increases during the last
10 years
o at least 35% of earnings reinvested
annually
o credit rating of "A" to "AAA" or
equivalent
In selecting equity securities, the Portfolio
Manager screens databases to create a universe
of companies that meet the preceding criteria.
The Portfolio Manager then fundamentally
analyzes the securities. This research
involves study of competitive industry
conditions, discussions with company
management, spreadsheet analysis, and
valuation projections. A proprietary computer
model compares expected rates of return for
each equity security in the universe. In
deciding whether to purchase a security, the
Portfolio Manager appraises a company's
fundamental strengths and relative
attractiveness based on its expected return.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Rising Dividends Portfolio":
o MANAGEMENT TECHNIQUE RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
RISING DIVIDENDS
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
16
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Kayne Anderson Investment
Management, LLC has managed the Portfolio
since its inception.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
RISING DIVIDENDS -- ANNUAL TOTAL RETURN
Year 1994 1995 1996 1997 1998
0.59% 31.06% 20.65% 29.82% 14.13%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 10/4/93 | | |
| (INCEPTION)| | 12/31/98... 17.29% |
| Portfolio's Average | | |
| Annual Total Return 14.13% 18.70% 18.47% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 28.58% 24.05% 23.32% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/98..(14.88)% |
| | | |
|-------------------------------------------------| |--------------------|
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks.
17
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
GROWTH & INCOME PORTFOLIO
INVESTMENT
OBJECTIVE Long-term total return
PRINCIPAL
INVESTMENT The Portfolio invests primarily in common
STRATEGY stocks of companies where the potential for
change (earnings acceleration) appears
significant.
The Portfolio Manager applies a growth-
oriented investment philosophy defined by its:
o Early recognition of change
o Value is created through the dynamics of
changing economic, industry and company
fundamentals
o The Portfolio Manager's willingness to
invest on incomplete information
o Judgment about the future, not merely
extrapolation of the past
o Invest in one to two year relative
earnings strength at an early stage and at
a reasonable price
o COMMITMENT TO FUNDAMENTAL RESEARCH
o Twenty-one fundamental analysts covering
U.S. companies
o EMPHASIS ON STOCK SELECTION
o Emphasis on companies and industries where
the potential for change (earnings
acceleration) is significant
o Remain fully invested
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
GROWTH & INCOME
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
18
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Growth & Income Portfolio":
o GROWTH INVESTING RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Growth & Income
Portfolio became available to investors on
August 17, 1998, performance information on
previous full years is not available.
Alliance Capital Management L.P. has managed
the Portfolio since March 1, 1999. Prior to
that date, a different firm managed the
Portfolio.
19
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
GROWTH PORTFOLIO
(FORMERLY, THE VALUE + GROWTH PORTFOLIO)
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests primarily in common
INVESTMENT stocks of growth companies that have favorable
STRATEGY relationships between price/earnings ratios
and growth rates in
sectors offering the potential for above-
average returns.
The Portfolio invests primarily in common
stocks the Portfolio Manager believes will
appreciate in value. The Portfolio Manager
generally takes a "bottom up" approach to
selecting companies. In other words, it seeks
to identify individual companies with earnings
growth potential that may not be recognized by
the market at large. It makes this assessment
by looking at companies one at a time,
regardless of size, country of organization,
place of principal business activity, or other
similar selection criteria. Income is not a
significant consideration when choosing
investments for the Portfolio.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Growth Portfolio":
o GROWTH INVESTING RISK
o SMALL COMPANY RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
o HIGH YIELD BOND RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
GROWTH
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
20
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Growth Portfolio became
available to investors on August 17, 1998,
performance information on previous full years
is not available. Janus Capital Corporation
has managed the Portfolio since March 1, 1999.
Prior to that date, a different firm managed
the Portfolio.
21
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
VALUE EQUITY PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation. Dividend income is a
secondary objective.
PRINCIPAL The Portfolio normally invests primarily in
INVESTMENT common stocks of domestic and foreign issuers
STRATEGY that meet quantitative standards relating to
financial soundness and high intrinsic value
relative to price.
In selecting equity securities, the Portfolio
Manager identifies stocks trading at a
significant discount to their underlying
intrinsic value that fall into at least one of
three basic categories:
o "Pure" value opportunities -- stocks that
appear attractive relative to the broader
market
o "Relative" value opportunities -- stocks
that trade at a discount to the valuation
parameters historically applied to them or
their peer group
o "Event-driven" value opportunities --
stocks whose underlying value may be
recognized as a result of a realized or
anticipated event
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Value Equity Portfolio":
o VALUE INVESTING RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
VALUE EQUITY
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
IN THIS PORTFOLIO AS COMPARED TO OTHER GCG TRUST PORTFOLIOS.]
22
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Eagle Asset Management, Inc.
has managed the Portfolio since its inception.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
VALUE EQUITY -- ANNUAL TOTAL RETURN
Year 1995 1996 1997 1998
35.21% 10.62% 27.28% 1.55%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 1/3/95 | | |
| (INCEPTION)| | 12/31/98... 17.34% |
| Portfolio's Average | | |
| Annual Total Return 1.55% 17.96% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 28.58% 30.49% | |--------------------|
| Russell Midcap Index 10.09% 22.78% | | Quarter Ended |
| | | |
| | | 9/30/98..(13.99)% |
| | | |
|-------------------------------------------------| |--------------------|
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks. The Russell Midcap Index
consists of the 800 smallest companies in the
Russell 1000 Index, which contains the 1,000
largest companies in the U.S.
23
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
RESEARCH PORTFOLIO
INVESTMENT
OBJECTIVE Long-term growth of capital and future income
PRINCIPAL The Portfolio normally invests at least 80% of
INVESTMENT its total assets in common stocks and related
STRATEGY securities (such as preferred stock,
convertible securities and depositary
receipts). The Portfolio focuses on companies
that the Portfolio Manager believes have
favorable prospects for long-term growth,
attractive valuations based on current and
expected earnings or cash flow, dominant or
growing market share and superior management.
The Portfolio may invest in companies of any
size. The Portfolio's investments may also
include foreign securities, and securities
traded on securities exchanges or in the over-
the-counter markets.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to the
following additional principal risks described
under "Description of the Portfolios-Research
Portfolio":
o OTC INVESTMENT RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
RESEARCH
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
24
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Research Portfolio
became available to investors on August 17,
1998, performance information on previous full
years is not available. Massachusetts
Financial Services Company has managed the
Portfolio since its inception.
25
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
MID-CAP GROWTH PORTFOLIO
INVESTMENT
OBJECTIVE Long-term growth of capital
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its assets in common stocks and related equity
STRATEGY securities (such as preferred stock,
convertible securities and depositary
receipts) of companies with medium market
capitalizations (or "mid-cap") which the
Portfolio Manager believes have above-average
growth potential.
The Portfolio Manager defines mid-cap
companies as companies with market
capitalizations equaling or exceeding $250
million but not exceeding the top range of the
Russell Midcap/tm/ Growth Index at the time of
the Portfolio's investment.
Growth companies are companies that the
Portfolio Manager considers well-run and
poised for growth. The Portfolio Manager
looks particularly for companies which
demonstrate:
o a strong franchise, strong cash flows and
a recurring revenue stream
o a solid industry position, where there is
potential for high profit margins and
substantial barriers to new entry in the
industry
o a strong management team with a clearly
defined strategy
o a catalyst that may accelerate growth
The Portfolio Manager uses a bottom-up, as
opposed to a top-down, investment style in
managing the Portfolio. This means that
securities are selected based on fundamental
analysis performed by the Portfolio Manager
and its group of equity research analysts and
generally not selected based on the industry
in which they belong.
The Portfolio is non-diversified and, when
compared with other funds, may invest a
greater portion of its assets in a particular
issuer. A non-diversified portfolio has
greater exposure to the risk of default or the
poor earnings of the issuer.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
MID-CAP GROWTH
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
26
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Mid-Cap Growth Portfolio":
o MID-CAP COMPANY RISK
o OTC INVESTMENT RISK
o EMERGING MARKETS RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Mid-Cap Growth
Portfolio became available to investors on
August 17, 1998, performance information on
previous full years is not available.
Massachusetts Financial Services Company has
managed the Portfolio since its inception.
27
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
ALL-GROWTH PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio normally invests primarily in
INVESTMENT growth securities (such as common stocks) of
STRATEGY middle-range capitalization (or "mid-cap")
companies. Mid-cap companies in which the
Portfolio invests generally have market
capitalizations or annual revenues between
$500 million and $10 billion. Growth
securities in which the Portfolio invests are
primarily common stocks that the Portfolio
Manager believes have strong earnings growth
and capital appreciation potential.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction-General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
All-Growth Portfolio":
o MID-CAP COMPANY RISK
o GROWTH INVESTING RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
ALL-GROWTH
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
28
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Pilgrim Baxter & Associates
Ltd. has managed the firm since February 3,
1997. Prior to that date, different firms
managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
ALL-GROWTH -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
-7.35% 36.48% -2.59% 6.56% -10.77% 22.42% -0.57% 5.87% 9.52%
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 1/24/89 | | |
| (INCEPTION)| | 12/31/98... 25.89% |
| Portfolio's Average | | |
| Annual Total Return 9.52% 4.72 5.93% | |--------------------|
| | | WORST QUARTER |
| Russell Midcap Index 10.09% 17.75 16.15% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/98..(21.08)% |
| | | |
|-------------------------------------------------| |--------------------|
The Russell 1000 Index consists of the 800
smallest companies in the Russell 1000 Index,
which contains the 1,000 largest companies in
the U.S.
29
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL
INVESTMENT The Portfolio invests primarily in equity
STRATEGY securities of domestic companies generally
having total market capitalizations of $1
billion or more.
The Portfolio seeks growth at a reasonable
value by investing in companies with sound
fundamental value and potential. The
Portfolio selects its investments based on a
combination of quantitative screening
techniques and fundamental analysis.
The Portfolio Manager:
o Identifies a universe of investment
candidates by screening companies based on
changes in growth rates and valuation
ratios (such as price to sales, price to
earnings and price to cash flows)
o Identifies rapidly growing companies with
reasonable valuations and accelerating
growth rates, or with low valuations and
initial signs of growth
o Fundamentally analyzes these companies,
focusing on:
o balance sheets and income statements
o company visits and discussions with
management
o contacts with industry specialists and
industry analysts
o review of competitive environments
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
GROWTH OPPORTUNITIES
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
30
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
following additional principal risks described
under "Description of the Portfolios -- Growth
Opportunities":
o GROWTH INVESTING RISK
o MANAGEMENT TECHNIQUE RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Growth Opportunities
Portfolio became available to investors on
June 1, 1998, performance information on
previous full years is not available.
Montgomery Asset Management, LLC has managed
the Portfolio since its inception.
31
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
STRATEGIC EQUITY PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests principally in common
INVESTMENT stocks of medium- and small-sized growth
STRATEGY companies. The Portfolio Manager focuses on
companies it believes are likely to benefit
from new or innovative products, services or
processes as well as those that have
experienced above-average, long-term growth in
earnings and have excellent prospects for
future growth.
The Portfolio primarily comprises of
securities of two basic categories of
companies: (a) "core" companies, which the
Portfolio Manager considers to have
experienced above-average and consistent long-
term growth in earnings and to have excellent
prospects for outstanding future growth, and
(b) "earnings acceleration" companies that the
Portfolio Manager believes are currently
enjoying a dramatic increase in profits.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios
-- Strategic Equity Portfolio":
o GROWTH INVESTING RISK
o SMALL COMPANY RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
STRATEGIC EQUITY
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<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
32
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results.
A I M Capital Management, Inc. has managed the
Portfolio since March 1, 1999. Prior to that
date, a different firm managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
STRATEGIC EQUITY -- ANNUAL TOTAL RETURN
Year 1996 1997 1998
19.39% 23.16% 0.84%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 10/2/95 | | |
| (INCEPTION)| | 12/31/98... 15.31% |
| Portfolio's Average | | |
| Annual Total Return 0.84% 13.02% | |--------------------|
| Russell Midcap Index 10.09% 18.68% | | WORST QUARTER |
| Russell 2000 Index (2.55)% 8.17% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/98..(17.96)% |
| | | |
|-------------------------------------------------| |--------------------|
The Russell Midcap Index is consisted of the
800 smallest companies in the Russell 1000
Index, which contains the 1,000 largest
companies in the U.S. The Russell 2000 Index
represents the 2,000 smallest companies in the
Russell 3000 Index, which contains the 3,000
largest U.S. companies, based on total market
capitalization.
33
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital growth
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities the Portfolio Manager believes to
STRATEGY be undervalued relative to the Portfolio
Manager's appraisal of the current or
projected earnings of the companies issuing
the securities, or relative to current market
values of assets owned by the companies
issuing the securities or relative to the
equity markets generally.
The Portfolio Manager focuses on undervalued
equity securities of:
o out-of-favor cyclical growth companies
o established growth companies that are
undervalued compared to historical
relative valuation parameters
o companies where there is early but
tangible evidence of improving prospects
that are not yet reflected in the price of
the company's equity securities
o companies whose equity securities are
selling at prices that do not reflect the
current market value of their assets and
where there is reason to expect
realization of this potential in the form
of increased equity values
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Capital Appreciation Portfolio":
o VALUE INVESTING RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
CAPITAL APPRECIATION
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
34
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. A I M Capital Management, Inc.
has managed the Portfolio since April 1, 1999.
Prior to that date, different firms managed the
Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
CAPITAL APPRECIATION -- ANNUAL TOTAL RETURN
Year 1993 1994 1995 1996 1997 1998
8.31% -1.59% 30.16% 20.26% 28.95% 12.68%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 5/4/92 | | |
| (INCEPTION)| | 6/30/97... 16.99% |
| Portfolio's Average | | |
| Annual Total Return 12.68% 17.48% 16.00% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 28.58% 24.05% 20.49% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/98..(13.12)% |
| | | |
|-------------------------------------------------| |--------------------|
The Standard & Poor's 500 Index is comprised
of 500 U.S. stocks.
35
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
SMALL CAP PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of small capitalization ("small-
STRATEGY cap") companies. The Portfolio Manager
considers small cap companies to be companies
that have total market capitalization within
the range of companies included in the
o Russell 2000 Growth Index
o Standard & Poor's Small Cap 600 Index
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Small Cap Portfolio":
o SMALL CAP COMPANY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
SMALL CAP
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
36
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Fred Alger Management, Inc.
has managed the Portfolio since its inception.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
SMALL CAP -- ANNUAL TOTAL RETURN
Year 1996 1997 1998
20.10% 10.32% 20.98%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 1/3/96 | | |
| (INCEPTION)| | 12/31/98... 28.34% |
| Portfolio's Average | | |
| Annual Total Return 20.98% 17.07% | |--------------------|
| Russell 2000 Index (2.55)% 11.58% | | WORST QUARTER |
| | |--------------------|
| | | Quarter Ended |
| | | |
| | | 9/30/98..(19.52)% |
| | | |
|-------------------------------------------------| |--------------------|
The Russell 2000 Index represents the 2,000
smallest companies in the Russell 3000 Index,
which contains the 3,000 largest U.S.
companies, based on total market
capitalization.
37
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
REAL ESTATE PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation. Current income is a
secondary objective.
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of companies in the real estate
STRATEGY industry that are listed on national exchanges
or the National Association of Securities
Dealers Automated Quotation System ("NASDAQ").
The Portfolio Manager selects securities
generally for long-term investment.
The Portfolio invests the majority of its
assets in companies that have at least 50% of
their assets in, or that derive at least 50%
of their revenues from, the following sectors
of the real estate industry:
o ownership (including listed real estate
investment trusts)
o construction and development
o asset sales
o property management or sale
o other related real estate services
The Portfolio may invest more than 25% of its
assets in any of the above sectors.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios
-- Real Estate Portfolio":
o REAL ESTATE o INDUSTRY CONCENTRATION
RISK RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
REAL ESTATE
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
38
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The average annual total
returns below include reinvestment of
dividends and distributions. The accompanying
table shows the Portfolio's average annual
total return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. EII Realty Securities, Inc.
has managed the Portfolio since January 1,
1995. Prior to that date, a different firm
managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
REAL ESTATE -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
-20.78% 34.06% 13.87% 17.27% 6.34% 16.59% 35.30% 22.79% (13.45%)
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 1/24/89 | | |
| (INCEPTION)| | 3/31/91... 23.44% |
| Portfolio's Average | | |
| Annual Total Return (13.45)% 12.26% 9.65% | |--------------------|
| Wilshire Real Estate | | WORST QUARTER |
| Securities Index (17.63)% 9.30% 4.59% | |--------------------|
| | | Quarter Ended |
| | | |
| | | 3/30/90..(15.18)% |
| | | |
|-------------------------------------------------| |--------------------|
The Wilshire Real Estate Securities Index
consists of real estate investment trusts
(REITs) and real estate operating companies
(REOCs).
39
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
HARD ASSETS PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in hard asset
INVESTMENT securities. Hard asset securities include
STRATEGY equity and debt 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.
Hard asset companies are companies that are
directly or indirectly engaged significantly
in the exploration, development, production or
distribution of one or more of the following:
o precious metals
o ferrous and non-ferrous metals
o gas, petroleum, petrochemicals or other
hydrocarbons
o forest products
o agricultural commodities
o other basic materials that can be priced
by a market
The Portfolio normally invests at least 5% of
its assets in each of the first five sectors
listed above, and up to 50% in any one of the
above sectors.
The Portfolio's investment strategy is based
on the belief that hard asset securities can
protect against eroding monetary values.
Recent history indicates that the policies of
many governments (particularly, budget
deficits and high rates of money supply
growth) have caused and will continue to cause
accelerated inflation, and that the prices of
many natural resources will continue to rise
faster than the rate of inflation. The
Portfolio Manager anticipates that inflation
and the price of certain natural resources
will continue on a upward trend.
The Portfolio normally invests at least 5% if
its assets in each of the first five sectors
listed above, and may invest up to 50% in any
one of the above sectors.
The Portfolio's investment strategy is based
on the belief that hard asset securities can
protect against eroding monetary values.
Recent history indicates that the policies of
may governments (particularly, budget deficits
and high rates of money supply growth) have
caused inflation and that the profitability of
many natural resources companies, will as a
result, improve.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
HARD ASSETS
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
40
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject
to the following principal risks
described under "Introduction -- General Risk
Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
In addition, an investment in the Portfolio is
subject to the following principal risks
described under "Description of the Portfolios
-- Hard Assets Portfolio":
o HARD ASSET RISK o INDUSTRY CONCENTRATION
RISK
o SECTOR CONCENTRATION o FOREIGN INVESTMENT AND
RISK CURRENCY RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Baring International
Investment Limited has managed the Portfolio
since March 1, 1999. Prior to that date, a
different firm managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
HARD ASSETS -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
-13.84% 4.70% -9.81% 49.93% 2.53% 10.69% 33.17% 6.22% -29.58%
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 1/24/89 | | |
| (INCEPTION)| | 12/31/93... 21.80% |
| Portfolio's Average | | |
| Annual Total Return (29.58)% 2.48% 5.11% | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index 28.58% 24.05% 18.51% | |--------------------|
| Russell 2000 Index (2.55)% 11.87% 12.54% | | Quarter Ended |
| | | |
| | | 9/30/98..(19.01)% |
| | | |
|-------------------------------------------------| |--------------------|
The Standard & Poor's Index is comprised of
500 U.S. stocks. The Russell 2000 Index
represents the 2,000 smallest companies in the
Russell 3000 Index, which contains the 3,000
largest U.S. companies, based on total market
capitalization.
41
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
MANAGED GLOBAL PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation. Current income is only
an incidental consideration.
PRINCIPAL The Portfolio invests primarily in common
INVESTMENT stocks traded in securities markets throughout
STRATEGY the world. The Portfolio generally invests at
least 65% of its assets in at least three
different countries, one of which may be the
United States.
The Portfolio may invest in any type of
company, large or small, with earnings showing
a relatively strong growth trend, or in a
company in which significant further growth is
not anticipated but whose securities are
thought to be undervalued. The Portfolio may
also invest in small and relatively less well
known companies.
The Portfolio is non-diversified and, when
compared with other funds, may invest a
greater portion of its assets in a particular
issuer. A non-diversified portfolio has
greater exposure to the risk of default or the
poor earnings of the issuer.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risk
described under "Description of the Portfolios --
Managed Global Portfolio":
o EMERGING MARKET RISK
o SMALL COMPANY RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
MANAGED GLOBAL
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
42
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Putnam Investment Management,
Inc. has managed the Portfolio since March 3,
1997. Prior to that date, different firms
managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
MANAGED GLOBAL -- ANNUAL TOTAL RETURN
Year 1993 1994 1995 1996 1997 1998
6.59% -13.21% 7.56% 12.27% 12.17% 29.31%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 1/3/96 | | |
| (INCEPTION)| | 12/31/98... 22.27% |
| Portfolio's Average | | |
| Annual Total Return 29.31% 8.84% 8.12% | |--------------------|
| Morgan Stanley Capital | | WORST QUARTER |
| International All | |--------------------|
| Country World Free | | Quarter Ended |
| Index 21.97% 14.78% 16.40% | | |
| | | 9/30/98..(12.36)% |
| | | |
|-------------------------------------------------| |--------------------|
The Morgan Stanley Capital International All
Country World Free Index is comprised of
government and investment-grade corporate debt
securities with remaining maturities of one to
five years.
43
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
DEVELOPING WORLD PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Developing World Portfolio invests
INVESTMENT primarily in emerging market companies. The
STRATEGY Portfolio normally invests in at least six
different "emerging market countries" with no
more than 35% of its assets in any one
country. Emerging market countries are those
countries having economies and markets that
the World Bank or the United Nations considers
to be emerging or developing. A list of such
countries is set forth under "Description of
the Portfolios -- Developing World Portfolio."
The Portfolio Manager's investment process is
based on the evaluation of key investment
factors at both the macro and micro level.
Such factors include accelerating GDP growth
earnings surprise and favorable valuation
characteristics. The investment process is a
combination of top-down country allocation and
bottom-up stock selection. Structured
fundamental research supported by quantitative
analyses drives both the country and company
decision making.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Developing World Portfolio":
o EMERGING MARKET RISK
o MANAGEMENT TECHNIQUE RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
DEVELOPING
WORLD
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
44
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Developing World
Portfolio became available to investors on
June 1, 1998, performance information on
previous full years is not available. Baring
International Investment Limited has managed
the Portfolio since March 1, 1999. Prior to
that date, a different firm managed the
Portfolio.
45
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of companies in at least six
STRATEGY different emerging market countries. The
Portfolio's investment philosophy is to
capitalize on emerging capital markets in
developing nations and other nations in which
economic and political factors are likely to
produce above average growth rates.
Emerging market countries are those that are
identified as such in the Morgan Stanley
Capital International Emerging Markets Free
Index or the International Finance Corporation
Emerging Market Index, or by the Portfolio
Manager because they have a developing economy
or because their markets have begun a process
of change and are growing in size and/or
sophistication.
In selecting securities, the Portfolio Manager
looks for 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 on the medium-term outlook for
such companies. The Portfolio Manager
considers 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.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios
-- Emerging Markets Portfolio":
o EMERGING MARKET o VALUE INVESTING
RISK RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
EMERGING
MARKETS
LA LMB GFI TR EI FM RD GI G VE R MCG AG GO SE CA SC RE HA MG DW EM
<<<---------------------------------------------------------------------->>>
<<< xxXXXXx>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
46
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. The following bar chart shows
the Portfolio's annual total return changes
from year-to-year. The accompanying table
shows the Portfolio's average annual total
return for 1 year, 5 years and since its
inception date as compared to the applicable
market index. The average annual total
returns include reinvestment of dividends and
distributions. This may help you weigh the
risk of investing in the Portfolio. Of course,
past performance does not necessarily indicate
future results. Putnam Investment Management,
Inc. has managed the Portfolio since March 3,
1997. Prior to that date, a different firm
managed the Portfolio.
The performance information does not include
insurance-related charges. Thus, you should
not compare the Portfolio's performance
directly with performance information of other
products without taking into account all
insurance-related charges and expenses payable
under your Variable Contract.
[Performance Bar Chart Follows:]
EMERGING MARKETS -- ANNUAL TOTAL RETURN
Year 1994 1995 1996 1997 1998
-15.18% -10.11% 7.28% -9.37% -24.09%
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | Quarter Ended |
| 1 YEAR 5 YEAR 1/3/96 | | |
| (INCEPTION)| | 9/30/94... 22.68% |
| Portfolio's Average | | |
| Annual Total Return (24.09)%(10.86%) (6.58)%| |--------------------|
| Morgan Stanley Capital | | WORST QUARTER |
| International Emerging | |--------------------|
| Markets Free Index (25.34)% (9.27)% (3.81)%| | Quarter Ended |
| | | |
| | | 9/30/98..(23.43)% |
| | | |
|-------------------------------------------------| |--------------------|
The Morgan Stanley Capital International
Emerging Markets Free Index is comprised of
equity securities in emerging markets.
47
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
MORE INFORMATION
- -------------------------------------------------------------------------
A WORD Each portfolio in this prospectus, unless
ABOUT specifically noted in the portfolio's
PORTFOLIO investment objective, is diversified, as
DIVERSITY defined in the Investment Company Act of 1940.
A diversified portfolio may not, as to 75% of
its total assets, invest more than 5% of its
total assets in any one issuer and may not
purchase more than 10% of the outstanding
voting securities of any one issuer (other
than U.S. Government securities). The
investment objective and certain of the
investment restrictions of each portfolio in
this prospectus are fundamental. This means
they may not be modified or changed without a
vote of the shareholders.
ADDITIONAL A Statement of Additional Information is made
INFORMATION a part of this prospectus. It identifies and
ABOUT THE discusses non-principal investment strategies
PORTFOLIOS associated risks of each portfolio, as well as
investment restrictions, secondary or
temporary investments and associated risks,a
description of how the bond rating system
works and other information that may be
helpful to you in your decision to invest.
You may obtain a copy without charge by
calling our Customer Service Center at 1-800-
344-6864, or visiting the Securities and
Exchange Commission's website
(http://www.sec.gov).
NON-PRINCIPAL This prospectus does not describe various
INVESTMENTS types of securities, strategies and practices
AND which are available to, but are not the
STRATEGIES principal focus of, a particular portfolio.
Such non-principal investment and strategies
are discussed in the Statement of Additional
Information.
TEMPORARY This prospectus does not describe temporary
DEFENSIVE defensive positions. A portfolio may depart
POSOTIONS from its principal investment strategies by
temporarily investing for defensive purposes
when adverse market, economic or political
conditions exist. While a portfolio invests
defensively, it may not be able to pursue its
investment objective. A portfolio's defensive
investment position may not be effective in
protecting its value. The types of defensive
positions in which a portfolio may engage are
identified and discussed, together with their
risks, in the Statement of Additional
Information.
PORTFOLIO Before investing in a portfolio, you should
TURNOVER review its portfolio turnover rate for an
indication of the potential effect of
transaction costs on the portfolio's future
returns. In general, the greater the volume
of buying and selling by the portfolio, the
greater the impact that brokerage commissions
and other transaction costs will have on its
return.
Portfolio turnover rate is calculated by
dividing the value of the lesser of purchases
or sales of portfolio securities for the year
by the monthly average of the value of
portfolio securities owned by the portfolio
during the year. Securities whose maturities
at the time of purchase were one year or less
are excluded. A 100% portfolio turnover rate
would occur, for example, if a portfolio sold
and replaced securities valued at 100% of its
total net assets within a one-year period.
The portfolio turnover rates for each
portfolio are presented in the Financial
Highlights.
LEGAL Sutherland Asbill & Brennan LLP, located at
COUNSEL 1275 Pennsylvania Avenue, N.W., Washington,
D.C. 20004.
INDEPENDENT
AUDITORS Ernst & Young LLP, located at 200 Clarendon
Street, Boston, MA 02116.
48
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
MORE INFORMATION (CONTINUED)
- -------------------------------------------------------------------------
YEAR 2000 The Trust could be adversely affected if the
computer systems used by the Trust's
investment adviser, Directed Services, Inc.
("DSI"), and the Trust's other service
providers do not properly process and
calculate date-related information from and
after January 1, 2000. DSI, along with an
affiliate, Golden American, have studied their
computer software systems and hardware. Some
of these systems support certain trust
operations. DSI 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. DSI is in contact with the
Trust's portfolio managers and third party
vendors to ensure that their systems will be
substantially compliant by year 2000. If
these portfolio managers and third parties are
unable to transact business in the year 2000
and thereafter, the Trust's operations could
be adversely affected.
49
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------
The following financial highlights tables are intended to help you
understand each of the portfolio's financial performance for the past
5 years (or, if shorter, for the period of the portfolio's
operations). Certain information reflects financial results for a
single portfolio share. The total returns in the tables represent the
rate that an investor would have earned or lost on an investment in
the portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Ernst & Young
LLP, whose report, along with a portfolio's financial statements, are
included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
LIQUID ASSET PORTFOLIO *
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income ................... 0.050 0.050 0.049 0.054 0.040
-------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 0.050 0.050 0.049 0.054 0.040
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Dividends from Net Investment Income . (0.050) (0.050) (0.049) (0.054) (0.040)
-------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS (0.050) (0.050) (0.049) (0.054) (0.040)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= =======
TOTAL RETURN ............................ 5.13% 5.07% 5.01% 5.51% 3.89%
======== ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) .... $211,730 $59,453 $39,096 $38,589 $46,122
Ratio of Operating Expenses to Average
Net Assets ............................ 0.59% 0.61% 0.61% 0.61% 0.61%
Decrease Reflected in Above Expense Ratio
Due to Expense Limitations............. -- -- -- -- --
Ratio of Net Investment Income to
Average Net Assets .................... 4.92% 4.99% 4.89% 5.39% 3.89%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Since August 13, 1996, ING Investment Management LLC or an affiliate
has managed the Liquid Asset Portfolio. Prior to that date, different
firms managed the Portfolio.
<TABLE>
<CAPTION>
LIMITED MATURITY BOND PORTFOLIO *
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97# 12/31/96 12/31/95 12/31/94
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 10.31 $ 10.43 $ 11.15 $ 9.98 $ 10.62
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income ................... 0.24 0.60 0.59 0.60 0.51
Net Realized and Unrealized Gain/(Loss)
on Investments......................... 0.47 0.09 (0.13) 0.57 (0.64)
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ........ 0.71 0.69 0.46 1.17 (0.13)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income .... (0.34) (0.81) (1.15) -- (0.51)
Distributions from Capital Gains ........ -- -- (0.03) -- --
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS ..................... (0.34) (0.81) (1.18) -- (0.51)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......... $ 10.68 $ 10.31 $ 10.43 $ 11.15 $ 9.98
======= ======= ======= ======= =======
TOTAL RETURN ............................ 6.86% 6.67% 4.32% 11.72% (1.19%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) .... $148,426 $53,839 $81,317 $90,081 $72,213
Ratio of Operating Expenses to Average
Net Assets ............................ 0.60% 0.61% 0.61% 0.61% 0.60%
Decrease Reflected In Above Expense
Ratio Due to Expense Limitations....... -- -- -- -- --
Ratio of Net Investment Income to
Average Net Assets .................... 5.15% 5.71% 5.33% 5.58% 4.73%
Portfolio Turnover Rate ................. 52% 81% 250% 302% 209%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Since August 13, 1996, ING Investment Management LLC or
an affiliate has managed the Limited Maturity Bond Portfolio.
Prior to that date, different firms managed the Portfolio.
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share
data for the period.
50
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO*
- -------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------
12/31/98#
----------
Net Asset Value, Beginning of Period ............................ $ 10.47
-------
INVESTMENT OPERATIONS:
Net Investment Income ........................................... 0.09
Net Realized and Unrealized Gain on Investments and Foreign
Currencies .................................................... 0.74
-------
TOTAL FROM INVESTMENT OPERATIONS ................................ 0.83
- ----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................ (0.09)
Dividends in excess of net investment income .................... (0.04)
Distributions from Capital Gains ................................ --
-------
TOTAL DISTRIBUTIONS ........................................... (0.13)
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .................................. $ 11.17
=======
TOTAL RETURN .................................................... 7.99++
=======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ............................ $21,932
Ratio of Operating Expenses to Average Net Assets ............... 1.74%+
Ratio of Net Investment Loss to Average Net Assets .............. 2.37%+
Portfolio Turnover Rate ......................................... 25%
- -----------------------------------------------------------------------------
* The Global Fixed Income Portfolio commenced operations on August 14, 1998.
+ 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.
TOTAL RETURN PORTFOLIO*
- -------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------
12/31/98*#
----------
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 14.88
--------
INVESTMENT OPERATIONS
Net investment income ........................................... 0.17
Net Realized and Unrealized Gain (Loss) on Investments........... 0.86
--------
TOTAL FROM INVESTMENT OPERATIONS ................................ 1.03
- ----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................ (0.11)
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .................................. $ 15.80
========
TOTAL RETURN .................................................... 6.90%++
========
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ............................ $453,093
Ratio of Operating Expenses to Average Net Assets ............... 0.98%+
Ratio of Net Investment Income to Average Net Assets ............ 2.95%+
Portfolio Turnover Rate ......................................... 37%
- -----------------------------------------------------------------------------
* The Total Return Portfolio commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
51
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO*
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ... $ 13.09 $ 12.41 $ 12.52 $ 11.33 $ 11.89
-------- -------- -------- -------- --------
INVESTMENT OPERATIONS
Net Investment Income .................. 0.49 0.57 0.56 0.58 0.42
Net Realized and Unrealized Gain/
(Loss) on Investments and Foreign
Currencies ........................... 0.58 1.58 0.52 1.56 (0.56)
-------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS ....... 1.07 2.15 1.08 2.14 (0.14)
-------- -------- -------- -------- --------
DISTRIBUTIONS
Dividends from Net Investment Income ... (0.50) (0.55) (0.58) (0.45) (0.42)
Distributions from Capital Gains ....... (0.99) (0.92) (0.61) (0.50) --
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS .................... (1.49) (1.47) (1.19) (0.95) (0.42)
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period ......... $ 12.67 $ 13.09 $ 12.41 $ 12.52 $ 11.33
======== ======== ======== ======== ========
TOTAL RETURN ........................... 8.26% 17.44% 8.77% 18.93% (1.18)%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ... $278,074 $264,599 $272,791 $307,691 $299,392
Ratio of Operating Expenses to Average
Net Assets ........................... 0.98% 0.99% 1.00% 1.01% 1.00%
Decrease Reflected in Above Expense
Ratio Due to Expense Limitations...... -- -- -- -- --
Ratio of Net Investment Income to
Average Net Assets ................... 3.63% 3.88% 3.86% 4.42% 3.56%
Portfolio Turnover Rate ................ 61% 79% 158% 187% 291%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Since March 1, 1999, T. Rowe Price Associates, Inc. has managed the
Portfolio. Prior to that date, the Equity Income Portfolio was
named the Multiple Allocation Portfolio and was managed by different
firms.
<TABLE>
<CAPTION>
FULLY MANAGED PORTFOLIO*
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 15.73 $ 14.82 $ 13.79 $ 11.70 $ 12.99
-------- -------- -------- -------- -------
INVESTMENT OPERATIONS
Net Investment Income ................... 0.36 0.39 0.56 0.45 0.35
Net Realized and Unrealized Gain/(Loss)
on Investments and Foreign
Currencies ............................ 0.55 1.86 1.69 1.98 (1.29)
-------- -------- -------- -------- -------
TOTAL FROM INVESTMENT OPERATIONS ........ 0.91 2.25 2.25 2.43 (0.94)
- -------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income .... (0.36) (0.41) (0.56) (0.34) (0.35)
Distributions from capital gains ........ (1.05) (0.93) (0.66) -- --
-------- -------- -------- -------- -------
TOTAL DISTRIBUTIONS ..................... (1.41) (1.34) (1.22) (0.34) (0.35)
-------- -------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD .......... $ 15.23 $ 15.73 $ 14.82 $ 13.79 $ 11.70
======== ======== ======== ======== =======
TOTAL RETURN ............................ 5.89% 15.27% 16.36% 20.80% (7.27)%
======== ======== ======== ======== =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) .... $246,196 $169,987 $136,660 $118,589 $99,854
Ratio of Operating Expenses to Average
Net Assets ............................ 0.98% 0.99% 1.00% 1.01% 1.00%
Decrease Reflected in Above Expense
Ratio Due to Expense Limitations....... -- -- -- -- --
Ratio of Net Investment Income to
Average Net Assets .................... 2.83% 2.67% 3.83% 3.41% 2.62%
Portfolio Turnover Rate ................. 44% 48% 45% 113% 66%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Since January 1, 1995, T. Rowe Price Associates, Inc. has managed the
Fully Managed Portfolio. Prior to that date, a different firm managed
the Portfolio.
52
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
RISING DIVIDENDS PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96# 12/31/95 12/31/94
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 20.04 $ 15.81 $ 13.30 $ 10.22 $ 10.30
-------- -------- -------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income ................... 0.10 0.14 0.14 0.13 0.14
Net Realized and Unrealized Gain(Loss)
on Investments and Foreign
Currencies ............................ 2.74 4.57 2.61 3.04 (0.08)
-------- -------- -------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ........ 2.84 4.71 2.75 3.17 0.06
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Dividends from Net Investment Income .... (0.10) (0.13) (0.13) (0.09) (0.14)
Distributions from Capital Gains ........ (0.77) (0.35) (0.11) -- --
-------- -------- -------- ------- -------
TOTAL DISTRIBUTIONS ..................... (0.87) (0.48) (0.24) (0.09) (0.14)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......... $ 22.01 $ 20.04 $ 15.81 $ 13.30 $ 10.22
======== ======== ======== ======= =======
TOTAL RETURN ............................ 14.13% 29.82% 20.65% 31.06% 0.59%
======== ======== ======== ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End Of Period (in 000's) .... $574,843 $252,191 $126,239 $81,210 $50,712
Ratio Of Operating Expenses To Average
Net Assets ............................ 0.98% 0.99% 1.00% 1.01% 1.00%
Ratio Of Net Investment Income To
Average Net Assets .................... 0.72% 0.96% 0.99% 1.24% 1.88%
Portfolio Turnover Rate ................. 34% 26% 15% 43% 26%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share
data for the period.
GROWTH & INCOME PORTFOLIO(*)(**)
- -----------------------------------------------------------------------------
YEAR ENDED
- -----------------------------------------------------------------------------
12/31/98*#
----------
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 14.24
--------
INVESTMENT OPERATIONS
Net Investment Income ......................................... 0.09
Net Realized and Unrealized Gain(Loss) on Investments and Foreign
Currencies .................................................... 1.36
--------
TOTAL FROM INVESTMENT OPERATIONS ................................ 1.45
- -----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................ (0.07)
--------
NET ASSET VALUE, END OF PERIOD .................................. $ 15.62
========
TOTAL RETURN .................................................... 10.19%++
========
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ............................ $298,839
Ratio of Operating Expenses to Average Net Assets ............... 1.08%+
Ratio of Net Investment Income to Average Net Assets............. 1.86%+
Portfolio Turnover Rate ......................................... 92%
- -----------------------------------------------------------------------------
* Since March 1, 1999, Alliance Capital Management L.P. has managed
the Growth & Income Portfolio. Prior to March 1, 1999, a
different firm managed the Portfolio.
** The Growth & Income Portfolio commenced operations on August 14, 1998.
+ 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.
53
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
GROWTH PORTFOLIO(*)(**)
- -----------------------------------------------------------------------------
YEAR ENDED
- -----------------------------------------------------------------------------
12/31/98#
----------
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 13.63
--------
INVESTMENT OPERATIONS
Net Investment Income............................................ (0.03)
Net Realized and Unrealized Gain(Loss) on Investments and Foreign
Currencies .................................................... 2.02
--------
TOTAL FROM INVESTMENT OPERATIONS ................................ 1.99
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .................................. $ 15.62
========
TOTAL RETURN .................................................... 14.60%++
========
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ............................ $231,216
Ratio of Operating Expenses to Average Net Assets ............... 1.09%+
Ratio of Net Investment Income to Average Net Assets ............ (0.58)%+
Portfolio Turnover Rate ......................................... 88%
- -----------------------------------------------------------------------------
* Since March 1, 1999, Janus Capital Corporation has managed the Growth
Portfolio. Prior to that date, the Growth Protfolio was named the
Value + Growth Series and was managed by a different firm.
** The Growth Portfolio commenced operations on August 14, 1998.
+ 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>
<CAPTION>
VALUE EQUITY PORTFOLIO*
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95*
-------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........... $ 16.13 $ 13.92 $ 13.18 $ 10.00
-------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income .......................... 0.19 0.16 0.22 0.08
Net Realized and Unrealized Gain on Investments
and Foreign Securities ....................... 0.06 3.63 1.18 3.44
-------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ............... 0.25 3.79 1.40 3.52
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ........... (0.18) (0.18) (0.19) (0.06)
Distributions from Capital Gains ............... (0.32) (1.40) (0.47) (0.28)
-------- ------- ------- -------
TOTAL DISTRIBUTIONS ............................ (0.50) (1.58) (0.66) (0.34)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ................. $ 15.88 $ 16.13 $ 13.92 $ 13.18
======== ======= ======= =======
TOTAL RETURN ................................... 1.55% 27.28% 10.62% 35.21%++
======== ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000'S) ........... $129,784 $80,048 $44,620 $28,830
Ratio of Operating Expenses to Average Net
Assets ....................................... 0.98% 0.99% 1.00% 1.01%+
Ratio of Net Investment Income to Average Net
Assets ....................................... 1.49% 1.31% 1.80% 1.53%+
Portfolio Turnover Rate ........................ 124% 128% 131% 86%
- ------------------------------------------------------------------------------------------------------------------------
* The Value Equity Portfolio commenced operations on January 3, 1995.
+ Annualized
++ Non-annualized
</TABLE>
54
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
RESEARCH PORTFOLIO*
- ------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------
12/31/98*#
----------
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 17.75
--------
INVESTMENT OPERATIONS
Net Investment Income ........................................... 0.02
Net Realized and Unrealized Gain(Loss) on Investments and Foreign
Currencies .................................................... 2.56
--------
TOTAL FROM INVESTMENT OPERATIONS ................................ 2.58
- ------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................ (0.01)
Distributions from Capital Gains ................................ (0.01)
--------
TOTAL DISTRIBUTIONS ............................................. (0.02)
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .................................. $ 20.31
========
TOTAL RETURN .................................................... 14.54%++
========
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ............................ $613,771
Ratio of Operating Expenses to Average Net Assets ............... 0.94%+
Ratio of Net Investment Income to Average Net Assets ............ 0.23%+
Portfolio Turnover Rate ......................................... 35%
- ------------------------------------------------------------------------------
* The Research Series commenced operations on August 14, 1998.
+ 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.
MID-CAP GROWTH PORTFOLIO*
- -------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------
12/31/98*#
----------
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 15.68
--------
INVESTMENT OPERATIONS:
Net Investment Income ........................................... 0.01
Net realized and unrealized gain on investments and foreign
currencies .................................................... 2.52
--------
TOTAL FROM INVESTMENT OPERATIONS ................................ 2.53
- -------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................ (0.01)
Distributions from Capital Gains ................................ (0.10)
--------
TOTAL DISTRIBUTIONS ............................................. (0.11)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .................................. $ 18.10
========
TOTAL RETURN .................................................... 16.12%++
========
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000'S) ............................ $252,022
Ratio of Operating Expenses to Average Net Assets ............... 0.95%+
Ratio of Net Investment Income to Average Net Assets ............ 0.15%+
Portfolio Turnover Rate ......................................... 55%
- -------------------------------------------------------------------------------
* The Mid-Cap Portfolio commenced operations on August 14, 1998.
+ 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.
55
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALL-GROWTH PORTFOLIO *
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 13.77 $ 13.39 $ 13.78 $ 11.86 $ 13.42
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income(Loss) ............. (0.07) (0.06) 0.14 0.18 0.11
Net Realized and Unrealized Gain(Loss) on
Investments and Foreign Currencies .... 1.38 0.84 (0.23) 2.47 (1.56)
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ........ 1.31 0.78 (0.09) 2.65 (1.45)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income .... -- (0.03) (0.14) (0.14) (0.11)
Distributions from Capital Gains ........ (0.09) (0.37) (0.16) (0.59) --
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS ..................... (0.09) (0.40) (0.30) (0.73) (0.11)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......... $ 14.99 $ 13.77 $ 13.39 $ 13.78 $ 11.86
======= ======= ======= ======= =======
TOTAL RETURN ............................ 9.52% 5.87% (0.57)% 22.42% (10.77)%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) .... $83,930 $73,856 $78,750 $93,198 $71,218
Ratio of Operating Expenses to Average Net
Assets ................................ 0.99% 0.99% 1.00% 1.01% 1.00%
Ratio of Net Investment Income(Loss) to
Average Net Assets .................... (0.51)% (0.47)% 0.86% 1.42% 1.08%
Portfolio Turnover Rate ................. 229% 325% 118% 81% 196%
- ------------------------------------------------------------------------------------------------------------------------------
* Since February 3, 1997, Pilgrim Baxter & Associates, Ltd. has
managed the All-Growth Portfolio. Prior to that date, different
firms managed the Portfolio.
</TABLE>
GROWTH OPPORTUNITIES PORTFOLIO*
- -------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------
12/31/98*#
- -------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD ............................... $10.00
------
INVESTMENT OPERATIONS
Net Investment Income .............................................. 0.08
Net Realized and Unrealized Gain(Loss) on Investments and
Foreign Currencies ............................................... (0.31)
------
TOTAL FROM INVESTMENT OPERATIONS ................................... (0.23)
- -------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................... (0.06)
------
NET ASSET VALUE, END OF PERIOD ..................................... $ 9.71
======
TOTAL RETURN ....................................................... (2.28)%++
======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ............................... $9,091
Ratio of Operating Expenses to Average Net Assets .................. 1.15%+
Ratio of Net Investment Income to Average Net Assets ............... 0.99%+
Portfolio Turnover Rate ............................................ 77%
- -------------------------------------------------------------------------------
* The Growth Opportunities Portfolio commenced operations on
February 18, 1998.
+ 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.
56
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
STRATEGIC EQUITY PORTFOLIO/1/
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- -----------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96## 12/31/95*
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........... $ 13.63 $ 11.68 $ 10.01 $10.00
------- ------- ------- ------
INVESTMENT OPERATIONS
Net Investment Income .......................... 0.16 0.20 0.23 0.06
Net Realized and Unrealized Gain(Loss) on
Investments ................................. (0.07) 2.49 1.71 (0.03)#
------- ------- ------- ------
TOTAL FROM INVESTMENT OPERATIONS ............... 0.09 2.69 1.94 0.03
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ........... (0.16) (0.19) (0.14) (0.02)
Distributions from Capital Gains ............... (0.59) (0.55) (0.13) --
Distributions in excess of Capital Gains ....... (0.15) -- -- --
------- ------- ------- ------
TOTAL DISTRIBUTIONS ............................ (0.90) (0.74) (0.27) (0.02)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ................. $ 12.82 $ 13.63 $ 11.68 $10.01
======= ======= ======= ======
TOTAL RETURN ................................... 0.84% 23.16% 19.39% 0.33%++
======= ======= ======= ======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ........... $73,261 $51,789 $30,423 $8,067
Ratio of Operating Expenses to Average Net
Assets ....................................... 0.99% 0.99% 1.00% 1.00%+
Ratio of Net Investment Income to Average Net
Assets ....................................... 1.46% 1.88% 2.05% 4.04%+
Portfolio Turnover Rate ........................ 139% 105% 133% 29%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Since March 1, 1999, A I M Capital Management, Inc. has managed the
Strategic Equity Portfolio. Prior to that date, a different firm
managed the Portfolio.
* The Strategic Equity Portfolio 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.
<TABLE>
<CAPTION>
CAPITAL APPRECIATION PORTFOLIO*
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 17.65 $ 15.06 $ 13.51 $ 11.34 $ 11.76
-------- -------- -------- -------- -------
INVESTMENT OPERATIONS
Net Investment Income ................... 0.15 0.16 0.16 0.19 0.23
Net Realized and Unrealized Gain(Loss)
on Investments ........................ 2.07 4.19 2.57 3.22 (0.42)
-------- -------- -------- -------- -------
TOTAL FROM INVESTMENT OPERATIONS ........ 2.22 4.35 2.73 3.41 (0.19)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income .... (0.15) (0.16) (0.17) (0.15) (0.23)
Distributions from Capital Gains ........ (1.63) (1.60) (1.01) (1.09) --
-------- -------- -------- -------- -------
TOTAL DISTRIBUTIONS ..................... (1.78) (1.76) (1.18) (1.24) (0.23)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......... $ 18.09 $ 17.65 $ 15.06 $ 13.51 $ 11.34
======== ======== ======== ======== =======
TOTAL RETURN ............................ 12.68% 28.95% 20.26% 30.16% (1.59)%
======== ======== ======== ======== =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000'S) .... $263,313 $193,986 $148,752 $122,227 $88,890
Ratio of Operating Expenses to Average
Net Assets ............................ 0.98% 0.99% 1.00% 1.01% 1.00%
Decrease Reflected in Above Expense Ratio
Due to Expense Limitations ............ -- -- -- -- --
Ratio of Net Investment Income to
Average Net Assets .................... 0.95% 0.95% 1.12% 1.53% 1.96%
Portfolio Turnover Rate ................. 64% 51% 64% 98% 84%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Since April 1, 1999, A I M Capital Management, Inc. has managed the
Capital Appreciation Portfolio. Prior to that date, a different
firm managed the Portfolio.
57
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP PORTFOLIO*
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96*
-------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .................... $ 13.25 $ 12.01 $ 10.00
-------- ------- -------
INVESTMENT OPERATIONS
Net Investment Loss ..................................... (0.03) (0.03) (0.01)
Net Realized and Unrealized Gain on Investments ......... 2.81 1.27 2.02
-------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ........................ 2.78 1.24 2.01
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......................... $ 16.03 $ 13.25 $ 12.01
======== ======= =======
TOTAL RETURN ............................................ 20.98% 10.32% 20.10%++
======== ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000'S) .................... $147,696 $66,396 $34,365
Ratio of Operating Expenses to Average Net Assets ....... 0.99% 0.99% 0.99%++
Ratio of Net Investment Loss to Average Net Assets ...... (0.32)% (0.34)% (0.08)%++
Portfolio Turnover Rate ................................. 133% 130% 117%
- --------------------------------------------------------------------------------------------------------------
* The Small Cap Portfolio commenced operations on January 3, 1996.
++ Non-annualized
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE PORTFOLIO *
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 18.27 $ 15.98 $ 12.63 $ 11.29 $ 11.18
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income ................... 0.83 0.69 0.70 0.75 0.60
Net Realized and Unrealized Gain
Investments ......................... (3.34) 2.93 3.70 1.12 0.11#
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ........ (2.51) 3.62 4.40 1.87 0.71
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income .... (0.66) (0.63) (0.77) (0.53) (0.60)
Distributions from Capital Gains ........ (1.52) (0.70) (0.28) -- --
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS ..................... (2.18) (1.33) (1.05) (0.53) (0.60)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......... $ 13.58 $ 18.27 $ 15.98 $ 12.63 $ 11.29
======= ======= ======= ======= =======
TOTAL RETURN ............................ (13.45)% 22.79% 35.30% 16.59% 6.34%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000'S) .... $69,911 $75,530 $51,135 $34,975 $37,336
Ratio of Operating Expenses to Average
Net Assets ............................ 0.99% 0.99% 1.00% 1.01% 1.00%
Decrease Reflected in Above Expense Ratio
Due to Expense Limitations ............ -- -- -- -- --
Ratio of Net Investment Income to
Average Net Assets .................... 5.26% 4.49% 5.53% 5.79% 5.31%
Portfolio Turnover Rate ................. 29% 41% 31% 53% 64%
- --------------------------------------------------------------------------------------------------------------------------------
* Since January 1, 1995, EII Realty Securities, Inc. has managed the
Real Estate Portfolio. Prior to that date, a different firm
managed the Portfolio.
# 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 portfolio shares.
</TABLE>
58
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
HARD ASSETS PORTFOLIO*
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 15.05 $ 17.85 $ 15.04 $ 13.88 $ 13.89
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income(Loss) ............. 0.26 0.14 0.05 0.15 0.13
Net Realized and Unrealized Gain(Loss)
on Investments ......................... (4.73) 0.99 4.92 1.34 0.23
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ........ (4.47) 1.13 4.97 1.49 0.36
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income .... (0.26) (0.13) (0.07) (0.13) (0.13)
Distributions from Capital Gains ........ (0.72) (3.80) (2.09) (0.20) (0.24)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS ..................... (0.98) (3.93) (2.16) (0.33) (0.37)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......... $ 9.60 $ 15.05 $ 17.85 $ 15.04 $ 13.88
======= ======= ======= ======= =======
TOTAL RETURN ............................ (29.58)% 6.22% 33.17% 10.69% 2.53%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000'S) .... $30,530 $46,229 $43,903 $27,147 $32,879
Ratio of Operating Expenses to Average Net
Assets ................................ 1.00% 0.99% 1.00% 1.01% 1.00%
Decrease Reflected in Above Expense Ratio
Due to Expense Limitations .............. -- -- -- -- --
Ratio of Net Investment Income to Average
Net Assets ............................ 1.99% 0.76% 0.34% 0.89% 1.01%
Portfolio Turnover Rate ................. 178% 124% 96% 24% 25%
- --------------------------------------------------------------------------------------------------------------------------------
* Since March 1, 1999, Baring International Investment Limited has
managed the Hard Assets Portfolio. Prior to that date, a
different firm managed the Portfolio. Prior to January 23, 1997,
the Hard Assets Portfolio was named the Natural Resources Series.
</TABLE>
<TABLE>
<CAPTION>
MANAGED GLOBAL PORTFOLIO *
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96**# 12/31/95# 12/31/94#
-------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 11.46 $ 11.13 $ 9.96 $ 9.26 $ 10.67
-------- -------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income ................... (0.02) 0.02 0.04 0.05 0.07
Net Realized and Unrealized Gain(Loss)
on Investments .......................... 3.37 1.33 1.18 0.65 (1.48)
-------- -------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ........ 3.35 1.35 1.22 0.70 (1.41)
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income .... (0.05) (0.17) -- -- --
Dividends in Excess of Net Investment
Income ................................ 0.00## (0.07) -- -- --
Distributions from Capital Gains ........ (0.57) (0.78) (0.05) -- --
-------- -------- ------- ------- -------
TOTAL DISTRIBUTIONS ..................... (0.62) (1.02) (0.05) -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .......... $ 14.19 $ 11.46 $ 11.13 $ 9.96 $ 9.26
======== ======== ======= ======= =======
TOTAL RETURN ............................ 29.31% 12.17% 12.27% 7.56% (13.21)%
======== ======== ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000'S) .... $134,078 $105,305 $86,376 $72,375 $86,209
Ratio of Operating Expenses to
Average Net Assets .................... 1.26% 1.36% 1.26% 1.26% 1.31%
Decrease Reflected in Above Expense
Ratio Due to Expense Limitations ...... -- -- -- 0.09% 0.09%
Ratio of Net Investment Income to
Average Net Assets .................... (0.17)% 0.06% 0.39% 0.51% 0.69%
Portfolio Turnover Rate ................. 173% 199% 141% 44% N/A
- --------------------------------------------------------------------------------------------------------------------------------
* Since March 3, 1997, Putnam Investment Management, Inc. has managed
the Managed Global Portfolio. Prior to that date, a different
firms managed the Portfolio.
** On September 3, 1996, the Managed Global Portfolio was reorganized
into the GCG 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.
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share
data for the period.
## Amount represents less than $0.01 per share.
</TABLE>
59
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEVELOPING WORLD PORTFOLIO(*)(**)
- ------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------
12/31/98*##
-----------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............................. $ 10.00
INVESTMENT OPERATIONS
Net Investment Income ............................................ 0.04
Net Realized and Unrealized Gain(Loss) on Investments ............ (2.67)
-------
TOTAL FROM INVESTMENT OPERATIONS ................................. (2.63)
- ------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................. 0.00#
Dividends in Excess of Net Investment Income ..................... 0.00#
-------
TOTAL DISTRIBUTIONS .............................................. 0.00#
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ................................... $ 7.37
=======
TOTAL RETURN ..................................................... (26.27)%++
=======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000'S) ............................. $ 8,797
Ratio of Operating Expenses to Average Net Assets ................ 1.83%+
Ratio of Net Investment Income to Average Net Assets ............. 0.69%+
Portfolio Turnover Rate .......................................... 67%
- ------------------------------------------------------------------------------
* Since March 1, 1999, Baring International Investment limited has
managed the Developing World Portfolio. Prior to that date, a
different firm managed the Portfolio.
** The Developing World Portfolio commenced operations on February 18,
1998.
+ Annualized
++ Non-annualized
# Amount represents less than $0.01 per share.
## Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share
data for the period.
</TABLE>
<TABLE>
<CAPTION>
EMERGING MARKETS PORTFOLIO*
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 8.80 $ 9.72 $ 9.06 $ 10.08 $ 12.44
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income ................... 0.06 (0.01) 0.04 0.04 --
Net Realized and Unrealized Gain(Loss) on
Investments ........................... (2.18) (0.90) 0.62 (1.06) (1.89)
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS ........ (2.12) (0.91) 0.66 (1.02) (1.89)
- --------------------------------------------------------------------------------------------------------------------------------
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 PERIOD .......... $ 6.68 $ 8.80 $ 9.72 $ 9.06 $ 10.08
======= ======= ======= ======= =======
TOTAL RETURN ............................ (24.09)% (9.37)% 7.28% (10.11)% (15.18)%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (In 000'S) .... $26,028 $39,436 $51,510 $47,974 $65,224
Ratio of Operating Expenses to Average Net
Assets ................................ 1.83% 1.80% 1.55% 1.53% 1.73%
Ratio of Net Investment Income to
Average Net Assets .................... 0.83% (0.09)% 0.38% 0.40% 0.03%
Portfolio Turnover Rate ................. 108% 170% 136% 141% 106%
- --------------------------------------------------------------------------------------------------------------------------------
* Since March 3, 1997, Putnam Investment Management, Inc. has managed
the Emerging Markets Portfolio. Prior to that date, a different
firm managed the Portfolio.
# Amount represents less than $0.01 per share.
</TABLE>
60
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
- -------------------------------------------------------------------------
LIQUID ASSET PORTFOLIO
PORTFOLIO
MANAGER ING Investment Management LLC
INVESTMENT
OBJECTIVE High level of current income consistent with the
preservation of capital and liquidity
PRINCIPAL The Portfolio Manager strives to maintain a
INVESTMENT stable $1 per share net asset value and its
STRATEGY investment strategy focuses on safety of
principal, liquidity and yield, in order of
importance, to achieve this goal. The Portfolio
Manager implements its strategy through a
four-step investment process also designed to
ensure adherence to regulatory requirements.
Step One: The Portfolio Manager actively
maintains a formal Approved List of high
quality companies
Step Two: Securities of Approved List issuers
that meet maturity guidelines and are
rated in one of the two highest ratings
category (or determined to be of
comparable quality by the Portfolio
Manager) are eligible for investment
Step Three: Eligible securities are reviewed
to ensure that an investment in such
securities would not cause the Portfolio
to exceed its diversification limits
Step Four: The Portfolio Manager makes yield
curve positioning decisions based on
liquidity requirements, yield curve
analysis and market expectations of
future interest rates
Money market funds are highly regulated by Rule
2a-7 of the Investment Company Act of 1940, which
sets forth specific maturity, quality and
diversification guidelines. The Portfolio must
adhere to procedures adopted by the Board of
Trustees pursuant to Rule 2a-7 and to Rule 2a-7
itself. Some of these limitations include:
o QUALITY. At least 95% of the Portfolio's
investments must be rated in the highest
short-term ratings category (or determined to
be of comparable quality by the Portfolio
Manager) and the Portfolio Manager must make
an independent determination that each
investment represents minimal credit risk to
the Portfolio.
o MATURITY. The average maturity of the
Portfolio's securities may not exceed 90 days
and the maturity of any individual security
may not exceed 397 days.
o DIVERSIFICATION. At the time of purchase, no
more than 5% of total assets may be invested
in the securities of a single issuer and no
more than 10% of total assets may be subject
to demand features or guarantees from a
single institution.
The Portfolio may invest in U.S.
dollar-denominated money market instruments
including:
o U.S. Treasury and U.S. Government Agency
securities
o fully collateralized repurchase agreements
o bank obligations, including certificates of
deposit, time deposits, and bankers'
acceptances
61
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
o commercial paper
o asset-backed securities
o variable or floating rate securities,
including variable rate demand obligations
o short-term corporate debt securities other
than commercial paper
o U.S. dollar-denominated foreign securities
o shares of other investment companies
Some of the securities purchased may be
considered illiquid and thus subject to a
restriction of 10% of total assets.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o INCOME RISK
o CREDIT RISK
o INTEREST RATE RISK
AN INVESTMENT IN THE LIQUID ASSET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND WE CANNOT ASSURE YOU THAT THE
PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE $1
SHARE PRICE.
MORE ING Investment Management LLC (or investment
ON THE advisers acquired by ING Investment Management LLC)
PORTFOLIO ("ING Investment") have managed the Portfolio since
MANAGER August, 1996. ING Investment Management is engaged
in the business of providing investment advice to
affiliated insurance and investment companies and
institutional clients possessing portfolios,
which, as of December 31, 1998, were valued at
approximately $27.6 billion. The address of ING
Investment is 5780 Powers Ferry Road, N.W., Suite
300, Atlanta, Georgia 30327. ING Investment is
a subsidiary of ING Groep N.V. and is affiliated
with Directed Services, Inc.
The Portfolio is managed by a team of three
investment professionals led by Ms. Jennifer J.
Thompson, CFA. Ms. Thompson has been employed by
ING Investment as an investment professional
since 1998 and has seven years investment
experience.
ING Investment also manages the Limited Maturity
Bond Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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LIMITED MATURITY BOND PORTFOLIO
PORTFOLIO
MANAGER ING Investment Management, LLC
INVESTMENT
OBJECTIVE Highest current income consistent with low risk
to principal and liquidity.
PRINCIPAL As a secondary objective, the Portfolio seeks to
INVESTMENT enhance its total return through capital
STRATEGY 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 invests primarily in a diversified
portfolio of limited maturity debt securities.
These short-to-intermediate-term debt securities
have remaining maturities of seven years or less.
The dollar-weighted average maturity of the
Portfolio generally will not exceed five years
and in periods of rapidly rising interest rates
may be shortened to one year or less.
The Portfolio Manager utilizes the following
decision making process to achieve the
Portfolio's objectives:
o Active Duration Management. The average
duration of the portfolio is actively managed
relative to the benchmark's average duration.
In rising rate environments, the average
duration will tend to be equal to or less
than the benchmark and in falling rate
environments, the average duration will be
longer than the benchmark.
o Yield Curve Analysis. The yield curve shape
is assessed to identify the risk/reward
trade-off of maturity decisions and market
expectations of future interest rates.
o Sector Selection. Sectors are overweighted
or underweighted relative to the benchmark
based on sector analysis and market
opportunities. Sectors are broadly defined
to include U.S. Treasury securities, U.S.
Government Agency securities, corporate
securities, mortgage-backed securities,
asset-backed securities and money market
securities. The Portfolio Manager may
further evaluate groupings within sectors
such as various industry groups within the
corporate securities sector (e.g., finance,
industrials, utilities, etc.).
o Security Selection. The Portfolio Manager
emphasizes individual securities with
positive credit fundamentals, liquidity and
relative value within their respective
sectors are emphasized.
The Portfolio invests in non-government
securities only if rated Baa3 or better by
Moody's or BBB- or better by Standard & Poor's
(S&P) or, if not rated by Moody's or S&P, if the
Portfolio Manager determines that they are of
comparable quality. Money market securities must
be rated tier one or tier two by Moody's (P-1 or
P-2) or S&P (A-1+, A-1 or A-2), or determined to
be of comparable quality by the Portfolio
Manager. For a description of bond ratings,
please refer to the Statement of Additional
Information.
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Various security types are eligible for
investment including:
o corporate securities o mortgage-backed
securities
o asset-backed o variable and floating
securities rate securities
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
o U.S. treasury securities and U.S. Government
Agency securities
o money market securities such as commercial
paper, certificates of deposit and bankers'
acceptances
o repurchase agreements and reverse repurchase
agreements
o U.S. dollar-denominated foreign securities
o shares of other investment companies
o futures contracts, options and options on
futures contracts
o sovereign debt
o supranational organizations
o real estate investment trusts (REITS)
In addition, private placements of debt
securities (which are often restricted
securities) are eligible for purchase along with
other illiquid securities, subject to appropriate
limits.
The Portfolio may borrow up to 10% of the value
of its net assets. This amount may be increased
to 25% for temporary purposes.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INCOME RISK
o CREDIT RISK o INTEREST RATE RISK
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE ING Investment Management LLC ("ING Investment")
ON THE (or investment advisers acquired by ING
PORTFOLIO Investment Management) has managed the Portfolio
MANAGER since August 13, 1996. ING Investment Management
is engaged in the business of providing
investment advice to affiliated insurance and
investment companies and institutional clients
possessing portfolios, which, as of December 31,
1998, were valued at approximately $27.6 billion.
ING Investment is a subsidiary of ING Groep N.V.
and is affiliated with Directed Services, Inc.
The address of ING Investment is 5780 Powers
Ferry Road, N.W., Suite 300, Atlanta, Georgia
30327.
The Portfolio is managed by a team of three
investment professionals led by Ms. Jennifer J.
Thompson, CFA. Ms. Thompson has been employed by
ING Investment as an investment professional
since 1998 and has seven years investment
experience.
ING Investment also manages the Liquid Asset
Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO
PORTFOLIO
MANAGER Baring International Investment Limited
INVESTMENT
OBJECTIVE High total return
PRINCIPAL
INVESTMENT The Portfolio invests primarily in high-grade
STRATEGY fixed income securities, both foreign and
domestic. The Portfolio normally primarily
invests in:
o obligations issued or guaranteed by foreign
national governments, or their agencies,
instrumentalities or political subsidiaries
o U.S. Government securities
o debt securities issued or guaranteed by
supranational organizations, considered to be
"government securities"
o non-government foreign and domestic debt
securities, including corporate debt
securities, bank obligations, mortgage-backed
or asset-backed securities, and repurchase
agreements
The Portfolio may invest in securities issued in
any currency and may hold foreign currencies
normally in at least six different countries,
including the U.S., although the Portfolio may at
times invest all of its assets in a single
country. The Portfolio's assets will be invested
principally within, or in the currencies of:
o Australia o United States
o Canada o Scandinavia
o Japan o Western Europe
o New Zealand o European Community
When U.S. securities offer superior opportunities
for achieving the Portfolio's investment
objective, the Portfolio may invest substantially
all of its assets in securities of U.S. issuers
or securities denominated in U.S. dollars. The
Portfolio may also acquire securities and
currency in less developed and developing
countries.
The Portfolio 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 Portfolio may invest in debt securities with
varying maturities, which generally will not
exceed 10 years. The average maturity of the
Portfolio's debt portfolio will be shorter when
interest rates worldwide or in a particular
country are expected to rise, and longer when
interest rates are expected to fall. The
majority of the Portfolio's investments are rated
within the three highest rating categories of
Standard & Poor's (AAA, AA, A) or Moody's (Aaa,
Aa or A) or if unrated, considered by the
Portfolio Manager to be of equivalent quality.
For a description of bond ratings, please refer
to the Statement of Additional Information.
65
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<PAGE>
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
The Portfolio Manager allocates the Portfolio's
investments among those markets, companies and
currencies that offer the most attractive
combination of high income and principal
stability. In evaluating investments for the
Portfolio, the Portfolio Manager analyzes
relative yields and the appreciation potential of
securities in particular markets, world interest
rates and monetary trends, economic, political
and financial market conditions 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.
Frequency of portfolio turnover will not be a
limiting factor if the Portfolio Manager
considers it advantageous to purchase or sell
securities. The Portfolio Manager anticipates
that the portfolio turnover rate generally will
not exceed 300%. A higher rate of portfolio
turnover may result in correspondingly higher
portfolio transaction costs that would have to be
borne directly by the Portfolio and ultimately by
the shareholders.
The Portfolio is non-diversified and, when
compared with other funds, may invest a greater
portion of its assets in a particular issuer. A
non-diversified portfolio has greater exposure to
the risk of default or the poor earning of the
issuer.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o CREDIT RISK
o INCOME RISK o CALL RISK
o INTEREST RATE RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies. Further,
the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar Terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
o EMERGING MARKET RISK. 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. Repatriation of
investment income, capital, and proceeds of
sales by foreign investors may require
governmental registration and/or approval in
some emerging market countries. A number of
the currencies of developing countries have
experienced
66
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<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
significant declines against the U.S. dollar in
recent years, and devaluation may occur after
investments in those currencies by the Portfolio.
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;
nationalization; foreign exchange controls (may
be unable to transfer currency from a given
country); or creation of government monopolies.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Baring International Investment Limited ("Baring
ON THE International") has managed the Portfolio since
PORTFOLIO the Portfolio's inception. Baring International
MANAGER is a subsidiary of Baring Asset Management
Holdings Limited ("Baring"). Baring is the
parent of the world-wide group of investment
management companies that operate under the
collective name "Baring Asset Management" and is
owned by ING Groep N.V., a publicly traded
company based in the Netherlands with worldwide
insurance and banking subsidiaries. The address
of Baring International is 155 Bishopsgate,
London.
Baring Asset Management provides global
investment management services to U.S. investment
companies and maintains major investment offices
in Boston, London, Hong Kong and Tokyo. Baring's
predecessor corporation was founded in 1762.
Baring Asset Management provides advisory
services to institutional investors, offshore
investment companies, insurance companies and
private clients. As of December 31, 1998, Baring
Asset Management managed approximately $45.6
billion of assets.
The following person at Baring International is
responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Paul Thursby Investment Manager
Mr. Thursby has been an Investment Manager
with Baring International since 1991 and
has over 19 years of investment experience.
Baring International also manages the Hard Assets
Portfolio and the Developing World Portfolio.
67
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
TOTAL RETURN PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT
OBJECTIVE Above-average income (compared to a portfolio
entirely invested in equity securities)
consistent with the prudent employment of
capital. A secondary goal is the reasonable
opportunity for growth of capital and income.
PRINCIPAL
INVESTMENT The Portfolio is a "balanced fund," and invests
STRATEGY in a combination of equity and fixedincome
securities. Under normal market conditions, the
Portfolio invests:
o at least 40%, but not more than 75%, of its
assets in common stocks and related
securities (referred to as equity securities)
such as preferred stock, bonds, warrants or
rights convertible into stock, and depositary
receipts for those securities
o at least 25% of its net assets in non-
convertible fixed income securities.
The Portfolio may vary the percentage of its
assets invested in any one type of security
(within the limits described above) based on the
Portfolio Manager's interpretation of economic
and money market conditions, fiscal and monetary
policy and underlying security values.
EQUITY PORTION. The Portfolio Manager uses a
bottom-up, as opposed to a top-down, investment
style in managing the Portfolio. This means that
securities are selected based on fundamental
analysis performed by the Portfolio Manager and
its group of equity research analysts and
generally not selected based on the industry in
which they belong.
While the Portfolio may invest in all types of
equity securities, the Portfolio Manager
generally purchases equity securities of
companies that the Portfolio Manager believes are
undervalued in the market relative to their long-
term potential. The Portfolio Manager deems
equity securities of companies to be undervalued
where:
o they are viewed by the Portfolio Manager as
being temporarily out of favor in the market
due to any of the following:
o a decline in the market
o poor economic conditions
o developments that have affected or may affect
the issuer of the securities
or the issuer's industry
o the market has overlooked them
Undervalued equity securities generally have low
price-to-book, price-to-sales and/or price-to-
earnings ratios. The Portfolio focuses on
undervalued equity securities issued by companies
with relatively large market capitalizations
(i.e., market capitalizations of $5 billion or
more).
68
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
As noted above, the Portfolio's investments in
equity securities include convertible securities.
A convertible security is a security that may be
converted within a specifiedperiod of time into
a certain amount of common stock of the same or a
different issuer. A convertible security
generally provides:
o a fixed income stream
o the opportunity, through its conversion
feature, to participate in an increase in the
market price of the underlying common stock.
FIXED INCOME PORTION. The Portfolio invests in
securities that pay a fixed interest rate,
including:
o U.S. government securities, which are bonds
or other debt obligations issued by, or whose
principal and interest payments are
guaranteed by, the U.S. government or one of
its agencies or instrumentalities,
o mortgage-backed and asset-backed securities,
which represent interest in a pool of assets
such as mortgage loans, car loan receivables,
or credit card receivables. These
investments entitle the Portfolio to a share
of the principal and interest payments made
on the underlying mortgage, car loan, or
credit card. For example, if the Portfolio
invests in a pool that includes your mortgage
loan, a share of the principal and interest
payments on your mortgage would pass to the
Portfolio, and
o corporate bonds, which are bonds or other
debt obligations issued by corporations or
other similar entities.
In selecting fixed income investments for the
Portfolio, the Portfolio Manager considers the
views of its group of fixed income portfolio
managers and research analysts. This group
periodically assesses the three-month outlook for
various segments of the fixed income markets.
This three-month "horizon" outlook is used as a
tool in making or adjusting the Portfolio's asset
allocations to various segments of the fixed
income markets. In assessing the credit quality
of fixed-income securities, the Portfolio Manager
does not rely solely on the credit ratings
assigned by credit rating agencies, but rather
performs its own independent credit analysis.
The Portfolio may invest up to 20% of its assets
in U.S. government securities, mortgage pass-
through securities, American Depositary Receipts
and foreign securities (including in emerging or
developing markets) and lower rated fixed income
securities.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o INCOME RISK o CREDIT RISK
o CALL RISK o MARKET AND COMPANY
RISK
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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An investment in the Portfolio is subject to the
following additional principal risks:
o ALLOCATION RISK. The Portfolio will allocate
its investments between equity and fixed
income securities, and among various segments
of the fixed income markets, based upon
judgements made by the Portfolio Manager.
The Portfolio could miss attractive
investment opportunities by underweighting
markets where there are significant returns,
and could lose value by overweighting markets
where there are significant declines.
o CONVERTIBLE SECURITIES RISK. Convertible
securities, like fixed income securities,
tend to increase in value when interest rates
decline and decrease in value when interest
rates rise. The market value of a
convertible security also tends to increase
as the market value of the underlying stock
rises and decrease as the market value of the
underlying stock declines.
o EMERGING MARKET RISK. 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. Repatriation of
investment income, capital, and proceeds of
sales by foreign investors 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 after investments in those
currencies by the Portfolio. 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;
nationalization; foreign exchange controls (may
be unable to transfer currency from a given
country); or creation of government monopolies.
o UNDERVALUED SECURITIES RISK. Prices of
securities react to the economic condition of
the company that issued the security. The
Portfolio equity investments in an issuer may
rise and fall based on the issuer's actual
and anticipated earnings, changes in
management and the potential for takeovers
and acquisitions. The Portfolio Manager
invests in securities that are undervalued
based on its belief that the market value of
these securities will rise due to anticipated
events and investor perceptions. If these
events do not occur or are delayed, or if
investor perceptions about the securities do
not improve, the market price of these
securities may not rise or may fall.
o HIGH YIELD BOND RISK. High yield bonds
(commonly referred to "junk bonds") generally
provide greater income and increased
opportunity for capital appreciation than
investments in higher quality debt
securities, but they also typically have
greater potential price volatility and
principal and income risk. High yield bonds
are not considered investment grade.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies. Further,
the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Massachusetts Financial Services Company ("MFS")
ON THE has managed the Portfolio since its inception.
PORTFOLIO MFS is America's oldest mutual fund organization.
MANAGER MFS and its predecessor organizations have
managed money since 1924 and founded the first
mutual fund in the United States. MFS is a
subsidiary of Sun Life Assurance Company of
Canada (U.S.) which in turn is an indirect
subsidiary of Sun Life Assurance Company of
Canada (referred to as "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.
As of December 31, 1998, MFS managed net assets
of approximately $98 billion (approximately $69.5
billion in equity securities and $20.5 billion in
fixed income securities) on behalf of
approximately 3.7 million investor accounts. The
address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
The Portfolio is managed by a management team
consisting of six members. David M. Calabro,
Senior Vice President, heads the management team
and manages the common stock portion of the
Portfolio. Mr. Calabro has been employed by MFS
since 1992.
MFS also manages the Mid-Cap Growth Portfolio and
the Research Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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EQUITY INCOME PORTFOLIO
(FORMERLY, THE MULTIPLE ALLOCATION PORTFOLIO)
PORTFOLIO
MANAGER T. Rowe Price Associates, Inc.
INVESTMENT
OBJECTIVE Substantial dividend income as well as long-term
growth of capital.
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its assets in the common stocks of well-
STRATEGY established companies paying above-average
dividends. The Portfolio Manager typically
employs a "value" approach in selecting
investments. The Portfolio Manager's in-house
research team seeks companies that appear to be
undervalued by various measures and may be
temporarily out of favor, but have good prospects
for capital appreciation and dividend growth.
In selecting investments, the Portfolio Manager
generally looks for companies with the following:
o an established operating history.
o above-average dividend yield relative to the
S&P 500.
o low price/earnings ratio relative to the S&P
500.
o a sound balance sheet and other positive
financial characteristics.
o low stock price relative to a company's
underlying value as measured by assets, cash
flow or business franchises.
While most of the Portfolio's assets will be
invested in U.S. common stocks, it may also
invest in other securities, including foreign
securities, debt securities, futures and options,
in keeping with its objectives. The Portfolio
may also invest in shares of the Reserve
Investment Fund, an internally managed money
market fund of T. Rowe Price.
The Portfolio may sell securities for a variety
of reasons, such as to secure gains, limit
losses, or redeploy assets into more promising
opportunities.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following principal additional risk:
o VALUE INVESTING RISK. Undervalued stock may
not realize their perceived value for
extended periods of time. Value stocks may
respond differently to market and other
developments than other types of stocks.
Value stocks typically underperform when
other investing styles, such as growth
investing, are in favor.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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MORE T. Rowe Price Associates, Inc. has managed the
ON THE Portfolio since March 1, 1999. Prior to that,
PORTFOLIO different firms at different times served as
MANAGER portfolio manager. T. Rowe Price was founded in
1937 by the late Thomas Rowe Price, Jr. As of
March 31, 1999, the firm and its affiliates
managed approximately $149 billion in assets.
The address of T. Rowe Price is 100 East Pratt
Street, Baltimore, Maryland 21202.
The Portfolio is managed by an Investment
Advisory Committee consisting of six members.
Brian Rogers, as Committee Chair, has day-to-day
responsibility for managing the Portfolio and
works with the Committee in developing and
executing the Portfolio's investment program.
Mr. Rogers has been Chairman of the Committee
since its inception. He joined T. Rowe Price in
1982.
T. Rowe Price also manages the Fully Managed
Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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FULLY MANAGED PORTFOLIO
PORTFOLIO
MANAGER T. Rowe Price Associates, Inc.
INVESTMENT
OBJECTIVE Over the long-term, a high total investment
return, consistent with the preservation of
capital and with prudent investment risk.
PRINCIPAL The Portfolio invests primarily in the common
INVESTMENT stocks of established companies the Portfolio
STRATEGY Manager believes to have above-average potential
for capital growth. Common stocks typically
compose at least half of total assets. The
Portfolio may also invest in other securities,
including convertibles, warrants, preferred
stocks, corporate and government debt, foreign
securities, futures, and options, in keeping with
its objective.
The Portfolio's common stocks generally fall into
one of two categories:
o the larger category comprises long-term core
holdings whose purchase prices are considered
low in terms of company assets, earnings, or
other factors
o the smaller category comprises opportunistic
investments whose prices are expected by the
Portfolio Manager to rise in the short term
but not necessarily over the long term.
Since the Portfolio Manager attempts to
prevent losses as well as achieve gains, it
typically uses a value approach in selecting
investments. Its in-house research team
seeks to identify companies that seem
undervalued by various measures, such as
price/book value, and may be temporarily out
of favor, but have good prospects for capital
appreciation. The Portfolio Manager may
establish relatively large positions in
companies it finds particularly attractive
The Portfolio may sell securities for a variety
of reasons, such as to secure gains, limit
losses, or redeploy assets into more promising
opportunities.
The Portfolio's approach differs from that of
many other stock funds. The Portfolio Manager
works as hard to reduce risk as to maximize gains
and may realize gains rather than lose them in
market declines. In addition, the Portfolio
Manager searches for the best risk/reward values
among all types of securities. The portion of
the Portfolio invested in a particular type of
security, such as common stocks, results largely
from case-by-case investment decisions, and the
size of the Portfolio's cash reserve may reflect
the Portfolio Manager's ability to find companies
that meet valuation criteria rather than his
market outlook.
DEBT SECURITIES. Debt securities, including
convertible bonds, may often constitute between
25% and 50% of the Portfolio's overall portfolio.
The Portfolio may purchase debt securities of any
maturity. 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 15% of the
Portfolio's assets in debt securities that are
rated below investment-grade or, if not rated, of
equivalent quality. For a description of bond
ratings, please refer to the Statement of
Additional Information.
MONEY MARKET INSTRUMENTS. If there are remaining
assets available for investment, the Portfolio
Manager may invest the balance in any of the
following money market instruments with remaining
maturities not exceeding one year:
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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(1) shares of the Reserve Investment Fund, an
internally managed money market fund of
T. Rowe Price
(2) U.S. government obligations
(3) negotiable certificates of deposit, bankers'
acceptances and fixed time deposits and
other obligations of domestic banks that have
more than $1 billion in assets and are
members of the Federal Reserve System or are
examined by the Comptroller of the Currency
whose deposits are insured by the Federal
Deposit Insurance Corporation
(4) commercial paper rated at the date of purchase
in the two highest rating categories
(5) repurchase agreements
The Portfolio also may invest in short-term U.S.
dollar denominated obligations of foreign banks
if, at the time of purchase, such banks have more
than $1 billion in assets.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o CALL RISK o INCOME RISK
o MARKET AND COMPANY o CREDIT RISK
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o VALUE INVESTING RISK. A particular risk of
the Portfolio's value or "contrarian"
approach is that some holdings may not
recover and provide the capital growth
anticipated. If the Portfolio has large
holdings in a relatively small number of
companies, disappointing performance by those
companies will have a more adverse impact on
the Portfolio than would be the case with a
more diversified fund.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE T. Rowe Price Associates, Inc. has managed the
ON THE Portfolio since January, 1995. T. Rowe Price was
PORTFOLIO founded in 1937 by the late Thomas Rowe Price, Jr.
MANAGER As of March 31, 1999, the firm and its affiliates
managed approximately $149 billion in assets. The
address of T. Rowe Price is 100 East Pratt Street,
Baltimore, Maryland 21202.
The Portfolio is managed by an Investment
Advisory Committee consisting of five members.
Richard P. Howard, the Committee Chair, has day-
to-day responsibility for managing the Portfolio
and works with the Committee in developing and
executing the Portfolio's investment program.
Mr. Howard has been Chairman of the Committee
since 1995. He joined T. Rowe Price in 1982 and
has been managing investments since 1989.
T. Rowe Price also manages the Equity Income
Portfolio.
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RISING DIVIDENDS PORTFOLIO
PORTFOLIO
MANAGER Kayne Anderson Investment Management, LLC
INVESTMENT
OBJECTIVE Capital appreciation. A secondary objective is
dividend income.
PRINCIPAL
INVESTMENT The Portfolio invests in high-quality equity
STRATEGY securities, most of which meet all of the
following quality criteria:
o regular dividend increases during the last 10
years
o at least 35% of earnings reinvested annually
o credit rating of "A" to "AAA" or its
equivalent
There may from time to time be other high-quality
securities in the Portfolio which meet most, but
not all, of the criteria, but which the Portfolio
Manager deems a suitable investment. In addition
to common stocks, the Portfolio may invest in
securities convertible into common stocks, or
rights or warrants to subscribe for or purchase
common stocks.
In selecting equity securities, the Portfolio
Manager screens databases to create a universe of
companies that meet the preceding criteria. The
Portfolio Manager then fundamentally analyzes the
securities. This research involves study of
competitive industry conditions, discussions with
company management, spreadsheet analysis, and
valuation projections. A proprietary computer
model compares expected rates of return for each
equity security in the universe. In deciding
whether to purchase a security the Portfolio
Manager appraises a company's fundamental
strengths and relative attractiveness based on
its expected return.
The Portfolio generally holds at least 25 to 30
different securities. These securities are
diversified by industry. The security selection
discipline also avoid over-concentration in any
single sector or company.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o MANAGEMENT TECHNIQUE RISK. The Portfolio is
managed based on proprietary computer models
and techniques developed by the Portfolio
Manager. We cannot assure you that such
management techniques will correctly predict
market trends, or enable the Portfolio to
achieve its investment objective.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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MORE The Portfolio has been managed by Kayne Anderson
ON THE Investment Management, LLC or its predecessor
PORTFOLIO since the Portfolio's inception. Kayne Anderson
MANAGER 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. As of December 31, 1998, Kayne
Anderson managed portfolios amounting to
approximately $4 billion. The address of Kayne
Anderson is 1800 Avenue of the Stars, Suite 200,
Los Angeles, California 90067.
The following persons at Kayne Anderson are
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Allan M. Rudnick Chief Investment Officer and Portfolio
Manager
Mr. Rudnick has served as Chief
Investment Officer for Kayne Anderson
since 1989.
Paul Wayne Director of Research and Portfolio Manager
Mr. Wayne has been employed by Kayne
Anderson since 1992.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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GROWTH & INCOME PORTFOLIO
PORTFOLIO
MANAGER Alliance Capital Management L.P.
INVESTMENT
OBJECTIVE Long-term total return
PRINCIPAL
INVESTMENT The Portfolio invests primarily in common stocks
STRATEGY of companies where the potential for change
(earnings acceleration) is significant.
The Portfolio Manager applies a growth-oriented
investment philosophy defined by its:
o EARLY RECOGNITION OF CHANGE
o Value is created through the dynamics of
changing economic, industry and company
fundamentals
o The Portfolio Manager's willingness to invest
on incomplete information
o Judgment about the future, not merely
extrapolation of the past
o Invest in one to two year relative earnings
strength at an early stage and at a
reasonable price
o COMMITMENT TO FUNDAMENTAL RESEARCH
o Twenty-one fundamental analysts covering U.S.
companies
o EMPHASIS ON STOCK SELECTION
o Emphasis on companies and industries where
the potential for change (earnings
acceleration) is significant
o Remain fully invested
Although the Portfolio will focus on companies
with market capitalizations of up to $5 billion,
the Portfolio remains flexible and may invest in
securities of larger companies. The Portfolio
may also engage in short sales of securities it
expects to decline in price. The Portfolio may
invest a substantial portion of its assets in
securities issued by small, small Cap and mid-cap
companies. These companies may offer greater
opportunities for share price increase than
larger companies. Equity and debt securities in
which the Portfolio normally invests include
common and preferred stocks, convertible
securities, bonds, and notes.
The Portfolio may invest in:
o foreign securities (including in emerging or
developing markets)
o foreign currencies, options
o lower-quality, high yielding debt securities
(commonly called "junk bonds")
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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o "zero-coupon" bonds
o "payment-in-kind" bonds
At times the Portfolio 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 Portfolio would only overweight
its investments in a particular market sector if
the investment return available from such
overweighing in that sector justifies any
additional risk associated with heavily investing
in that sector.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
under "Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o GROWTH INVESTING RISK. Growth stocks may be
more volatile than other stocks because they
are more sensitive to investor perceptions of
the issuing company's growth potential.
Growth-oriented funds will typically
underperform when value investing is in
favor.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
Alliance Capital Management L.P. has managed the
Portfolio since March 1,1999.
MORE Alliance Capital Management Corporation, its
ON THE general partner, is an indirect subsidiary of The
PORTFOLIO Equitable Life Assurance Society of the United
MANAGER States. Alliance Capital is a professional
investment management firm that provides advisory
services to individual and institutional
investors. As of December 31, 1998, Alliance
Capital managed approximately $286.7 billion of
assets. The address of Alliance Capital is 1345
Avenue of the Americas, New York, New York 10105.
The following person at Alliance Capital is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Kevin J. O' Brien Senior Vice President
Mr. O' Brien has been employed by Alliance
Capital since 1988.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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GROWTH PORTFOLIO
(FORMERLY, THE VALUE + GROWTH PORTFOLIO)
PORTFOLIO
MANAGER Janus Capital Corporation
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests primarily in common stocks
INVESTMENT of growth companies that have favorable
STRATEGY relationships between price/earnings ratios and
growth rates in sectors offering the potential
for above-average returns.
The Portfolio invests substantially in common
stocks the Portfolio Manager believes will
appreciate in value. The Portfolio Manager
generally takes a "bottom up" approach to
selecting companies. In other words, it seeks to
identify individual companies with earnings
growth potential that may not be recognized by
the market at large. It makes this assessment by
looking at companies one at a time, regardless of
size, country of organization, place of principal
business activity, or other similar selection
criteria. Income is not a significant
consideration when choosing investments for the
Portfolio.
The Portfolio may invest in companies of any size
and may invest a substantial portion of its
assets in securities issued by small and medium
size companies.
The Portfolio may also invest in:
o foreign securities (including in emerging or
developing markets)
o forward foreign currency contracts, futures
and options
o debt securities (including up to 35% in high-
yield/high-risk securities)
When the Portfolio Manager believes that market
conditions are unfavorable for profitable
investing, or it is otherwise unable to locate
attractive investment opportunities, the
Portfolio's cash or similar investments may
increase. In other words, the Portfolio does not
always stay fully invested in stocks and bonds.
Cash or similar investments generally are a
residual--they represent the assets that remain
after the Portfolio Manager has committed
available assets to desirable investment
opportunities. Frequency of portfolio turnover
will not be a limiting factor if the Portfolio
Manager considers it advantageous to purchase or
sell securities.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o GROWTH INVESTING RISK. Growth stocks may be
more volatile than other stocks because they
are more sensitive to investor perceptions of
the issuing company's growth potential.
Growth-oriented funds will typically
underperform when value investing is in
favor.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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o SMALL COMPANY RISK. Investing in securities
of small companies may involve greater risks
than investing in larger, more established
issuers. Smaller companies may have limited
product lines, markets or financial
resources. Their securities may trade less
frequently and in more limited volume than
the securities of larger, more established
companies. In addition, smaller companies
are typically subject to greater changes in
earnings and business prospects than are
larger companies. Consequently, the prices
of small company stocks tend to rise and fall
in value more than other stocks. Although
investing in small companies offers potential
for above-average returns, the companies may
not succeed, and the value of stock shares
could decline significantly.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies. Further,
the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
o HIGH YIELD BOND RISK. High yield bonds
(commonly referred to "junk bonds") generally
provide greater income and increased
opportunity for capital appreciation than
investments in higher quality debt
securities, but they also typically have
greater potential price volatility and
principal and income risk. High yield bonds
are not considered investment grade.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Janus Capital Corporation has managed the
ON THE Portfolio since March 1, 1999. Janus Capital has
PORTFOLIO been an investment adviser since 1970, and
MANAGER provides advisory services to managed accounts
and investment companies. As of December 31,
1998, Janus Capital managed approximately $108
billion in assets. The address of Janus Capital
is 100 Fillmore Street, Denver, Colorado 80206.
The following person at Janus Capital is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Warren M. Lammert Executive Vice President
Mr. Lammert has been employed by Janus
Capital since 1987 and has managed
various other mutual funds and private
accounts during that time.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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VALUE EQUITY PORTFOLIO
PORTFOLIO
MANAGER Eagle Asset Management, Inc.
INVESTMENT
OBJECTIVE Capital appreciation. Dividend income is a
secondary objective.
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of domestic and foreign issuers that
STRATEGY meet quantitative standards relating to financial
soundness and high intrinsic value relative to
price. The principal strategies used to select
the investments include:
(i) A three-step process to identify possible
value opportunities:
o Screening the universe of equity securities
for five key variables: low price-to-book
ratios; low price-to-sales ratios; low price-
to earnings ratios; attractive relative
dividend yield; and relative price-to-
earnings ratios
o Performing in-depth fundamental research on
individual companies including their industry
outlook and trends, strategy, management
strength, and financial stability
o Using a discounted free cash flow model to
identify securities that are trading at a
significant discount to their estimated
intrinsic value
(ii) Identifying stocks trading at a significant
discount to their underlying intrinsic value and
which fall into at least one of three basic
categories:
o "Pure" value opportunities: stocks that
appear attractive relative to the broader
market
o "Relative" value opportunities: stocks that
trade at a discount to the valuation
parameters that the market has historically
applied to them or their peer group
o "Event-driven" value opportunities: stocks
whose underlying value may be recognized as a
result of a realized or anticipated event
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o VALUE INVESTING RISK. Undervalued stock may
not realize their perceived value for
extended periods of time. Value stocks may
respond differently to market and other
developments than other types of stocks.
Value stocks typically underperform when
other investing styles, such as growth
investing, are in favor.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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Eagle Asset Management, Inc. ("Eagle Asset") has
managed the Portfolio since its inception. Eagle
Asset is in the business of managing
institutional client accounts and individual
accounts on a discretionary basis. Eagle Asset
is a subsidiary of Raymond James Financial, Inc.,
a publicly traded company whose shares are listed
on the New York Stock Exchange. As of December
31, 1998, Eagle Asset had approximately $6
billion in client assets under management. The
address of Eagle Asset is 880 Carillon Parkway,
St. Petersburg, Florida 33716.
The following persons at Eagle Asset are
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Address
---- ------------------------------------
Louis Kirschbaum Senior Vice President
Mr. Kirschbaum assumed portfolio
management responsibilities for the
Portfolio in January 1999. Prior to
that, he managed various other
accounts for Eagle Asset. Mr.
Kirschbaum has 27 years of investment
experience and also has portfolio
management responsibilities for various
accounts invested in other portfolios
of Eagle Asset.
David M. Blount Senior Vice President
Mr. Blount assumed portfolio management
responsibilities for the Portfolio in
January, 1999. Prior to that, he managed
or provided research assistance for
various other accounts for Eagle Asset.
Mr. Blount has 16 years of investment
experience.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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RESEARCH PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT
OBJECTIVE Long-term growth of capital and future income
PRINCIPAL The Portfolio normally invests at least 80% of
INVESTMENT its total assets in common stocks and related
STRATEGY securities (such as preferred stocks, convertible
securities and depositary receipts). The
Portfolio focuses on companies that the Portfolio
Manager believes have favorable prospects for
long-term growth, attractive valuations based on
current and expected earnings or cash flow,
dominant or growing market share and superior
management. The Portfolio may invest in
companies of any size. The Portfolio's
investments may include securities traded on
securities exchanges or in the over-the-counter
markets.
A committee of investment research analysts
selects portfolio securities for the Portfolio.
This committee includes investment analysts
employed by the Portfolio Manager and its
affiliate. The committee allocates the
Portfolio's assets among various industries.
Individual analysts then select what they view as
the securities best suited to achieve the
Portfolio's investment objective within their
assigned industry responsibility.
The Portfolio may invest in foreign equity
securities, and may have exposure to foreign
currencies through its investment in these
securities, its direct holdings of foreign
currencies or through its use of foreign currency
exchange contracts for the purchase or sale of a
fixed quantity of foreign currency at a future
date.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o OTC INVESTMENT RISK. Investing in securities
traded on the over-the-counter (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 that
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
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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capitalization or established companies.
Shares of the Portfolio, therefore, are
subject to greater fluctuation in value than
shares of a conservative equity fund or of a
growth fund that invests entirely in proven
growth stocks.
o FOREIGN INVESTMENT RISK. In many foreign
countries there is less publicly available
information about companies than is available
in the United States. Foreign companies are
not generally subject to uniform accounting,
auditing, and financial reporting standards,
and auditing practices and requirements may
not be comparable to those applicable to U.S.
companies. Further, the Portfolio may
encounter difficulties or be unable to pursue
legal remedies or obtain judgments in foreign
courts.
The values of foreign investments may be affected by
changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Massachusetts Financial Services Company ("MFS")
ON THE has managed the Portfolio since its inception.
PORTFOLIO MFS is America's oldest mutual fund organization.
MAMANGER MFS and its predecessor organizations have
managed money since 1924 and founded the first
mutual fund in the United States. MFS is a
subsidiary of Sun Life Assurance Company of
Canada (U.S.) which in turn is an indirect
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. As of
December 31, 1998, MFS managed net assets of
approximately $98 billion (approximately $69.5
billion in equity securities and $20.5 billion in
fixed income securities) on behalf of
approximately 3.7 million investor accounts. The
address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
The Portfolio is managed by a committee of
research analysts at MFS.
MFS also manages the Mid-Cap Growth Portfolio and
the Total Return Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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MID-CAP GROWTH PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT
OBJECTIVE Long-term growth of capital
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its total assets in common stocks and related
STRATEGY securities (such as preferred stocks, convertible
securities and depositary receipts) of companies
with medium market capitalizations (or "mid-cap")
which the Portfolio Manager believes have above-
average growth potential.
The Portfolio Manager defines mid-cap companies
as companies with market capitalizations equaling
or exceeding $250 million but not exceeding the
top range of the Russell Midcap Growth Index at
the time of the Portfolio's investment. The
Index is a widely recognized, unmanaged index of
mid-cap common stock prices. Companies whose
capitalization falls below $250 million or
exceeds the top of the Russell Midcap Growth
Index range after purchase continue to be
considered mid-cap companies for purposes of the
Portfolio's 65% investment policy. As of April
30, 1999, the top of the Russell Midcap Growth
Index was $47 billion. The Portfolio's
investments may include securities listed on a
securities exchange or traded in the over-the-
counter markets.
Growth companies are companies that the Portfolio
Manager considers well-run and poised for growth.
The Portfolio Manager looks particularly for
companies which demonstrate:
o a strong franchise, strong cash flows and a
recurring revenue stream
o a solid industry position, where there is
potential for high profit margins and
substantial barriers to new entry in the industry
o a strong management team with a clearly
defined strategy
o a catalyst that may accelerate growth
The Portfolio uses a bottom-up, as opposed to a
top-down, investment style in managing the
Portfolio. This means that securities are
selected based on fundamental analysis performed
by the Portfolio Manager and its group of equity
research analysts and not selected based on the
industry in which they belong.
The Portfolio may invest in foreign securities
(including emerging markets securities), and may
have exposure to foreign currencies through its
investment in these securities, its direct
holdings of foreign currencies or through its use
of foreign currency exchange contracts for the
purchase or sale of a fixed quantity of foreign
currency at a future date.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
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The Portfolio is non-diversified and, when
compared with other funds, may invest a greater
portion of its assets in a particular issuer. A
non-diversified portfolio has greater exposure to
the risk of default or the poor earnings of the
issuer.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o MID-CAP COMPANY RISK. Investment in
securities of mid-cap companies entails
greater risks than investments in larger,
more established companies. Mid-cap
companies tend to have more narrow product
lines, more limited financial resources and a
more limited trading market for their stocks,
as compared with larger companies. As a
result, their stock prices may decline
significantly as market conditions change.
o OTC INVESTMENT RISK. Investing in securities
traded on the over-the-counter ("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.
Therefore, shares of the Portfolio 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.
o EMERGING MARKETS RISK. 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. Repatriation of
investment income, capital, and proceeds of
sales by foreign investors 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 after the Portfolio investments in
those currencies. 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;
nationalization; foreign exchange controls (may
be unable to transfer currency from a given
country); or creation of government monopolies.
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o FOREIGN INVESTMENT AND CURRENCY RISK. In many
foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies.
Further, the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Massachusetts Financial Services Company ("MFS")
ON THE has managed the Portfolio since its inception.
PORTOFLIO MFS is America's oldest mutual fund organization.
MANAGER MFS and its predecessor organizations have
managed money since 1924 and founded the first
mutual fund in the United States. MFS is a
subsidiary of Sun Life Assurance Company of
Canada (U.S.) which in turn is an indirect
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. As of
December 31, 1998, MFS managed net assets of
approximately $98 billion (approximately $69.5
billion in equity securities and $20.5 billion in
fixed income securities) on behalf of
approximately $3.7 million investor accounts.
The address of MFS is 500 Boylston Street,
Boston, Massachusetts 02116.
The following persons at MFS are primarily
responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
John W. Ballen Senior VP--Investments & Chief Equity
Officer
Mr. Ballen has been employed by MFS
since 1984.
Mark Regan Vice President--Investments
Mr. Regan has been employed as a
portfolio manager by MFS since 1989.
MFS also manages the Research Portfolio and the
Total Return Portfolio.
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ALL-GROWTH PORTFOLIO
PORTFOLIO
MANAGER Pilgrim Baxter & Associates, Ltd.
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio normally invests primarily in
INVESTMENT growth securities (such as common stocks) of
STRATEGY middle-range capitalization (or "mid-cap")
companies. Mid-cap companies in which the
Portfolio invests generally have market
capitalizations or annual revenues between $500
million and $10 billion. Growth securities in
the Portfolio are primarily common stocks that
the Portfolio Manager believes have strong
earnings growth and capital appreciation
potential.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o MID-CAP COMPANY RISK. Investment in
securities of mid-cap companies entail
greater risks than investments in larger,
more established companies. Mid-cap
companies tend to have more narrow product
lines, more limited financial resources and a
more limited trading market for their stocks,
as compared with larger companies. As a
result, their stock prices may decline
significantly as market conditions change.
o GROWTH INVESTING RISK. Growth stocks may be
more volatile than other stocks because they
are more sensitive to investor perceptions of
the issuing company's growth potential.
Growth-oriented funds will typically
underperform when value investing is in
favor.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Pilgrim Baxter & Associates, Ltd. has managed the
ON THE Portfolio since February 1997. Pilgrim Baxter
PORTFOLIO provides advisory services to pension and profit
MANAGER sharing plans, charitable institutions,
corporations, trust and estates, and other
investment companies. As of December 31, 1998,
Pilgrim Baxter managed approximately $12 billion
of assets. Pilgrim Baxter is a subsidiary of
United Asset Management Corporation, a publicly
traded company. The address of Pilgrim Baxter is
825 Duportail Road, Wayne, Pennsylvania 19087.
The following person at Pilgrim Baxter is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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Name Position and Recent Business Experience
---- ---------------------------------------
Jeffrey Wrona Investment Professional
Mr. Wrona has been an Inivestment
Professional with Pilgrim Baxter since
1997. Before joining Pilgrim Baxter, Mr.
Wrona worked as a Senior Portfolio Manager
at Munder Capital Management for seven years.
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GROWTH OPPORTUNITIES PORTFOLIO
PORTFOLIO
MANAGER Montgomery Asset Management, LLC
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL
INVESTMENT The Portfolio invests primarily in equity
STRATEGY securities of domestic companies generally having
total market capitalizations of $1 billion or
more.
The Portfolio may invest in other types of equity
securities and equity derivative securities. The
Portfolio also may invest up to 35% of its total
assets in highly rated debt securities.
The Portfolio seeks growth at a reasonable value
by investing in companies with sound fundamental
value and potential. The Portfolio selects its
investments based on a combination of
quantitative screening techniques and fundamental
analysis. The Portfolio Manager:
o identifies a universe of investment
candidates by screening companies based on
changes in growth rates and valuation ratios
(such as price to sales, price to earnings
and price to cash flows)
o identifies rapidly growing companies with
reasonable valuations and accelerating growth
rates, or with low valuations and initial
signs of growth
o fundamentally analyzes these companies,
focusing on:
o balance sheets and income statements
o company visits and discussions with
management
o contacts with industry specialists and
industry analysts
o review of the competitive environments
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o GROWTH INVESTING RISK. Growth stocks may be
more volatile than other stocks because they
are more sensitive to investor perceptions of
the issuing company's growth potential.
Growth-oriented funds will typically
underperform when value investing is in
favor.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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o MANAGEMENT TECHNIQUE RISK. The Portfolio
selects its investments based on a
combination of quantitative screening
techniques and fundamental analysis. We
cannot assure you that such market timing
techniques will correctly predict market
trends, or enable the Portfolio to achieve
its investment objective.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Montgomery Asset Management, LLC ("Montgomery")
ON THE or its affiliates has managed the Portfolio since
PORTFOLIO its inception. Montgomery advises private
MANAGER accounts as well as mutual funds. As of December
31, 1997, Montgomery had $9.5 billion in assets
under management. Montgomery is a subsidiary of
Commerzbank AG. 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 address of
Montgomery is 101 California Street, San
Francisco, CA 94111.
The following persons at Montgomery are primarily
responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Roger W. Honour Senior Portfolio Manager and Principal
Mr. Honour has been with Montgomery since
June 1993. From 1992 through May 1993,
Mr. Honour spent one year as Vice
President and portfolio manager at
Twentieth Century Investors.
Kathryn M. Peters Portfolio Manager and Principal
Ms. Peters joined Montgomery in 1995.
From 1993 to 1995, Ms. Peters was an
associate in the investment banking
division of Donaldson, Lufkin & Jenrette.
From 1990 to 1990 she analyzed mezzanine
investments for Barclays de Zoete Wedd.
Andrew Pratt, CFA Portfolio Manager and Principal
Mr. Pratt 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.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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STRATEGIC EQUITY PORTFOLIO
PORTFOLIO
MANAGER A I M Capital Management, Inc.
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests principally in common
INVESTMENT stocks of medium- and small-sized growth
STRATEGY companies. The Portfolio Manager focuses on
companies it believes are likely to benefit from
new or innovative products, services or processes
as well as those that have experienced above-
average, long-term growth in earnings and have
excellent prospects for future growth. The
Portfolio Manager usually sells a particular
security when any of those factors materially
changes. As a result of the Portfolio's
investment strategy, the market prices of many of
the securities purchased and held by the
Portfolio may fluctuate widely. Any income
received from securities held by the Portfolio is
incidental.
The Portfolio comprises primarily of securities
of two basic categories of companies: (a) "core"
companies, which the Portfolio Manager considers
to have experienced above-average and consistent
long-term growth in earnings and to have
excellent prospects for outstanding future
growth, and (b) "earnings acceleration" companies
that the Portfolio Manager believes are currently
enjoying a dramatic increase in profits.
The Portfolio's strategy does not preclude
investment in large, seasoned companies that the
Portfolio Manager believes possess superior
potential returns similar to companies with
formative growth profiles. The Portfolio also
invests in established smaller companies (under
$500 million in market capitalization) which
offer exceptional value based upon substantially
above-average earnings growth potential relative
to market value.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o GROWTH INVESTING RISK. Growth stocks may be
more volatile than other stocks because they
are more sensitive to investor perceptions of
the issuing company's growth potential.
Growth-oriented funds will typically
underperform when value investing is in
favor.
o SMALL COMPANY RISK. Investing in securities
of small companies may involve greater risks
than investing in larger, more established
issuers. Smaller companies may have limited
product lines, markets or financial
resources. Their securities may trade less
frequently and in more limited volume than
the securities of larger, more established
companies. In addition, smaller companies
are typically subject to greater changes in
earnings and business prospects than are
larger companies. Consequently, the prices
of small company stocks tend to rise and fall
in value more than other stocks. Although
investing in small companies offers potential
for above-average returns, the
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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companies may not succeed, and the value of stock
shares could decline significantly.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies. Further,
the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgements in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE A I M Capital Management, Inc. ("A I M Capital")
ON THE has managed the Portfolio since March 1, 1999.
PORTFOLIO A I M Capital is an indirect subsidiary of
MANAGER AMVESCAP, one of the world's largest independent
investment companies. As of December 31, 1998,
A I M Capital and its immediate parent, A I M
Advisors, Inc., managed approximately $109
billion in assets. The address of A I M Capital
is 11 Greenway Plaza, Houston, Texas 77046.
The following persons at A I M Capital are
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Robert M. Kippes Senior Portfolio Manager
Mr. Kippes has been associated with A I M
Capital and/or its affiliates since
1989.
Charles D. Scavone Senior Portfolio Manager
Mr. Scavone has been associated with A I M
Capital and/or its affiliates since
1996. From 1994 to 1996, he was Associate
Portfolio Manager for Van Kamper Capital
Asset Management, Inc.
David P. Barnard Senior Portfolio Manager
Mr. Barnard has been associated with A I M
Capital since 1982.
Kenneth A. Zschappel Senior Portfolio Manager
Mr. Zschappel has been associated with
A I M Capital and/or its affiliates
since 1990.
A I M Capital also manages the Capital
Appreciation Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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CAPITAL APPRECIATION PORTFOLIO
PORTFOLIO
MANAGER A I M Capital Management Group, Inc.
INVESTMENT
OBJECTIVE Long-term capital growth
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities the Portfolio Manager believes to be
STRATEGY undervalued relative to the Portfolio Manager's
appraisal of the current or projected earnings of
the companies issuing the securities, or relative
to current market values of assets owned by the
companies issuing the securities or relative to
the equity markets generally.
The Portfolio also may invest in preferred stocks
and debt instruments that are consistent with its
investment objective. Although the Portfolio may
receive income from these investments, they will
be purchased for their potential for growth of
capital and not for their ability to generate
income. The Portfolio also may invest up to 25%
of its assets in foreign securities.
The Portfolio Manager focuses on undervalued
equity securities of:
o out-of-favor cyclical growth companies
o established growth companies that are
undervalued compared to historical relative
valuation parameters
o companies where there is early but tangible
evidence of improving prospects that are not
yet reflected in the price of the company's
equity securities
o companies whose equity securities are selling
at prices that do not reflect the current
market value of their assets and where there
is reason to expect realization of this
potential in the form of increased equity
values
The Portfolio Manager usually sells a particular
security when it believes the company no longer
fits into any of the above categories.
In anticipation of or in response to adverse
market conditions or for cash management
purposes, the Portfolio may hold all or a portion
of its assets in cash, money market securities,
bonds or other debt securities. As a result, the
Portfolio may not achieve its investment
objective.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o VALUE INVESTING RISK. Undervalued stock may
not realize their perceived value for
extended periods of time. Value stocks may
respond differently to market and other
developments than other types of stocks.
Value stocks typically underperform when
other investing styles, such as growth
investing, are in favor.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
A I M Management, Inc. ("A I M Capital") has
managed the Portfolio since April 1, 1999.
MORE A I M Capital is an indirect subsidiary of
ON THE AMVESCAP, one of the world's largest independent
PORTFOLIO investment companies. As of December 31, 1998,
MANAGER A I M Capital and its immediate parent, A I M
Advisors, Inc., managed approximately $109
billion in assets. The address of A I M Capital
is 11 Greenway Plaza, Houston, TX 77046.
The following persons at A I M Capital are
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Joel E. Dobberpuhl Senior Portfolio Manager
Mr. Dubberpuhl has been associated with
A I M Capital and/or its affiliate since
1990.
Robert A. Shelton Portfolio Manager
Mr. Shelton has been associated with A I M
Capital and/or its affiliates since
1995. Prior to 1995, he was a financial
analyst for CS First Boston.
Evan G. Harrel Senior Portfolio Manager
Mr. Harrel has been associated with A I M
Capital and/or its affiliates since
1998. From 1994 to 1998, he was Vice
President of Van Kamper American Asset
Management, Inc. and a portfolio manager
of various growth and equity funds.
A I M Capital also manages the Strategic Equity
Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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SMALL CAP PORTFOLIO
PORTFOLIO
MANAGER Fred Alger Management, Inc.
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL
INVESTMENT The Portfolio invests primarily in equity
STRATEGY securities of companies that have total market
capitalization within the range of companies
included in:
o Russell 2000 Growth Index
o Standard & Poor's Small Cap 600 Index
Both indexes are broad indexes of small
capitalization stocks. As of December 31, 1998,
the range of market capitalization companies in
the Russell Index was $4.42 million to $3.21
billion, the range of the market capitalization
companies in the S&P 600 Index was $18 million to
$3.34 billion, and the combined range was $4.42
million to $3.34 billion. The Portfolio may
invest up to 35% of its assets in companies
outside this combined range.
Equity securities in which the Portfolio may
invest include common or preferred stocks, or
securities convertible into or exchangeable for
equity securities, such as warrants and rights.
The Portfolio invests primarily in companies
whose securities are traded on domestic stock
exchanges 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 because of 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.
The Portfolio may also hold up to 15% of its
assets in money market instruments and repurchase
agreements.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o SMALL CAP COMPANY RISK. Investing in
securities of small cap companies may involve
greater risks than investments in larger,
more established issuers. Smaller companies
may have limited product lines, markets or
financial resources. Their securities may
trade less frequently and in more limited
volume than the securities of larger, more
established companies. In addition, smaller
companies are typically subject to greater
changes in earnings and business prospects
than are larger companies. Consequently, the
prices of small company stocks tend to rise
and fall in value more than other stocks.
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Although investing in small cap companies
offers potential for above-average returns,
the companies may not succeed and the value
of stock shares could decline significantly.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Fred Alger Management, Inc. ("Fred Alger") has
ON THE managed the Portfolio since its inception. Fred
PORTFOLIO Alger has been in the business of providing
MANAGER investment advisory services since 1964. Fred
Alger is owned by Fred Alger & Company,
Incorporated, which in turn is owned by Alger
Associates, Inc., a financial services holding
company. As of December 31, 1998, Fred Alger
managed approximately $10.6 billion in assets.
The address of Fred Alger is One World Trade
Center, Suite 9333, New York, New York 10048.
The following persons at Fred Alger are primarily
responsible for making the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
David D. Alger President
Mr. Alger has been employed by the
Portfolio Manager since 1971 and as
President of the Portfolio Manager
since 1995.
Seilai Khoo Senior Vice President
Ms. Khoo has been employed by the
Portfolio Manager since 1989.
Ronald Tartaro Senior Research Analyst
Mr. Tartaro has been employed by Fred
Alger Management, Inc. since 1990.
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REAL ESTATE PORTFOLIO
PORTFOLIO
MANAGER EII Realty Securities, Inc.
INVESTMENT
OBJECTIVE Capital appreciation. Current income is a
secondary objective.
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT securities of companies in the real estate
STRATEGY industry that are listed on national exchanges or
the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). The
Portfolio Manager selects securities generally
for long-term investment.
The Portfolio invests the majority of its assets
in companies that have at least 50% of their
assets in, or that derive at least 50% of their
revenues from, the following sectors of the real
estate industry:
o ownership (including listed real estate
investment trusts)
o construction and development
o asset sales
o property management or sale
o other related real estate services
The Portfolio may invest more than 25% of its
assets in any of the above sectors.
The Portfolio also may invest in:
o equity, debt, or convertible securities of
issuers whose products and services related
to the real estate industry
o financial institutions which issue or service
mortgages
o securities of companies unrelated to the real
estate industry but which have significant real
estate holdings believed to be undervalued
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o REAL ESTATE RISK. Although the Portfolio
will not invest in real estate directly, the
Portfolio may invest in real estate industry
companies, including real estate investment
trusts. As a result, the Portfolio may be
subject to certain risks associated with
direct ownership of real estate and the real
estate industry in general. 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, tenant credit
worthiness and ability to meet rent
obligations, 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
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to tenants, leveraging of interests in real estate,
and increase in interest rates.
In addition, real estate investment trusts
(called "REITs") may be affected by any changes
in the value of the underlying property owned
by the REIT or by the quality of any credit
extended. REITs are dependent upon management
skills. Some REITs may not be highly
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.
o INDUSTRY CONCENTRATION RISK. Since the
Portfolio invests primarily in securities of
companies in the real estate industry, the
Portfolio may be subject to greater risks and
market fluctuations than other portfolios
that are more diversified by industry.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
EII Realty Securities, Inc. ("EII Realty") has
managed the Portfolio since January 1995.
MORE EII Realty and its parent company, European
ON THE Investors, Inc., have provided advisory services
PORTFOLIO to employee benefit plans, corporations, and high
MANAGER net worth individuals, both foreign and domestic,
since 1983. As of December 31, 1998, EII Realty
and its parent company managed approximately $1.8
billion in real estate securities assets. EII
Realty is a subsidiary of European Investors
Incorporated. The address of EII Realty is 667
Madison Avenue, 16th Floor, New York, New York
10021.
The following persons at EII Realty are primarily
responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Richard J. Adler Managing Director
Mr. Adler has been a portfolio manager
or real estate securities analyst for
EII Realty and/or its affiliates for
the past ten years.
Cydney C. Donnell Managing Director
Ms. Donnell has been a portfolio manager
or real estate securities analyst for
EII Realty and/or its affiliates for
the past ten years.
David P. O'Connor Managing Director
Mr. O'Connor has been a portfolio manager
or real estate securities analyst for
EII Realty and/or its affiliates since
1994.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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HARD ASSETS PORTFOLIO
PORTFOLIO
MANAGER Baring International Investment Limited
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL
INVESTMENT The Portfolio invests primarily in hard asset
securities.
Hard asset securities in which the Portfolio may
invest include equity securities of hard asset
companies and debt securities, including
structured notes, whose value is linked to the
price of a hard asset commodity or a commodity
index. Hard asset companies are companies that
are directly or indirectly engaged significantly
in the exploration, development, production or
distribution of one or more of the following:
o precious metals
o ferrous and non-ferrous metals
o gas, petroleum, petrochemicals or other
hydrocarbons
o forest products
o agricultural commodities
o other basic materials that can be priced by a
market
The Portfolio normally invests at least 5% of its
assets in each of the first five sectors listed
above, and may invest up to 50% in any one of the
above sectors.
The Portfolio's investment strategy is based on
the belief that hard asset securities can protect
against eroding monetary values. Recent history
indicates that the policies of many governments
(particularly, budget deficits and high rates of
money supply growth) have caused inflation and
that the profitability of many natural resources
companies will, as a result, improve.
The Portfolio may invest in:
o securities of foreign issuers, including up
to 35% in South Africa
o companies not engaged in natural
resources/hard asset activities
o investment-grade corporate debt
o U.S. government or foreign obligations
o money market instruments
o repurchase agreements
o 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
o derivatives
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
Equity securities in which the Portfolio invests
may be listed on the U.S. or foreign securities
exchanges or traded over-the-counter, and
include:
o common stock o direct equity
interests in trusts
o preferred stock o joint ventures
o rights o "partly paid" securities
o warrants o partnerships
o "when-issued" o restricted securities
securities
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o HARD ASSET RISK. The production and
marketing of hard assets may be affected by
actions and changes in governments.
Securities of 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.
o SECTOR CONCENTRATION RISK. Since the
Portfolio may invest up to 50% of its assets
in one particular hard asset sector, the
Portfolio may be subject to greater risks and
market fluctuations than other portfolios
that are more diversified by sector.
o INDUSTRY CONCENTRATION RISK. Since the
Portfolio invests primarily in securities of
companies engaged in natural resources/hard
asset activities and may concentrate in
securities of companies engaged in gold
operations, the Portfolio may be subject to
greater risks and market fluctuations than
other portfolios that are more diversified by
industry.
o FOREIGN INVESTMENT AND CURRENCY RISK. The
Portfolio may purchase securities in any
foreign country, developed or underdeveloped.
In many foreign countries, there is less
publicly available information about
companies than is available in the United
States. Foreign companies are not generally
subject to uniform accounting, auditing, and
financial reporting standards, and auditing
practices and requirements may not be
comparable to those applicable to U.S.
companies. Further, the Portfolio may
encounter difficulties or be unable to pursue
legal remedies or obtain judgments in foreign
courts.
Since investment may be concentrated in South
Africa, political and social conditions in South
Africa, due to former segregation policies of the
South African government and unsettled political
conditions prevailing in South
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
Africa and neighboring countries investment,
may pose certain risks to the Portfolio's investments.
If aggravated by local or international developments,
such risk could have an adverse effect on investment
in South Africa, including the Portfolio's investments
and possibly, the liquidity of the Portfolio and its
ability to meet shareholder redemption requests.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Baring International Investment Limited ("Baring
ON THE International") has managed the Portfolio since
PORTOFLIO March 1, 1999. Baring International is a
MANAGER subsidiary of Baring Asset Management Holdings
Limited ("Baring"). Baring is the parent of the
world-wide group of investment management
companies that operate under the collective name
"Baring Asset Management" and is owned by ING
Groep N.V., a publicly traded company based in
the Netherlands with worldwide insurance and
banking subsidiaries. The address of Baring
International is 155 Bishopsgate, London.
Baring Asset Management provides global
investment management services to U.S. investment
companies and maintains major investment offices
in Boston, London, Hong Kong and Tokyo. Baring's
predecessor corporation was founded in 1762.
Baring Asset Management provides advisory
services to institutional investors, offshore
investment companies, insurance companies and
private clients. As of December 31, 1998, Baring
Asset Management managed approximately $45.6
billion of assets.
The following person at Baring International is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Mark Latham Investment Manager
Mr. Latham has been an investment
professional with Baring International
Investment Limited and its ING affiliates
since 1987 and has 17 years of investment
experience.
Baring International Investment also manages the
Developing World Portfolio and the Global Fixed Income
Portfolio.
103
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
MANAGED GLOBAL PORTFOLIO
PORTFOLIO
MANAGER Putnam Investment Management, Inc.
INVESTMENT
OBJECTIVE Capital appreciation. Current income is only an
incidental consideration.
PRINCIPAL The Portfolio invests primarily in common stocks
INVESTMENT traded in securities markets throughout the
STRATEGY world. The Portfolio may invest up to 100% of
its total assets in securities traded in
securities markets outside the United States.
The Portfolio generally invests at least 65% of
its total assets in at least three different
countries, one of which may be the United States.
In unusual market circumstances where the
Portfolio Manager believes that foreign investing
may be unduly risky, all of the Portfolio's
assets may be invested in the United States. The
Portfolio may hold a portion of its assets in
cash or money market instruments.
The Portfolio may invest in any type of company,
large or small, with earnings showing relatively
strong growth trend, or in a company in which
significant further growth is not anticipated but
whose securities are thought to be undervalued.
The Portfolio may also invest in small and
relatively less well known companies.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to the
following additional principal risk:
o EMERGING MARKET RISK. 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. Repatriation of
investment income, capital, and proceeds of
sales by foreign investors 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 after investments in those
currencies by the Portfolio. 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
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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companies; expropriation or confiscatory taxation;
seizure; nationalization; foreign exchange controls
(may be unable to transfer currency from a given
country); or creation of government monopolies.
o SMALL COMPANY RISK. Investing in securities
of small companies may involve greater risks
than investments in larger, more established
issuers. Smaller companies may have limited
product lines, markets or financial
resources. Their securities may trade less
frequently and in more limited volume than
the securities of larger, amore established
companies. In addition, smaller companies
are typically subject to greater changes in
earnings and business prospects than are
larger companies. Consequently, the prices
of small company stocks tend to rise and fall
in value more than other stocks. Although
investing in small companies offers potential
for above-average returns, the companies may
not "succeed, and the value of stock shares
could decline significantly.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies. Further,
the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Putnam Investment Management, Inc. ("Putnam") has
ON THE managed the Portfolio since March, 1997. Putnam
PORTFOLIO has been managing mutual funds since 1937.
MANAGER Putnam is owned by Putnam Investments, Inc.,
which is owned by Marsh & McLennan Companies,
Inc., a publicly traded company. As of December
31, 1998, Putnam and its affiliates managed
approximately $297 billion of assets. The
address of Putnam is One Post Office Square,
Boston, Massachusetts 02109.
An investment committee at Putnam is responsible
for the day-to-day investment decisions of the
Portfolio.
Putnam also manages the Emerging Markets
Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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DEVELOPING WORLD PORTFOLIO
PORTFOLIO
MANAGER Baring International Investment Limited
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Developing World Portfolio invests primarily
INVESTMENT in the equity securities of emerging market
STRATEGY companies. The Portfolio normally invests in at
least six different "emerging market countries"
with no more than 35% of its assets in any one
country. Emerging market countries are those
countries having economies and markets that the
World Bank or the United Nations considers to be
emerging or developing. The Portfolio Manager
considers the following to be emerging market
countries:
LATIN AMERICA ASIA EUROPE MIDDLE EAST
Argentina Bangladesh Czech Republic Israel
Brazil China Greece Jordan
Chile India Hungary
Colombia Indonesia Poland AFRICA
Costa Rica Korea Russia Egypt
Jamaica Malaysia Turkey Ghana
Mexico Pakistan Croatia Ivory Coast
Peru Philippines Estonia Kenya
Trinidad and Sri Lanka Morocco
Tobago
Uruguay Taiwan Nigeria
Venezuela Thailand South Africa
Vietnam Tunisia
Hong Kong Zimbabwe
The Portfolio Manager when defining "emerging
markets" recognizes the IFC definition of an
emerging market as being those countries where
the GDP is less than U.S. $10,000 a year per
capita. In particular focuses on the constituent
countries of the Morgan Stanley Emerging Free
Index. However, there are countries, which
satisfy the emerging definition even though they
currently lie outside the Index.
The Portfolio's philosophy is based on the belief
that superior long-term results come from
identifying unrecognized growth investment
opportunities in countries and companies.
The Portfolio Manager's investment process seeks
to deliver superior risk adjusted returns by
evaluating key investment factors at both the
macro and micro level. Such factors include
accelerating GDP growth, earnings surprise and
favorable valuation characteristics. The
investment process is a combination of top-down
country allocation and bottom-up stock selection.
Structured fundamental research supported by
quantitative analysis drives both the country and
company decision making.
Equity securities in which the Portfolio invests
are primarily common stock but may also include
other types of equity and equity derivative
securities. The Portfolio may invest 10% in debt
securities, rated below investment-grade.
106
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
in the Portfolio is subject to the following
principal risks described under "Introduction --
General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o EMERGING MARKET RISK. 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. Repatriation of
investment income, capital, and proceeds of
sales by foreign investors 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 after investments in those
currencies by the Portfolio. 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;
nationalization; foreign exchange controls (may
be unable to transfer currency from a given
country); or creation of government monopolies.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies. Further,
the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar Terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their relative
investments.
o MANAGEMENT TECHNIQUE RISK. The Portfolio
uses a proprietary, quantitative asset
allocation model in selecting securities. We
cannot assure you that such models will
correctly predict market trends, or enable
the Portfolio to achieve its investment
objective.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
107
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
Baring International Investment Limited ("Baring
International") has managed the Portfolio since
March 1, 1999. Baring International is a
subsidiary of Baring Asset Management Holdings
Limited ("Baring"). Baring is the parent of the
world-wide group of investment management
companies that operate under the collective name
"Baring Asset Management" and is owned by ING
Groep N.V., a publicly traded company based in
the Netherlands with worldwide insurance and
banking subsidiaries. The address of Baring
International is 155 Bishopsgate, London.
MORE Baring Asset Management provides global
ON THE investment management services to U.S. investment
PORTFOLIO companies and maintains major investment offices
MANAGER in Boston, London, Hong Kong and Tokyo. Baring's
predecessor corporation was founded in 1762.
Baring Asset Management provides advisory
services to institutional investors, offshore
investment companies, insurance companies and
private clients. As of December 31, 1998, Baring
Asset Management managed approximately $45.6
billion of assets.
The following person at Baring International is
primarily responsible for the day-to-day
investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Matt Linsey Investment Manager
Mr. Linsey has been an investment
professional with Baring International
and its ING affiliates since 1994
and has 15 years of investment experience.
Baring International also manages the Hard Assets
Portfolio and the Global Fixed Income Portfolio.
108
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<PAGE>
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
PORTFOLIO
MANAGER Putnam Investment Management, Inc.
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in equity
INVESTMENT emerging market countries. The Portfolio's
STRATEGY investment philosophy is to capitalize on
emerging capital markets in developing nations
and other nations in which economic and political
factors are likely to produce above average
growth rates.
Emerging market countries are those that are
identified as such in the Morgan Stanley Capital
International Emerging Markets Free Index or the
International Finance Corporation Emerging Market
Index, or by the Portfolio Manager because they
have a developing economy or because their
markets have begun a process of change and are
growing in size and/or sophistication.
Equity securities that the Portfolio may invest
include common stock and other securities with
equity characteristics (such as preferred stock,
rights and warrants, and convertible securities)
shares of investment companies.
The Portfolio Manager selects securities by
taking into account economic and political
factors that may include, among others:
o relative market valuation
o earnings momentum
o supply and demand
o prospects for relative growth among the
regions and its countries
o expected levels of inflation
o governmental policies influencing business
conditions
o outlook for currency relationships
o range of alternative opportunities available
to international investors
In selecting securities, the Portfolio Manager
looks for 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 on the
medium term outlook for such companies. The
Portfolio Manager considers 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.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
If the Portfolio is not fully invested in
emerging market equity securities, the Portfolio
Manager may invest the remainder of the
Portfolio's assets (but not more than 35%) in:
o equity securities of issuers in developed
economies
o 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
o bank deposits or bank obligations, including
certificates of deposit, time deposits, and
bankers' acceptances
o mortgage-backed securities of banks in
emerging market or industrialized countries,
including the United States
o instruments issued by international
development agencies
o high-quality money market instruments,
including commercial paper and other short-
term corporate debt obligations of issuers in
industrialized and emerging market countries
o debt securities that are rated below
investment-grade or, if not rated, of
equivalent quality up to 10% of assets
o borrowings up to 10% of assets (which the
Portfolio Manager may increase to 25% for
temporary purposes)
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o EMERGING MARKET RISK. 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. Repatriation of
investment income, capital, and proceeds of
sales by foreign investors 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 after investments in those
currencies by the Portfolio. 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
110
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
companies; expropriation or confiscatory taxation;
seizure; nationalization; foreign exchange controls
(may be unable to transfer currency from a given
country); or creation of government monopolies.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies. Further,
the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
o VALUE INVESTING RISK. Undervalued stock may
not realize their perceived value for
extended periods of time. Value stocks may
respond differently to market and other
developments than other types of stocks.
Value stocks typically underperform when
other investing styles, such as growth
investing, are in favor.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Putnam Investment Management, Inc. ("Putnam") has
ON THE managed the Portfolio since March 1997. Prior to
PORTFOLIO that, different firms at different times managed
MANAGER the Portfolio. Putnam has been managing mutual
funds since 1937. Putnam is owned by Putnam
Investments, Inc, which is owned by Marsh &
McLennan Companies, Inc., a publicly traded
company. As of December 31, 1998, Putnam and its
affiliates managed approximately $297 billion of
assets. The address of Putnam is One Post Office
Square, Boston, Massachusetts 02109.
An investment committee at Putnam is responsible
for the day-to-day investment decisions of the
Portfolio.
Putnam Investment also manages the Managed Global
Portfolio.
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OVERALL MANAGEMENT OF THE TRUST
- -------------------------------------------------------------------------
THE Directed Services, Inc. ("DSI") is the overall
ADVISER adviser to the GCG Trust. DSI is a New York
corporation and is a wholly owned subsidiary of
ING. DSI is registered with the SEC as an
investment adviser and a broker-dealer. DSI is
the principal underwriter and distributor of the
Variable Contracts that Golden American Life
Insurance Company issues. The address of DSI is
1475 Dunwoody Drive, West Chester, Pennsylvania
19380.
DSI has overall responsibility for hiring
portfolio managers and for periodically
monitoring their performance. DSI considers
performance records in light of a portfolio's
investment objectives and policies. The GCG
Trust pays DSI for its services an advisory fee.
Out of this advisory fee, DSI in turn pays the
portfolio managers their respective portfolio
management fee.
In addition to advisory services, DSI provides
administrative and other services necessary for
the ordinary operation of the portfolios. DSI
procures and pays for the services and
information necessary to the proper conduct of
the portfolios' business, including custodial,
administrative, transfer agency, portfolio
accounting, dividend disbursing, auditing, and
ordinary legal services. DSI also acts as
liaison among the various service providers to
the portfolios, including the custodian,
portfolio accounting agent, portfolio managers,
and the insurance company or companies to which
the portfolios offer their shares. DSI also
ensures that the portfolios operate in compliance
with applicable legal requirements and monitors
the portfolio managers for compliance with
requirements under applicable law and with the
investment policies and restrictions of the
portfolios. 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 portfolio,
interest on borrowing, fees and expenses of the
independent trustees, and extraordinary expenses,
such as litigation or indemnification expenses.
DSI has full investment discretion and makes all
determinations with respect to the investment of
a portfolio's assets and the purchase and sale of
portfolio securities for one or more portfolios.
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The GCG Trust pays DSI an advisory fee, payable
monthly, based on the average daily net assets of
a portfolio (or the combined net assets of
portfolios).
ADVISORY FEE PAID IN 1998. For portfolios that
were in operation for the full 1998 year, the
Trust paid DSI in 1998 an advisory fee at the
following annual rates (based on the average
daily net assets of the portfolio):
|-------------------------------------------------------------|
| FEE PAID TO ADVISER |
| DURING 1998 |
| (AS A PERCENTAGE OF AVERAGE |
| PORTFOLIO NET ASSETS) |
|-------------------------------------------------------------|
| Liquid Asset 0.59% |
| Limited Maturity Bond 0.60% |
| Equity Income 0.98% |
| Fully Managed 0.98% |
| Rising Dividends 0.98% |
| Value Equity 0.98% |
| All-Growth 0.98% |
| Strategic Equity 0.98% |
| Capital Appreciation 0.98% |
| Small Cap 0.98% |
| Real Estate 0.98% |
| Hard Assets 0.98% |
| Managed Global 1.25% |
| Emerging Markets 1.75% |
| |
|-------------------------------------------------------------|
For portfolios that commenced operations in 1998
and did not operate for a full 1998 year, the
Trust pays DSI an advisory fee at the following
annual rates (based on average daily net assets):
|-------------------------------------------------------------|
| FEE (AS A PERCENTAGE OF AVERAGE |
| NET ASSETS OF A PORTFOLIO OR |
| COMBINED ASSETS OF THE INDICATED|
| PORTFOLIO GROUPS OF PORTFOLIOS) |
|-------------------------------------------------------------|
| Global Fixed Income 1.60% |
| Total Return, Research, 1.00% of first $250 million in |
| Mid-Cap Growth combined assets |
| 0.95% of next $400 million; |
| 0.90% of next $450 million; and |
| 0.85% of amounts in excess of |
| $1.1 billion |
| Growth & Income, Growth, 1.10% of first $250 million in |
| Mid-Cap Growth combined assets |
| Growth Opportunities 1.05% of next $400 million; |
| 1.00% of next $450 million; and |
| 0.95% of amount in excess of |
| $1.1 billion |
| Developing World 1.75% |
| |
|-------------------------------------------------------------|
Out of the advisory fee, DSI in turn pays, on a
monthly basis, the portfolio managers a portfolio
management fee for its services.
The GCG Trust is distinct in that the portfolios'
expense structure is simpler and more predictable
than that of most mutual funds. DSI PAYS MANY OF
THE ORDINARY EXPENSES FOR EACH PORTFOLIO,
INCLUDING CUSTODIAL, ADMINISTRATIVE, TRANSFER
AGENCY, PORTFOLIO ACCOUNTING, AUDITING, AND
ORDINARY LEGAL EXPENSES. MOST MUTUAL FUNDS PAY
FOR THESE EXPENSES DIRECTLY FROM THEIR OWN
ASSETS.
113
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<PAGE>
- -------------------------------------------------------------------------
SHARE PRICE
- -------------------------------------------------------------------------
A portfolio's share price (net asset value, or
"NAV"), is calculated each business day after the
close of trading (generally 4 p.m. Eastern time)
on the New York Stock Exchange.
Net asset value per share is computed by adding up the
total value of the portfolio's investments and other
assets, subtracting its liabilities and then dividing by
the number of portfolio shares outstanding.
The net asset values per share of each portfolio,
except the Liquid Asset Portfolio, fluctuates in
response to changes in market conditions and
other factors. The NAV of the shares of the
Liquid Asset Portfolio will not fluctuate in
response to changes in market conditions for so
long as the Portfolio is using the amortized cost
method of valuation. The Liquid Asset
Portfolio's securities are valued using the
amortized cost method of valuation. This
involves valuing a security at cost on the date
of purchase and thereafter assuming a constant
accretion of a discount or amortization of a
premium to maturity.
The other portfolios' securities are valued based
on market value. Market value is determined
based on the 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.
If market quotations are not available, securities
are valued at their fair value as determined in good
faith by, or under the direction of, the Board.
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 at close of business.
Securities traded in over-the-counter markets
outside the United States are valued at the last
available price in the over-the-counter market
before 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 portfolio writes a put or call option, the
amount of the premium is included in the
portfolio's 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 a portfolio pays
for an option is recorded as an asset, and
subsequently adjusted to market value. Futures
and options traded on commodities exchanges or
boards of trade are valued at their closing
settlement price on such exchange or board of
trade. Foreign securities quoted in foreign
currencies generally are valued at 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. The calculation of the
net asset value of a portfolio investing in
foreign securities may not take place
contemporaneously with the determination of the
prices of the securities included in the
calculation. Further, the prices of foreign
securities
114
<PAGE>
<PAGE>
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 GCG 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
portfolio's net asset value is determined may not
be reflected in the calculation of net asset
value of the portfolio unless DSI 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 DSI or the portfolio manager acting
under the direction of the Board.
- -------------------------------------------------------------------------
TAXES AND DISTRIBUTIONS
- -------------------------------------------------------------------------
The GCG Trust pays net investment income, if any,
on your shares of each portfolio annually, except
that net investment income of the Liquid Asset
Portfolio is declared as a dividend daily and
paid monthly and that the Limited Maturity Bond
Portfolio may declare a dividend monthly or
quarterly. Any net realized long-term capital
gains for any portfolio will be declared and paid
at least once annually. Net realized short-term
gains may be declared and paid more frequently.
We will automatically reinvest any distributions
made by any portfolio in additional shares of
that portfolio, unless the separate account of
your insurance company makes an election to
receive distributions in cash. Dividends or
distributions by a portfolio other than the
Liquid Asset Portfolio will reduce the per share
net asset value by the per share amount paid.
Each portfolio of the GCG Trust has qualified and
expect to continue to qualify as a regulated
investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended
("Code"). As qualified regulated investment
companies, the portfolios are generally not
subject to Federal income tax on the part of
their investment company taxable income
(including any net capital gains) which they
distribute to shareholders. It is each
portfolio's intention to distribute all such
income and gains.
Shares of each portfolio are offered to the
Separate Accounts of insurance companies. Under
the Code, an insurance company pays no tax with
respect to income of a qualifying Separate
Account when the income is properly allocable to
the value of eligible variable annuity or
variable life insurance contracts. Under current
tax law, your gains under your Contract are taxed
only when you take them out. Contract purchasers
should review the Contract prospectus for a
discussion of the tax treatment applicable to
holders of the Contracts.
The foregoing is only a summary of some of the
important Federal income tax considerations
generally affecting a portfolio and you. Please
refer to the Statement of Additional Information
for more information about the tax status of the
portfolios. You should consult with your tax
adviser for more detailed information regarding
taxes applicable to the Contracts.
115
<PAGE>
<PAGE>
<TABLE>
<C> <C>
TO OBTAIN THE GCG TRUST
MORE INFORMATION TRUSTEES
Two documents are available that offer R. Brock Armstrong, Chair
further information on the portfolios:
Barnett Chernow, Trustee
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS. The
GCG Trust's annual reports include a discussion J. Michael Earley, Trustee
of the market conditions and investment
strategies that significantly affected the R. Barbara Gitenstein, Trustee
portfolios' performance during the last fiscal
year. Robert A. Grayson, Trustee
STATEMENT OF ADDITIONAL INFORMATION. A Statement Elizabeth J. Newell, Trustee
of Additional Information, dated May 1, 1999, has
been filed with the Securities and Exchange Stanley B. Seidler, Trustee
Commission, and is made a part of this prospectus
by reference. Roger B. Vincent, Trustee
</TABLE>
To obtain a free copy of these documents or to
make inquiries about the portfolios, please write
to our Customer Service Center at P.O. Box 2700,
West Chester, Pennsylvania 19380 or call (800)
366-0066, or access the SEC's website
(http://www.sec.gov).
Information about the GCG Trust can be reviewed
and copied at the SEC's Public Reference Room.
Information about its operation may be obtained
by calling 1-800-SEC-0330. You may obtain copies
of reports and other information about the GCG
Trust, for payment of a duplication fee, by
writing to Public Reference Section of the
Commission, Washington, D.C. 20549-6009.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company is a stock
company domiciled in Delaware
G3059 5/99 811-5629
<PAGE>
<PAGE> NOTE
Following is a prospectus for the GCG TRUST which describes 3 Portfolio's.
<PAGE>
<PAGE>
THE GCG TRUST
PROSPECTUS
MAY 1, 1999
BALANCED FUND
Total Return Series
STOCK FUNDS
Research Series
Mid-Cap Growth Series
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
FOR THE SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ
CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
<PAGE>
<PAGE>
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------
IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION,
WE REFER TO THE GCG TRUST AS "THE GCG TRUST," AND TO A SERIES OF
THE GCG TRUST INDIVIDUALLY AS A "PORTFOLIO" AND COLLECTIVELY AS THE
"PORTFOLIOS."
<TABLE>
<S> <C>
PAGE
INTRODUCTION
Investing through your Variable
Contract 2
Why Reading this Prospectus is
Important 2
Types of Funds 2
General Risk Factors 3
PORTFOLIOS AT A GLANCE
Total Return 4
Research 6
Mid-Cap Growth 8
MORE INFORMATION
A Word about Portfolio Diversity 10
Additional Information about the
Portfolios 10
Non-Principal Investments and
Strategies 10
Temporary Defensive Positions 10
Portfolio Turnover 10
Legal Counsel 10
Independent Auditors 10
Year 2000 11
FINANCIAL HIGHLIGHTS
Total Return 12
Research 12
Mid-Cap Growth 13
DESCRIPTION OF THE PORTFOLIOS
Total Return 14
Research 18
Mid-Cap Growth 20
OVERALL MANAGEMENT OF THE TRUST
The Adviser 23
Advisory Fee 24
SHARE PRICE 25
TAXES AND DISTRIBUTIONS 26
</TABLE>
AN INVESTMENT IN ANY PORTFOLIO OF THE GCG TRUST IS NOT A BANK DEPOSIT
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY.
1
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
INTRODUCTION
- -------------------------------------------------------------------------
INVESTING THROUGH YOUR VARIABLE MONEY MARKET FUNDS. Money market
CONTRACT instruments (also known as cash
Shares of the portfolios of the investments) are debt securities
GCG Trust currently are sold to issued by governments,
segregated asset accounts corporations, banks, or other
("Separate Accounts") of insurance financial institutions.
companies as funding choices for
variable annuity contracts and BOND FUNDS. Bonds are debt
variable life insurance policies securities representing loans
("Variable Contracts"). Assets in from investors. A bond fund's
the Separate Account are invested share price - and therefore the
in shares of the portfolios based value of your investment - can
on your allocation instructions. rise or fall in value because
Not all portfolios described in of changing interest rates or
this prospectus may be available other factors.
under your Variable Contract. You
do not deal directly with the BALANCED FUNDS. A balanced fund
portfolios to purchase or redeem holds a mix of stocks, bonds,
shares. The accompanying Separate and sometimes, cash
Account prospectus describes your investments. A balanced fund
rights as a Variable Contract offers the convenience of
owner. We may sell shares of the investing in both stocks and
portfolios to qualified pension bonds through a single fund.
and retirement plans outside of
the separate account context. STOCK FUNDS. Stocks - which
represent shares of ownership
WHY READING THIS PROSPECTUS IS in a company - generally offer
IMPORTANT the greatest potential for long
This prospectus explains the term growth of principal. Many
investment objective, risks and stocks also provide regular
strategy of each of the portfolios dividends, which are generated
of the GCG Trust. Reading the by corporate profits. While
prospectus will help you to decide stocks have historically
whether a portfolio is the right provided the highest long-term
investment for you. We suggest returns, they have also
that you keep this prospectus and exhibited the greatest short-
the prospectus for the Separate term price fluctuations - so a
Account for future reference. stock fund has a higher risk of
losing value over the short
TYPES OF FUNDS term.
The portfolios are generally
classified among three major asset
classes: stock, bond and money
market.
MONEY MARKET BOND STOCK
FUNDS FUNDS FUNDS
|----------------------------------------------------------|
| LOWER <---------- RISK/RETURN ----------> HIGHER |
|----------------------------------------------------------|
2
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
INTRODUCTION (CONTINUED)
- -------------------------------------------------------------------------
GENERAL RISK FACTORS for shorter-
Investing in the portfolios, as term bonds, moderate for
with an investment in any intermediate-term bonds, and
security, involves risk factors high for longer-term bonds. A
and special considerations. A bond's duration measures its
portfolio's risk is defined sensitivity to changes in
primarily by its principal interest rates. The longer
investment strategies. An the duration, the greater the
investment in a portfolio is not bond's price movement will be
insured against loss of principal. as interest rates change.
As with any mutual fund, there can
be no assurance that a portfolio o CREDIT RISK. A bond issuer
will achieve its investment (debtor) may fail to repay
objective. Investing in shares of interest and principal in a
a portfolio should not be timely manner. The price of a
considered a complete investment security a portfolio holds may
program. The share value of each fall due to changing economic,
portfolio will rise and fall. political or market conditions
It is important to keep in mind or disappointing earnings results.
one of the main axioms of o CALL RISK. During periods of
investing: The higher the risk of falling interest rates, a bond
losing money, the higher the issuer may "call," or repay,
potential reward. The lower the its high yielding bond before
risk, the lower the potential the bond's maturity date.
reward. As you consider an Forced to invest the
investment in a portfolio, you unanticipated proceeds at
should take into account your lower interest rates, a
personal tolerance for investment portfolio would experience a
risk. decline in income.
o MATURITY RISK. Interest rate
risk will affect the price of
a fixed income security more
if the security has a longer
OVERALL RISK: maturity because changes in
interest rates are
o MANAGER RISK. A portfolio increasingly difficult to
manager of a portfolio may do predict over longer periods of
a mediocre or poor job in time. Fixed income securities
selecting securities. with longer maturities will
therefore be more volatile
RISK RELATED TO STOCK INVESTING: than other fixed income
securities with shorter
o MARKET AND COMPANY RISK. The maturities. Conversely, fixed
price of a security held by a income securities with shorter
portfolio may fall due to maturities will be less
changing economic, political volatile but generally provide
or market conditions or lower returns than fixed
disappointing earnings income securities with longer
results. Stock prices in maturities. The average
general may decline over short maturity of a portfolio's
or even extended periods. The fixed income investments will
stock market tends to be affect the volatility of the
cyclical, with periods when portfolio's share price.
stock prices generally rise
and periods when stock prices Because of these and other risks
generally decline. Further, that may be particular to a
even though the stock market portfolio, your investment could
is cyclical in nature, returns lose or not make any money.
from a particular stock market
segment in which a portfolio
invests may still trail
returns from the overall stock
market.
RISKS RELATED TO BOND INVESTING:
o INCOME RISK. A portfolio's
income may fall due to falling
interest rates. Income risk
is generally the greatest for
short-term bonds, and the
least for long-term bonds.
Changes in interest rates will
affect bond prices as well as
bond income.
o INTEREST RATE RISK. This is the
risk that bond prices overall
will decline over short or
even extended periods due to
rising interest rates.
Interest rate risk is
generally modest
3
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
TOTAL RETURN PORTFOLIO
INVESTMENT Above-average income (compared to a portfolio
OBJECTIVE entirely invested in equity securities)
consistent with the prudent employment of
capital. A secondary goal is the reasonable
opportunity for growth of capital and income.
PRINCIPAL
INVESTMENT The Portfolio is a "balanced fund," and
STRATEGY invests in a combination of equity and fixed
income securities. The Portfolio normally
invests:
o at least 40%, but not more than 75%, of
its assets in common stocks and related
equity securities
o at least 25% of its assets in non-
convertible fixed income securities
EQUITY PORTION. The Portfolio Manager uses a
bottom-up, as opposed to a top-down,
investment style in managing the Portfolio.
This means that securities are selected based
on fundamental analysis performed by the
Portfolio Manager and its group of equity
research analysts and not selected based on
the industry in which they belong.
While the Portfolio may invest in all types of
equity securities, the Portfolio Manager
generally purchases equity securities of
companies that it believes are undervalued in
the market relative to their long-term
potential. The equity securities of these
companies may be undervalued because they are
temporarily out of favor in the market or the
market has overlooked them. The Portfolio
focuses on undervalued equity securities
issued by companies with relatively large
market capitalizations (i.e., market
capitalizations of $5 billion or more).
FIXED INCOME PORTION. The Portfolio invests
in securities that pay a fixed interest rate,
which include:
o U.S. government o corporate bonds
securities
o mortgage-backed and asset-backed
securities
In selecting fixed income investments for the
Portfolio, the Portfolio Manager assesses the
three-month outlook for various segments of
the fixed income markets.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
TOTAL RETURN
TR R MCG
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
4
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
This three-month
"horizon" outlook is used as a tool in making
or adjusting the Portfolio's asset allocations
to various segments of the fixed income
markets.
The Portfolio may invest up to 20% of its
assets in U.S. Government securities, mortgage
pass-through securities, American Depositary
Receipts and foreign securities (including in
emerging or developing markets) and lower
rated fixed income securities.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money.
An investment in the Portfolio is subject to
the following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o INCOME RISK o CREDIT RISK
o CALL RISK o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Total Return Portfolio":
o ALLOCATION RISK o UNDERVALUED SECURITIES RISK
o CONVERTIBLE o HIGH YIELD BOND RISK
SECURITIES RISK
o EMERGING MARKET o FOREIGN INVESTMENT AND
RISK CURRENCY RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Total Return Portfolio
became available to investors on August 17,
1998, performance information on previous full
years is not available. Massachusetts
Financial Services Company has managed the
Portfolio since its inception.
5
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
RESEARCH PORTFOLIO
INVESTMENT
OBJECTIVE Long-term growth of capital and future income
PRINCIPAL The Portfolio normally invests at least 80% of
INVESTMENT its total assets in common stocks and related
STRATEGY securities (such as preferred stock,
convertible securities and depositary
receipts). The Portfolio focuses on companies
that the Portfolio Manager believes have
favorable prospects for long-term growth,
attractive valuations based on current and
expected earnings or cash flow, dominant or
growing market share and superior management.
The Portfolio may invest in companies of any
size. The Portfolio's investments may also
include foreign securities, and securities
traded on securities exchanges or in the over-
the-counter markets.
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to the
following additional principal risks described
under "Description of the Portfolios-Research
Portfolio":
o OTC INVESTMENT RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
RESEARCH
TR R MCG
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
6
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Research Portfolio
became available to investors on August 17,
1998, performance information on previous full
years is not available. Massachusetts
Financial Services Company has managed the
Portfolio since its inception.
7
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
MID-CAP GROWTH PORTFOLIO
INVESTMENT
OBJECTIVE Long-term growth of capital
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its assets in common stocks and related equity
STRATEGY securities (such as preferred stock,
convertible securities and depositary
receipts) of companies with medium market
capitalizations (or "mid-cap") which the
Portfolio Manager believes have above-average
growth potential.
The Portfolio Manager defines mid-cap
companies as companies with market
capitalizations equaling or exceeding $250
million but not exceeding the top range of the
Russell Midcap/tm/ Growth Index at the time of
the Portfolio's investment.
Growth companies are companies that the
Portfolio Manager considers well-run and
poised for growth. The Portfolio Manager
looks particularly for companies which
demonstrate:
o a strong franchise, strong cash flows and
a recurring revenue stream
o a solid industry position, where there is
potential for high profit margins and
substantial barriers to new entry in the
industry
o a strong management team with a clearly
defined strategy
o a catalyst that may accelerate growth
The Portfolio Manager uses a bottom-up, as
opposed to a top-down, investment style in
managing the Portfolio. This means that
securities are selected based on fundamental
analysis performed by the Portfolio Manager
and its group of equity research analysts and
generally not selected based on the industry
in which they belong.
The Portfolio is non-diversified and, when
compared with other funds, may invest a
greater portion of its assets in a particular
issuer. A non-diversified portfolio has
greater exposure to the risk of default or the
poor earnings of the issuer.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
MID-CAP GROWTH
TR R MCG
<<<---------------------------------------------------------------------->>>
<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
8
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PRINCIPAL Any investment involves the possibility that
RISKS you will lose money or not make money. An
investment in the Portfolio is subject to the
following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to
the following additional principal risks
described under "Description of the Portfolios --
Mid-Cap Growth Portfolio":
o MID-CAP COMPANY RISK
o OTC INVESTMENT RISK
o EMERGING MARKETS RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
PERFORMANCE The value of your share in the Portfolio will
fluctuate depending on its investment
performance. Since the Mid-Cap Growth
Portfolio became available to investors on
August 17, 1998, performance information on
previous full years is not available.
Massachusetts Financial Services Company has
managed the Portfolio since its inception.
9
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
MORE INFORMATION
- -------------------------------------------------------------------------
A WORD Each portfolio in this prospectus, unless
ABOUT specifically noted in the portfolio's
PORTFOLIO investment objective, is diversified, as
DIVERSITY defined in the Investment Company Act of 1940.
A diversified portfolio may not, as to 75% of
its total assets, invest more than 5% of its
total assets in any one issuer and may not
purchase more than 10% of the outstanding
voting securities of any one issuer (other
than U.S. Government securities). The
investment objective and certain of the
investment restrictions of each portfolio in
this prospectus are fundamental. This means
they may not be modified or changed without a
vote of the shareholders.
ADDITIONAL A Statement of Additional Information is made
INFORMATION a part of this prospectus. It identifies and
ABOUT THE discusses non-principal investment strategies
PORTFOLIOS associated risks of each portfolio, as well as
investment restrictions, secondary or
temporary investments and associated risks,a
description of how the bond rating system
works and other information that may be
helpful to you in your decision to invest.
You may obtain a copy without charge by
calling our Customer Service Center at 1-800-
344-6864, or visiting the Securities and
Exchange Commission's website
(http://www.sec.gov).
NON-PRINCIPAL This prospectus does not describe various
INVESTMENTS types of securities, strategies and practices
AND which are available to, but are not the
STRATEGIES principal focus of, a particular portfolio.
Such non-principal investment and strategies
are discussed in the Statement of Additional
Information.
TEMPORARY This prospectus does not describe temporary
DEFENSIVE defensive positions. A portfolio may depart
POSOTIONS from its principal investment strategies by
temporarily investing for defensive purposes
when adverse market, economic or political
conditions exist. While a portfolio invests
defensively, it may not be able to pursue its
investment objective. A portfolio's defensive
investment position may not be effective in
protecting its value. The types of defensive
positions in which a portfolio may engage are
identified and discussed, together with their
risks, in the Statement of Additional
Information.
PORTFOLIO Before investing in a portfolio, you should
TURNOVER review its portfolio turnover rate for an
indication of the potential effect of
transaction costs on the portfolio's future
returns. In general, the greater the volume
of buying and selling by the portfolio, the
greater the impact that brokerage commissions
and other transaction costs will have on its
return.
Portfolio turnover rate is calculated by
dividing the value of the lesser of purchases
or sales of portfolio securities for the year
by the monthly average of the value of
portfolio securities owned by the portfolio
during the year. Securities whose maturities
at the time of purchase were one year or less
are excluded. A 100% portfolio turnover rate
would occur, for example, if a portfolio sold
and replaced securities valued at 100% of its
total net assets within a one-year period.
The portfolio turnover rates for each
portfolio are presented in the Financial
Highlights.
LEGAL Sutherland Asbill & Brennan LLP, located at
COUNSEL 1275 Pennsylvania Avenue, N.W., Washington,
D.C. 20004.
INDEPENDENT
AUDITORS Ernst & Young LLP, located at 200 Clarendon
Street, Boston, MA 02116.
10
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<PAGE>
- -------------------------------------------------------------------------
MORE INFORMATION (CONTINUED)
- -------------------------------------------------------------------------
YEAR 2000 The Trust could be adversely affected if the
computer systems used by the Trust's
investment adviser, Directed Services, Inc.
("DSI"), and the Trust's other service
providers do not properly process and
calculate date-related information from and
after January 1, 2000. DSI, along with an
affiliate, Golden American, have studied their
computer software systems and hardware. Some
of these systems support certain trust
operations. DSI 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. DSI is in contact with the
Trust's portfolio managers and third party
vendors to ensure that their systems will be
substantially compliant by year 2000. If
these portfolio managers and third parties are
unable to transact business in the year 2000
and thereafter, the Trust's operations could
be adversely affected.
11
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------
The following financial highlights tables are intended to help you
understand each of the portfolio's financial performance for the past
5 years (or, if shorter, for the period of the portfolio's
operations). Certain information reflects financial results for a
single portfolio share. The total returns in the tables represent the
rate that an investor would have earned or lost on an investment in
the portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Ernst & Young
LLP, whose report, along with a portfolio's financial statements, are
included in the annual report, which is available upon request.
TOTAL RETURN PORTFOLIO*
- -------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------
12/31/98*#
----------
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 14.88
--------
INVESTMENT OPERATIONS
Net investment income ........................................... 0.17
Net Realized and Unrealized Gain (Loss) on Investments........... 0.86
--------
TOTAL FROM INVESTMENT OPERATIONS ................................ 1.03
- ----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................ (0.11)
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .................................. $ 15.80
========
TOTAL RETURN .................................................... 6.90%++
========
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ............................ $453,093
Ratio of Operating Expenses to Average Net Assets ............... 0.98%+
Ratio of Net Investment Income to Average Net Assets ............ 2.95%+
Portfolio Turnover Rate ......................................... 37%
- -----------------------------------------------------------------------------
* The Total Return Portfolio commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
12
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- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
RESEARCH PORTFOLIO*
- ------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------
12/31/98*#
----------
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 17.75
--------
INVESTMENT OPERATIONS
Net Investment Income ........................................... 0.02
Net Realized and Unrealized Gain(Loss) on Investments and Foreign
Currencies .................................................... 2.56
--------
TOTAL FROM INVESTMENT OPERATIONS ................................ 2.58
- ------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................ (0.01)
Distributions from Capital Gains ................................ (0.01)
--------
TOTAL DISTRIBUTIONS ............................................. (0.02)
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .................................. $ 20.31
========
TOTAL RETURN .................................................... 14.54%++
========
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) ............................ $613,771
Ratio of Operating Expenses to Average Net Assets ............... 0.94%+
Ratio of Net Investment Income to Average Net Assets ............ 0.23%+
Portfolio Turnover Rate ......................................... 35%
- ------------------------------------------------------------------------------
* The Research Series commenced operations on August 14, 1998.
+ 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.
MID-CAP GROWTH PORTFOLIO*
- -------------------------------------------------------------------------------
YEAR ENDED
- -------------------------------------------------------------------------------
12/31/98*#
----------
NET ASSET VALUE, BEGINNING OF PERIOD ............................ $ 15.68
--------
INVESTMENT OPERATIONS:
Net Investment Income ........................................... 0.01
Net realized and unrealized gain on investments and foreign
currencies .................................................... 2.52
--------
TOTAL FROM INVESTMENT OPERATIONS ................................ 2.53
- -------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ............................ (0.01)
Distributions from Capital Gains ................................ (0.10)
--------
TOTAL DISTRIBUTIONS ............................................. (0.11)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD .................................. $ 18.10
========
TOTAL RETURN .................................................... 16.12%++
========
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000'S) ............................ $252,022
Ratio of Operating Expenses to Average Net Assets ............... 0.95%+
Ratio of Net Investment Income to Average Net Assets ............ 0.15%+
Portfolio Turnover Rate ......................................... 55%
- -------------------------------------------------------------------------------
* The Mid-Cap Portfolio commenced operations on August 14, 1998.
+ 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.
13
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<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
TOTAL RETURN PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT
OBJECTIVE Above-average income (compared to a portfolio
entirely invested in equity securities)
consistent with the prudent employment of
capital. A secondary goal is the reasonable
opportunity for growth of capital and income.
PRINCIPAL
INVESTMENT The Portfolio is a "balanced fund," and invests
STRATEGY in a combination of equity and fixedincome
securities. Under normal market conditions, the
Portfolio invests:
o at least 40%, but not more than 75%, of its
assets in common stocks and related
securities (referred to as equity securities)
such as preferred stock, bonds, warrants or
rights convertible into stock, and depositary
receipts for those securities
o at least 25% of its net assets in non-
convertible fixed income securities.
The Portfolio may vary the percentage of its
assets invested in any one type of security
(within the limits described above) based on the
Portfolio Manager's interpretation of economic
and money market conditions, fiscal and monetary
policy and underlying security values.
EQUITY PORTION. The Portfolio Manager uses a
bottom-up, as opposed to a top-down, investment
style in managing the Portfolio. This means that
securities are selected based on fundamental
analysis performed by the Portfolio Manager and
its group of equity research analysts and
generally not selected based on the industry in
which they belong.
While the Portfolio may invest in all types of
equity securities, the Portfolio Manager
generally purchases equity securities of
companies that the Portfolio Manager believes are
undervalued in the market relative to their long-
term potential. The Portfolio Manager deems
equity securities of companies to be undervalued
where:
o they are viewed by the Portfolio Manager as
being temporarily out of favor in the market
due to any of the following:
o a decline in the market
o poor economic conditions
o developments that have affected or may affect
the issuer of the securities
or the issuer's industry
o the market has overlooked them
Undervalued equity securities generally have low
price-to-book, price-to-sales and/or price-to-
earnings ratios. The Portfolio focuses on
undervalued equity securities issued by companies
with relatively large market capitalizations
(i.e., market capitalizations of $5 billion or
more).
14
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<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
As noted above, the Portfolio's investments in
equity securities include convertible securities.
A convertible security is a security that may be
converted within a specifiedperiod of time into
a certain amount of common stock of the same or a
different issuer. A convertible security
generally provides:
o a fixed income stream
o the opportunity, through its conversion
feature, to participate in an increase in the
market price of the underlying common stock.
FIXED INCOME PORTION. The Portfolio invests in
securities that pay a fixed interest rate,
including:
o U.S. government securities, which are bonds
or other debt obligations issued by, or whose
principal and interest payments are
guaranteed by, the U.S. government or one of
its agencies or instrumentalities,
o mortgage-backed and asset-backed securities,
which represent interest in a pool of assets
such as mortgage loans, car loan receivables,
or credit card receivables. These
investments entitle the Portfolio to a share
of the principal and interest payments made
on the underlying mortgage, car loan, or
credit card. For example, if the Portfolio
invests in a pool that includes your mortgage
loan, a share of the principal and interest
payments on your mortgage would pass to the
Portfolio, and
o corporate bonds, which are bonds or other
debt obligations issued by corporations or
other similar entities.
In selecting fixed income investments for the
Portfolio, the Portfolio Manager considers the
views of its group of fixed income portfolio
managers and research analysts. This group
periodically assesses the three-month outlook for
various segments of the fixed income markets.
This three-month "horizon" outlook is used as a
tool in making or adjusting the Portfolio's asset
allocations to various segments of the fixed
income markets. In assessing the credit quality
of fixed-income securities, the Portfolio Manager
does not rely solely on the credit ratings
assigned by credit rating agencies, but rather
performs its own independent credit analysis.
The Portfolio may invest up to 20% of its assets
in U.S. government securities, mortgage pass-
through securities, American Depositary Receipts
and foreign securities (including in emerging or
developing markets) and lower rated fixed income
securities.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o INTEREST RATE RISK
o INCOME RISK o CREDIT RISK
o CALL RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o ALLOCATION RISK. The Portfolio will allocate
its investments between equity and fixed
income securities, and among various segments
of the fixed income markets, based upon
judgements made by the Portfolio Manager.
The Portfolio
15
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<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
could miss attractive investment opportunities
by underweighting markets where there are significant
returns, and could lose value by overweighting markets
where there are significant declines.
o CONVERTIBLE SECURITIES RISK. Convertible
securities, like fixed income securities,
tend to increase in value when interest rates
decline and decrease in value when interest
rates rise. The market value of a
convertible security also tends to increase
as the market value of the underlying stock
rises and decrease as the market value of the
underlying stock declines.
o EMERGING MARKET RISK. 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. Repatriation of
investment income, capital, and proceeds of
sales by foreign investors 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 after investments in those
currencies by the Portfolio. 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;
nationalization; foreign exchange controls (may
be unable to transfer currency from a given
country); or creation of government monopolies.
o UNDERVALUED SECURITIES RISK. Prices of
securities react to the economic condition of
the company that issued the security. The
Portfolio equity investments in an issuer may
rise and fall based on the issuer's actual
and anticipated earnings, changes in
management and the potential for takeovers
and acquisitions. The Portfolio Manager
invests in securities that are undervalued
based on its belief that the market value of
these securities will rise due to anticipated
events and investor perceptions. If these
events do not occur or are delayed, or if
investor perceptions about the securities do
not improve, the market price of these
securities may not rise or may fall.
o HIGH YIELD BOND RISK. High yield bonds
(commonly referred to "junk bonds") generally
provide greater income and increased
opportunity for capital appreciation than
investments in higher quality debt
securities, but they also typically have
greater potential price volatility and
principal and income risk. High yield bonds
are not considered investment grade.
o FOREIGN INVESTMENT AND CURRENCY RISK. In
many foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies. Further,
the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
16
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<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Massachusetts Financial Services Company ("MFS")
ON THE has managed the Portfolio since its inception.
PORTFOLIO MFS is America's oldest mutual fund organization.
MANAGER MFS and its predecessor organizations have
managed money since 1924 and founded the first
mutual fund in the United States. MFS is a
subsidiary of Sun Life Assurance Company of
Canada (U.S.) which in turn is an indirect
subsidiary of Sun Life Assurance Company of
Canada (referred to as "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.
As of December 31, 1998, MFS managed net assets
of approximately $98 billion (approximately $69.5
billion in equity securities and $20.5 billion in
fixed income securities) on behalf of
approximately 3.7 million investor accounts. The
address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
The Portfolio is managed by a management team
consisting of six members. David M. Calabro,
Senior Vice President, heads the management team
and manages the common stock portion of the
Portfolio. Mr. Calabro has been employed by MFS
since 1992.
MFS also manages the Mid-Cap Growth Portfolio and
the Research Portfolio.
17
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
RESEARCH PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT
OBJECTIVE Long-term growth of capital and future income
PRINCIPAL The Portfolio normally invests at least 80% of
INVESTMENT its total assets in common stocks and related
STRATEGY securities (such as preferred stocks, convertible
securities and depositary receipts). The
Portfolio focuses on companies that the Portfolio
Manager believes have favorable prospects for
long-term growth, attractive valuations based on
current and expected earnings or cash flow,
dominant or growing market share and superior
management. The Portfolio may invest in
companies of any size. The Portfolio's
investments may include securities traded on
securities exchanges or in the over-the-counter
markets.
A committee of investment research analysts
selects portfolio securities for the Portfolio.
This committee includes investment analysts
employed by the Portfolio Manager and its
affiliate. The committee allocates the
Portfolio's assets among various industries.
Individual analysts then select what they view as
the securities best suited to achieve the
Portfolio's investment objective within their
assigned industry responsibility.
The Portfolio may invest in foreign equity
securities, and may have exposure to foreign
currencies through its investment in these
securities, its direct holdings of foreign
currencies or through its use of foreign currency
exchange contracts for the purchase or sale of a
fixed quantity of foreign currency at a future
date.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o OTC INVESTMENT RISK. Investing in securities
traded on the over-the-counter (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 that
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
18
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<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
capitalization or established companies.
Shares of the Portfolio, therefore, are
subject to greater fluctuation in value than
shares of a conservative equity fund or of a
growth fund that invests entirely in proven
growth stocks.
o FOREIGN INVESTMENT RISK. In many foreign
countries there is less publicly available
information about companies than is available
in the United States. Foreign companies are
not generally subject to uniform accounting,
auditing, and financial reporting standards,
and auditing practices and requirements may
not be comparable to those applicable to U.S.
companies. Further, the Portfolio may
encounter difficulties or be unable to pursue
legal remedies or obtain judgments in foreign
courts.
The values of foreign investments may be affected by
changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Massachusetts Financial Services Company ("MFS")
ON THE has managed the Portfolio since its inception.
PORTFOLIO MFS is America's oldest mutual fund organization.
MAMANGER MFS and its predecessor organizations have
managed money since 1924 and founded the first
mutual fund in the United States. MFS is a
subsidiary of Sun Life Assurance Company of
Canada (U.S.) which in turn is an indirect
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. As of
December 31, 1998, MFS managed net assets of
approximately $98 billion (approximately $69.5
billion in equity securities and $20.5 billion in
fixed income securities) on behalf of
approximately 3.7 million investor accounts. The
address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
The Portfolio is managed by a committee of
research analysts at MFS.
MFS also manages the Mid-Cap Growth Portfolio and
the Total Return Portfolio.
19
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<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
MID-CAP GROWTH PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT
OBJECTIVE Long-term growth of capital
PRINCIPAL The Portfolio normally invests at least 65% of
INVESTMENT its total assets in common stocks and related
STRATEGY securities (such as preferred stocks, convertible
securities and depositary receipts) of companies
with medium market capitalizations (or "mid-cap")
which the Portfolio Manager believes have above-
average growth potential.
The Portfolio Manager defines mid-cap companies
as companies with market capitalizations equaling
or exceeding $250 million but not exceeding the
top range of the Russell Midcap Growth Index at
the time of the Portfolio's investment. The
Index is a widely recognized, unmanaged index of
mid-cap common stock prices. Companies whose
capitalization falls below $250 million or
exceeds the top of the Russell Midcap Growth
Index range after purchase continue to be
considered mid-cap companies for purposes of the
Portfolio's 65% investment policy. As of April
30, 1999, the top of the Russell Midcap Growth
Index was $47 billion. The Portfolio's
investments may include securities listed on a
securities exchange or traded in the over-the-
counter markets.
Growth companies are companies that the Portfolio
Manager considers well-run and poised for growth.
The Portfolio Manager looks particularly for
companies which demonstrate:
o a strong franchise, strong cash flows and a
recurring revenue stream
o a solid industry position, where there is
potential for high profit margins and
substantial barriers to new entry in the industry
o a strong management team with a clearly
defined strategy
o a catalyst that may accelerate growth
The Portfolio uses a bottom-up, as opposed to a
top-down, investment style in managing the
Portfolio. This means that securities are
selected based on fundamental analysis performed
by the Portfolio Manager and its group of equity
research analysts and not selected based on the
industry in which they belong.
The Portfolio may invest in foreign securities
(including emerging markets securities), and may
have exposure to foreign currencies through its
investment in these securities, its direct
holdings of foreign currencies or through its use
of foreign currency exchange contracts for the
purchase or sale of a fixed quantity of foreign
currency at a future date.
The Portfolio may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading increases
transaction costs, which could detract from the
Portfolio's performance.
20
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<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
The Portfolio is non-diversified and, when
compared with other funds, may invest a greater
portion of its assets in a particular issuer. A
non-diversified portfolio has greater exposure to
the risk of default or the poor earnings of the
issuer.
PRINCIPAL An investment in the Portfolio is subject to the
RISKS following principal risks described under
"Introduction -- General Risk Factors":
o MANAGER RISK o MARKET AND COMPANY
RISK
An investment in the Portfolio is subject to the
following additional principal risks:
o MID-CAP COMPANY RISK. Investment in
securities of mid-cap companies entails
greater risks than investments in larger,
more established companies. Mid-cap
companies tend to have more narrow product
lines, more limited financial resources and a
more limited trading market for their stocks,
as compared with larger companies. As a
result, their stock prices may decline
significantly as market conditions change.
o OTC INVESTMENT RISK. Investing in securities
traded on the over-the-counter ("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.
Therefore, shares of the Portfolio 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.
o EMERGING MARKETS RISK. 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. Repatriation of
investment income, capital, and proceeds of
sales by foreign investors 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 after the Portfolio investments in
those currencies. 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;
nationalization; foreign exchange controls (may
be unable to transfer currency from a given
country); or creation of government monopolies.
21
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
o FOREIGN INVESTMENT AND CURRENCY RISK. In many
foreign countries there is less publicly
available information about companies than is
available in the United States. Foreign
companies are not generally subject to
uniform accounting, auditing, and financial
reporting standards, and auditing practices
and requirements may not be comparable to
those applicable to U.S. companies.
Further, the Portfolio may encounter difficulties or
be unable to pursue legal remedies or obtain
judgments in foreign courts.
The values of foreign investments may be affected
by changes in currency rates or exchange control
regulations. If the local currency gains
strength against the U.S. dollar, the value of
the foreign security increases in U.S. dollar
terms. Conversely, if the local currency weakens
against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S.
dollar-denominated securities of foreign issuers,
including depositary receipts, also are subject
to currency risk based on their related
investments.
This prospectus does not describe all of the
risks of every technique, strategy or temporary
defensive position that the Portfolio may use.
For such information, please refer to the
Statement of Additional Information.
MORE Massachusetts Financial Services Company ("MFS")
ON THE has managed the Portfolio since its inception.
PORTOFLIO MFS is America's oldest mutual fund organization.
MANAGER MFS and its predecessor organizations have
managed money since 1924 and founded the first
mutual fund in the United States. MFS is a
subsidiary of Sun Life Assurance Company of
Canada (U.S.) which in turn is an indirect
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. As of
December 31, 1998, MFS managed net assets of
approximately $98 billion (approximately $69.5
billion in equity securities and $20.5 billion in
fixed income securities) on behalf of
approximately $3.7 million investor accounts.
The address of MFS is 500 Boylston Street,
Boston, Massachusetts 02116.
The following persons at MFS are primarily
responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
John W. Ballen Senior VP--Investments & Chief Equity
Officer
Mr. Ballen has been employed by MFS
since 1984.
Mark Regan Vice President--Investments
Mr. Regan has been employed as a
portfolio manager by MFS since 1989.
MFS also manages the Research Portfolio and the
Total Return Portfolio.
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- -------------------------------------------------------------------------
OVERALL MANAGEMENT OF THE TRUST
- -------------------------------------------------------------------------
THE Directed Services, Inc. ("DSI") is the overall
ADVISER adviser to the GCG Trust. DSI is a New York
corporation and is a wholly owned subsidiary of
ING. DSI is registered with the SEC as an
investment adviser and a broker-dealer. DSI is
the principal underwriter and distributor of the
Variable Contracts that Golden American Life
Insurance Company issues. The address of DSI is
1475 Dunwoody Drive, West Chester, Pennsylvania
19380.
DSI has overall responsibility for hiring
portfolio managers and for periodically
monitoring their performance. DSI considers
performance records in light of a portfolio's
investment objectives and policies. The GCG
Trust pays DSI for its services an advisory fee.
Out of this advisory fee, DSI in turn pays the
portfolio managers their respective portfolio
management fee.
In addition to advisory services, DSI provides
administrative and other services necessary for
the ordinary operation of the portfolios. DSI
procures and pays for the services and
information necessary to the proper conduct of
the portfolios' business, including custodial,
administrative, transfer agency, portfolio
accounting, dividend disbursing, auditing, and
ordinary legal services. DSI also acts as
liaison among the various service providers to
the portfolios, including the custodian,
portfolio accounting agent, portfolio managers,
and the insurance company or companies to which
the portfolios offer their shares. DSI also
ensures that the portfolios operate in compliance
with applicable legal requirements and monitors
the portfolio managers for compliance with
requirements under applicable law and with the
investment policies and restrictions of the
portfolios. 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 portfolio,
interest on borrowing, fees and expenses of the
independent trustees, and extraordinary expenses,
such as litigation or indemnification expenses.
DSI has full investment discretion and makes all
determinations with respect to the investment of
a portfolio's assets and the purchase and sale of
portfolio securities for one or more portfolios.
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The GCG Trust pays DSI an advisory fee, payable
monthly, based on the average daily net assets of
a portfolio (or the combined net assets of
portfolios).
ADVISORY FEE PAID IN 1998. For portfolios that
were in operation for the full 1998 year, the
Trust paid DSI in 1998 an advisory fee at the
following annual rates (based on the average
daily net assets of the portfolio):
The Trust pays DSI an advisory fee at the following
annual rates (based on average daily net assets):
|-------------------------------------------------------------|
| FEE (AS A PERCENTAGE OF AVERAGE |
| NET ASSETS OF A PORTFOLIO OR |
| COMBINED ASSETS OF THE INDICATED|
| PORTFOLIO GROUPS OF PORTFOLIOS) |
|-------------------------------------------------------------|
| |
| Total Return, Research, 1.00% of first $250 million in |
| Mid-Cap Growth combined assets |
| 0.95% of next $400 million; |
| 0.90% of next $450 million; and |
| 0.85% of amounts in excess of |
| $1.1 billion |
|-------------------------------------------------------------|
Out of the advisory fee, DSI in turn pays, on a
monthly basis, the portfolio manager a portfolio
management fee for its services.
The GCG Trust is distinct in that the portfolios'
expense structure is simpler and more predictable
than that of most mutual funds. DSI PAYS MANY OF
THE ORDINARY EXPENSES FOR EACH PORTFOLIO,
INCLUDING CUSTODIAL, ADMINISTRATIVE, TRANSFER
AGENCY, PORTFOLIO ACCOUNTING, AUDITING, AND
ORDINARY LEGAL EXPENSES. MOST MUTUAL FUNDS PAY
FOR THESE EXPENSES DIRECTLY FROM THEIR OWN
ASSETS.
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- -------------------------------------------------------------------------
SHARE PRICE
- -------------------------------------------------------------------------
A portfolio's share price (net asset value, or
"NAV"), is calculated each business day after the
close of trading (generally 4 p.m. Eastern time)
on the New York Stock Exchange.
Net asset value per share is computed by adding up the
total value of the portfolio's investments and other
assets, subtracting its liabilities and then dividing by
the number of portfolio shares outstanding.
The net asset values per share of each portfolio
fluctuates in response to changes in market conditions
and other factors.
The other portfolios' securities are valued based
on market value. Market value is determined
based on the 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.
If market quotations are not available, securities
are valued at their fair value as determined in good
faith by, or under the direction of, the Board.
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 at close of business.
Securities traded in over-the-counter markets
outside the United States are valued at the last
available price in the over-the-counter market
before 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 portfolio writes a put or call option, the
amount of the premium is included in the
portfolio's 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 a portfolio pays
for an option is recorded as an asset, and
subsequently adjusted to market value. Futures
and options traded on commodities exchanges or
boards of trade are valued at their closing
settlement price on such exchange or board of
trade. Foreign securities quoted in foreign
currencies generally are valued at 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. The calculation of the
net asset value of a portfolio investing in
foreign securities may not take place
contemporaneously with the determination of the
prices of the securities included in the
calculation. Further, 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 GCG 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
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<PAGE>
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
portfolio's net asset value is determined may not
be reflected in the calculation of net asset
value of the portfolio unless DSI 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 DSI or the portfolio manager acting
under the direction of the Board.
- -------------------------------------------------------------------------
TAXES AND DISTRIBUTIONS
- -------------------------------------------------------------------------
The GCG Trust pays net investment income, if any,
on your shares of each portfolio annually. Any net
realized long-term capital gains for any portfolio
will be declared and paid at least once annually.
Net realized short-term gains may be declared and
paid more frequently. We will automatically reinvest
any distributions made by any portfolio in additional
shares of that portfolio, unless the separate account
of your insurance company makes an election to receive
distributions in cash. Dividends or distributions by
a portfolio will reduce the per share net asset value
by the per share amount paid.
Each portfolio of the GCG Trust has qualified and
expect to continue to qualify as a regulated
investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended
("Code"). As qualified regulated investment
companies, the portfolios are generally not
subject to Federal income tax on the part of
their investment company taxable income
(including any net capital gains) which they
distribute to shareholders. It is each
portfolio's intention to distribute all such
income and gains.
Shares of each portfolio are offered to the
Separate Accounts of insurance companies. Under
the Code, an insurance company pays no tax with
respect to income of a qualifying Separate
Account when the income is properly allocable to
the value of eligible variable annuity or
variable life insurance contracts. Under current
tax law, your gains under your Contract are taxed
only when you take them out. Contract purchasers
should review the Contract prospectus for a
discussion of the tax treatment applicable to
holders of the Contracts.
The foregoing is only a summary of some of the
important Federal income tax considerations
generally affecting a portfolio and you. Please
refer to the Statement of Additional Information
for more information about the tax status of the
portfolios. You should consult with your tax
adviser for more detailed information regarding
taxes applicable to the Contracts.
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<TABLE>
<C> <C>
TO OBTAIN THE GCG TRUST
MORE INFORMATION TRUSTEES
Two documents are available that offer R. Brock Armstrong, Chair
further information on the portfolios:
Barnett Chernow, Trustee
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS. The
GCG Trust's annual reports include a discussion J. Michael Earley, Trustee
of the market conditions and investment
strategies that significantly affected the R. Barbara Gitenstein, Trustee
portfolios' performance during the last fiscal
year. Robert A. Grayson, Trustee
STATEMENT OF ADDITIONAL INFORMATION. A Statement Elizabeth J. Newell, Trustee
of Additional Information, dated May 1, 1999, has
been filed with the Securities and Exchange Stanley B. Seidler, Trustee
Commission, and is made a part of this prospectus
by reference. Roger B. Vincent, Trustee
</TABLE>
To obtain a free copy of these documents or to
make inquiries about the portfolios, please write
to our Customer Service Center at P.O. Box 2700,
West Chester, Pennsylvania 19380 or call (800)
366-0066, or access the SEC's website
(http://www.sec.gov).
Information about the GCG Trust can be reviewed
and copied at the SEC's Public Reference Room.
Information about its operation may be obtained
by calling 1-800-SEC-0330. You may obtain copies
of reports and other information about the GCG
Trust, for payment of a duplication fee, by
writing to Public Reference Section of the
Commission, Washington, D.C. 20549-6009.
G3059-SUB 5/99 811-5629
<PAGE>
<PAGE>
SAI
THE GCG TRUST
<PAGE>
<PAGE>
THE GCG TRUST
1475 Dunwoody Drive
West Chester, PA 19380
(800) 366-0066
Statement of Additional Information
The date of this Statement of Additional Information is
May 1, 1999
This Statement of Additional Information discusses twenty-three
portfolios (the "Portfolios") of The GCG Trust (the "Trust"), which
is an open-end management investment company. The Portfolios
described herein are as follows: the Equity Income Portfolio; the
Fully Managed Portfolio; the Limited Maturity Bond Portfolio; the
Hard Assets Portfolio; the Real Estate Portfolio; the All-Growth
Portfolio; the Capital Appreciation Portfolio; the Rising Dividends
Portfolio; the Emerging Markets Portfolio; the Value Equity
Portfolio; the Strategic Equity Portfolio; the Small Cap Portfolio;
the Managed Global Portfolio; the Liquid Asset Portfolio; the Mid-Cap
Growth Portfolio; the Research Portfolio; the Total Return Portfolio;
the Growth & Income Portfolio; the Growth Portfolio; the Global Fixed
Income Portfolio; the Growth Opportunities Portfolio; the Developing
World Portfolio and the Market Manager Portfolio. The Portfolios'
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, 1999 (which pertains to all Portfolios other than
the Market Manager Portfolio) and the Prospectus of the Market
Manager Portfolio dated May 1, 1999. 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. Shareholder Reports are available, without
charge, upon request.
MANAGER:
DIRECTED SERVICES, INC.
(800) 447-3644
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION 1
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 1
U.S. Government Securities 1
Debt Securities 1
High Yield Bonds 2
Brady Bonds 3
Sovereign Debt 3
Mortgage-Backed Securities 4
GNMA Certificates 4
FNMA and FHLMC Mortgage-Backed Obligations 5
Collateralized Mortgage Obligations (CMOs) 5
Other Mortgage-Backed Securities 6
Asset-Backed Securities 6
Variable and Floating Rate Securities 7
Derivatives 7
Banking Industry and Savings Industry Obligations 7
Commercial Paper 8
Repurchase Agreements 9
Reverse Repurchase Agreements 10
Lending Portfolio Securities 10
Other Investment Companies 10
Short Sales 10
Short Sales Against the Box 10
Futures Contracts and Options on Futures Contracts 11
General Description of Futures Contracts 11
Interest Rate Futures Contracts 11
Options on Futures Contracts 11
Stock Index Futures Contracts 12
Investment in Gold and Other Precious Metals 13
Gold Futures Contracts 13
Limitations 14
Options on Securities and Securities Indexes 14
Purchasing Options on Securities 14
Risks of Options Transactions 15
Writing Covered Call and Secured Put Options 15
Options on Securities Indexes 16
Over-the-Counter Options 16
General 16
Risks Associated with Futures and Futures Options 17
When-Issued or Delayed Delivery Securities 18
Foreign Securities 18
Foreign Currency Transactions 19
Options on Foreign Currencies 20
Common Stock and Other Equity Securities 21
Convertible Securities 21
Currency Management 21
Hybrid Investments 21
Dollar Roll Transactions 23
Equity and Debt Securities Issued or Guaranteed by
Supranational Organizations 23
Exchange Rate Related Securities 23
Geographical and Industry Concentration 24
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Illiquid Securities 24
Restricted Securities 24
Lease Obligation Bonds 24
Borrowing 25
Hard Asset Securities 25
Real Estate Securities 25
Swaps 26
Zero-Coupon Bonds 26
Small Companies 26
Strategic Transactions 27
Lending of Portfolio Securities 27
Special Situations 28
Warrants 28
INVESTMENT OBJECTIVES AND ADDITIONAL
INVESTMENT STRATEGIES AND ASSOCIATED RISKS 28
Equity Income Portfolio 28
Fully Managed Portfolio 28
Limited Maturity Bond Portfolio 29
Hard Assets Portfolio 31
Real Estate Portfolio 33
All-Growth Portfolio 33
Rising Dividend Portfolio 34
Emerging Market Portfolio 34
Value Equity Portfolio 35
Strategic Equity Portfolio 36
Capital Appreciation Portfolio 36
Small Cap Portfolio 37
Managed Global Portfolio 38
Growth Opportunities Portfolio 39
Developing World Portfolio 39
Mid-Cap Growth Portfolio 40
Research Portfolio 41
Total Return Portfolio 41
Growth & Income Portfolio 42
Growth Portfolio 43
Global Fixed Income Portfolio 44
Liquid Asset Portfolio 44
Market Manager Portfolio 46
INVESTMENT RESTRICTIONS 46
Fundamental Investment Restrictions
For the Equity Income Portfolio, the Fully Managed
Portfolio, the Limited Maturity Bond Portfolio, the
Hard Assets Portfolio, the Real Estate Portfolio,
the All-Growth Portfolio, the Capital Appreciation
Portfolio, the Rising Dividends Portfolio, the
Emerging Markets Portfolio, the Value Equity
Portfolio, the Strategic Equity Portfolio, the
Small Cap Portfolio, the Managed Global Portfolio,
the Market Manager Portfolio and the Liquid Asset
Portfolio 47
For the Total Return Portfolio, Research Portfolio,
Mid-Cap Growth Portfolio and Global Fixed Income
Portfolio 48
For the Growth Portfolio 49
For the Growth & Income Portfolio 50
For the Growth Opportunities and Developing World
Portfolio 51
Non-Fundamental Investment Restrictions 52
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For the Rising Dividends Portfolio, Emerging
Markets Portfolio, Value Equity Portfolio,
Strategic Equity Portfolio, Small Cap Portfolio,
Managed Global Portfolio and Market Manager
Portfolio 52
For the Managed Global Portfolio 52
For the Total Return Portfolio, Research
Portfolio, Mid-Cap Growth Portfolio and Global
Fixed Income Portfolio 52
For the Growth Portfolio 53
For the Growth & Income Portfolio 53
For the Growth Opportunities and Developing
World Portfolio 54
MANAGEMENT OF THE TRUST 54
The Management Agreement 58
Portfolio Managers 60
Distribution of Trust Shares 62
Purchases and Redemptions 62
PORTFOLIO TRANSACTIONS AND BROKERAGE 62
Investment Decisions 62
Brokerage and Research Services 65
NET ASSET VALUE 65
PERFORMANCE INFORMATION 66
TAXES 68
OTHER INFORMATION 70
Capitalization 70
Voting Rights 70
Custodian and Other Service Providers 72
Purchase of Shares 70
Redemption of Shares 71
Exchages 71
Independent Auditors 72
Counsel 72
Registration Statement 72
Financial Statements 72
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 Portfolios,
including the discussion of certain securities and investment
techniques. The more detailed information contained herein is
intended for investors who have read the Prospectuses and are
interested in a more detailed explanation of certain aspects of some
of the Portfolio's securities and some investment techniques. Some
of the Portfolios' 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 Portfolios' Prospectuses. Terms not
defined herein will have the meanings given them in the 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 Portfolios 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
Certain Portfolios may invest in debt securities, as stated in the
Portfolios' investment objectives and policies in the relevant
Prospectus or in this Statement of Additional Information. Some
Portfolios 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") or 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 Portfolio will not
accrue any income on these securities prior to delivery. The
Portfolio 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 securities
depends, to a large extent, on the credit analysis performed or used
by the Portfolio's Manager.
HIGH YIELD BONDS
"High Yield Bonds" (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 Portfolio. Investment in such securities generally
provides greater income and increased opportunity for capital
appreciation than investments in higher quality securities, but it
also typically entails 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. 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 Portfolio 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
Portfolio 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 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 Portfolio 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 secondary trading market could adversely affect the price at which
the Portfolio could sell a high yield bond, and could adversely
affect and cause large fluctuations in the daily net asset value of
the Portfolio's 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 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 Portfolio may
invest will not be subject to restructuring arrangements or to
requests for new credit, which may cause the Portfolio to suffer a
loss of interest or principal on any of its holdings.
SOVEREIGN DEBT
Debt obligations known as "sovereign debt" are obligations of
governmental issuers in emerging market countries and industrialized
countries. Some Portfolios may invest in obligations issued or
guaranteed by a foreign government or 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.
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.
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A governmental entity's willingness or ability to repay principal and pay
interestdue 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 Portfolio
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 a Portfolio may invest will not be subject to
similar restructuring arrangements or to requests for new credit,
which may adversely affect the Portfolio's 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 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.
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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 Portfolio 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 conventional (i.e.,
not insured or guaranteed by any government agency) purchases
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 portfolios (e.g., A, B, C, Z) of CMO bonds ("Bonds").
Proceeds of the Bond offering are used to purchase mortgages or
mortgage pass-through 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 portfolio A, B,
and C Bonds all bear current interest. Interest on the portfolio Z
Bond is accrued and added to the principal; a like amount is paid as
principal on the portfolio A, B, or C Bond currently being paid off.
When the portfolio A, B, and C Bonds are paid in full, interest and
principal on the portfolio Z Bond begin to be
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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 Portfolio' s
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 Portfolios may buy mortgage-backed securities without
insurance or guarantees, if the Portfolio Manager determines that the
securities meet a Portfolio's quality standards. Although the market
for such securities is becoming increasingly liquid, securities
issued by certain private organizations may not be readily
marketable. A Portfolio 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 Portfolio 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 Portfolio's 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 Portfolios.
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 Portfolio may not invest in these securities.
CARS/sm/ represent undivided fractional interests in a 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 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
Portfolio 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 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
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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. 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.
DERIVATIVES
Certain Portfolios invest in derivatives, which are securities
and contracts whose value is based on performance of an underlying
financial asset, index or other investment. Examples of the
derivatives are CMOs, variable and floating rate securities, futures
contracts, options contracts, and forward currency exchange
contracts.
Derivative securities and contracts may be used as a direct
investment or as a hedge for a portfolio of investments. Hedging
involves using a security or contract to offset investment risk, and
can reduce the risk of a position held in an investment portfolio.
If the Portfolio Manager's judgement about fluctuations in securities
prices, interest rates or currency prices proves incorrect, or the
strategy does not correlate well with a Portfolio's volitility. In
addition, in the event that non-exchange traded derivatives are used,
they could result in a loss if the counter-party to the transaction
does not perform as promised.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Certain Portfolios 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 Portfolios 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 Portfolios also may
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 this Statement of Additional
Information 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
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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 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 Portfolio 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
Portfolio, 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 Portfolios invest only in bank and S&L obligations
as specified in that Portfolio's investment policies. Other
Portfolios, except the Managed Global Portfolio, will not invest in
obligations issued by a commercial bank or S&L unless:
(i) the bank or S&L has total assets of at 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 Portfolio Manager, of an investment
quality comparable with other debt securities which may be
purchased by the Portfolio. 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 Portfolio 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 Portfolios may invest in commercial paper (including
variable amount master demand notes and extendable command notes
("ECN")), denominated in U.S. dollars, issued by U.S. corporations or
foreign
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corporations. Unless otherwise indicated in the investment
policies for a Portfolio, it 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 Portfolio may
invest.
Commercial paper obligations may include variable amount master
demand notes. These notes are obligations that permit investment of
fluctuating amounts at varying rates of interest pursuant to direct
arrangements between a Portfolio, 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 Portfolio 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
Portfolio may invest. Master demand notes are considered by the
Portfolio 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 Portfolios 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 Portfolio 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 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 their
value always equals or exceeds the agreed-upon repurchase price to be
paid to the Portfolio. 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 Portfolio enters into repurchase
agreements.
A Portfolio 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
Portfolio 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 Portfolio 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 Portfolio's limitation, either 10% or
15% of the net assets of the Portfolio, depending on the Portfolio,
on investing in illiquid securities. If the seller should become
bankrupt or default on its obligations to repurchase the securities,
a Portfolio 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 Portfolio 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 Portfolio and its agreement to repurchase the instrument at a
specified time and price. A Portfolio 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
Portfolio 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 Portfolio will limit its investments in
reverse repurchase agreements consistent with the borrowing limits
applicable to the Portfolio. See "Borrowing" for further information
on these limits. The use of reverse repurchase agreements by a
Portfolio creates leverage which increases a Portfolio's investment
risk. If the income and gains on securities purchased with the
proceeds of reverse repurchase agreements exceed the cost of the
agreements, the Portfolio's 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 Portfolios may lend portfolio securities to broker-dealers or
institutional investors for the purpose of realizing additional
income. A Portfolio will only enter into this type of 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 33 1/3% of the total assets of the Portfolio. 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 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
Portfolio must maintain with the Portfolio 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 Portfolio lending such voting securities may call them if
important shareholder meetings are imminent. A Portfolio may only
lend portfolio securities to entities that are not affiliated with
either the Manager or a Portfolio Manager.
OTHER INVESTMENT COMPANIES
All Portfolios may invest in shares issued by other investment
companies. A Portfolio 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 Portfolio's total assets in the investment company, or (3) invest
more than 10% of the Portfolio's total assets in all investment
company holdings. As a shareholder in any investment company, a
Portfolio will bear its ratable share of the investment company's
expenses, including management fees in the case of a management
investment company. The Equity Income and Fully Managed Portfolios
may, however, invest in shares of the T. Rowe Price Money Market
Funds and the Growth Portfolio may invest in shares of Janus' Money
Market Funds. Other Portfolios may invest in shares issued by other
investment companies to the extent allowable by the 1940 Act.
SHORT SALES
A short sale is a transaction in which the Portfolio sells a
security it does not own in anticipation of a decline in market
price. A Portfolio may make short sales to offset a potential
decline in a long position or a group of long positions, or if the
Portfolio Manager believes that a decline in the price of a
particular security or group of securities is likely.
The Portfolio's obligation to replace the security borrowed in
connection with the short sale will be secured by collateral
deposited with a broker, consisting of cash or securities acceptable
to the broker. In addition, with
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respect to any short sale, other than short sales against the box, the
Portfolio 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 Portfolio's potential loss on a short sale, which may exceed the
entire amount of the collateral.
A Portfolio 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.
SHORT SALES AGAINST THE BOX
A short sale "against the box" is a short sale where, at the time
of the short sale, the Portfolio owns or has the immediate and
unconditional right, at no added cost, to obtain the identical
security. A Portfolio would enter into such a transaction to defer a
gain or loss for Federal income tax purposes on the security owned by
the Portfolio. Short sales against the box are not subject to the
percentage limitations on short sales described in the Prospectuses.
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
Portfolio has sold a futures contract, if the offsetting purchase
price is less than the original futures contract sale price, the
Portfolio realizes a gain; if it is more, the Portfolio realizes a
loss. Where a Portfolio has purchased a futures contract, if the
offsetting price is more than the original futures contract purchase
price, the Portfolio realizes a gain; if it is less, the Portfolio
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.
A Portfolio may purchase and sell interest rate futures as a hedge
against adverse changes in debt instruments and other interest rate
sensitive securities. As a hedging strategy a Portfolio might
employ, a Portfolio 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 Portfolio 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 Portfolio 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 Portfolio or avoided by taking
delivery of the debt securities under the futures contract.
A Portfolio 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 Portfolio would be substantially offset by the
ability of the Portfolio to repurchase at a lower price the interest
rate futures contract previously sold. While the Portfolio could
sell the long-term debt security and invest in a short-term security,
ordinarily the Portfolio 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
Portfolio 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
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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 Portfolio.
The Portfolio 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 Portfolio 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 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 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 Portfolio 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 Portfolio 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 Portfolio is attempting to purchase equity
positions in issues which it had or was having difficulty
purchasing at prices considered by the 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.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS. Some Portfolios 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
Portfolio (with the exception of the Hard Assets Portfolio) intends
to manage its metal investments and/or futures contracts on metals so
that less than 10% of the gross income of the Portfolio 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
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Portfolio will be delivered to and stored with a qualified custodian bank.
Metal investments do not generate interest or dividend income.
Metal investments are considered speculative and are affected by
various worldwide 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 governmental 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.
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 Portfolio
purchases a gold futures contract it becomes obligated to take
delivery of and pay for the gold from the seller, and when the
Portfolio 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 Portfolio 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 Portfolio
will not engage in these contracts for speculation or for achieving
leverage. The Portfolio's 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
Portfolio 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 Portfolio might use futures
contracts to hedge against anticipated changes in interest rates that
might adversely affect either the value of the Portfolio's securities
or the price of the securities which the Portfolio intends to
purchase. The Portfolio's 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 Portfolio's exposure to
interest rate fluctuations, a Portfolio may be able to hedge its
exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options. See this Statement of
Additional Information for a discussion of other strategies involving
futures and futures options.
If a purchase or sale of a futures contract is made by a
Portfolio, it 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 Portfolio upon termination of the contract,
assuming all contractual obligations have been satisfied. Each
investing Portfolio expects to earn interest income on its initial
margin deposits.
A futures contract held by a Portfolio is valued daily at the
official settlement price of the exchange on which it is traded.
Each day the Portfolio 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
Portfolio but is settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired.
In computing daily net asset value, each Portfolio will mark-to-
market its open futures positions.
A Portfolio 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 Portfolio.
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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 Portfolio realizes a capital gain, or if it is more,
the Portfolio realizes a capital loss. Conversely, if an offsetting
sale price is more than the original purchase price, the Portfolio
realizes a capital gain, or if it is less, the Portfolio realizes a
capital loss. The transaction costs must also be included in these
calculations.
LIMITATIONS. When purchasing a futures contract, a Portfolio 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 Portfolio 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 Portfolio. 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.
A Portfolio 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 Portfolio and the
positions. For this purpose, to the extent the Portfolio 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 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 or 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 Portfolio 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 Portfolio would
enable it to protect, at least partially, an unrealized gain in an
appreciated security without actually selling the security. In
addition, the Portfolio would continue to receive interest income on
such security.
A Portfolio may purchase call options on securities to protect
against substantial increases in prices of securities the Portfolio
intends to purchase pending its ability to invest in such securities
in an orderly manner. A Portfolio 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.
A Portfolio may purchase long-term exchange traded equity options
called Long Term Equity Anticipation Securities ("LEAPS") and Buy
Write Option Unitary Derivatives ("BOUNDS"). LEAPs provide the
holder the opportunity to participate in the underlying securities'
appreciation in excess of a fixed dollar amount, BOUNDs provide a
holder the opportunity to retain dividends on the underlying
securities while potentially participating in underlying securities'
capital appreciation up to a fixed dollar amount.
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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 Portfolio 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 Portfolio 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
Portfolio seeks to close out an option position. Furthermore, if
trading restrictions or suspensions are imposed on the options
markets, a Portfolio may be unable to close out a position. If a
Portfolio 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 Portfolio, 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 Portfolio's net asset value being more
sensitive to changes in the value of the underlying securities.
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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio may write a call or put option only if the option is
"covered" or "secured" by the Portfolio holding a position in the
underlying securities. This means that so long as the Portfolio 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 Portfolio 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 the
option. A put is secured if the Portfolio 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
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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 Portfolio.
OPTIONS ON SECURITIES INDEXES. A Portfolio may purchase or sell
call and put options on securities indexes for the same purposes as
it purchase or sells 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 Portfolio is required to maintain a segregated account
consisting of cash, cash equivalents or high grade obligations or the
Portfolio must purchase a like option of greater value that will
expire no earlier than the option sold. Purchased options may not
enable the Portfolio to hedge effectively against stock market risk
if they are not highly correlated with the value of the Portfolio's
securities. Moreover, the ability to hedge effectively depends upon
the ability to predict movements in the stock market.
OVER-THE-COUNTER OPTIONS. Certain Portfolios 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 Portfolio 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 Portfolio's
assets (the "SEC illiquidity ceiling"). Except as provided below, the
Portfolios 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 Portfolio have in
place with such primary dealers will provide that each Portfolio 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 Portfolio 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 Portfolio will treat all or a part of the
formula price as illiquid for purposes of the SEC illiquidity
ceiling. Certain Portfolio 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 Portfolio relies on the
party from whom it purchases an OTC Option to perform if the
Portfolio 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 Portfolio 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. 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 Portfolio
is recorded as an asset of the Portfolio and subsequently adjusted.
The premium received for an option written by a Portfolio is included
in the Portfolio's 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.
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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
Portfolio's transactions in futures may protect the Portfolio against
adverse movements in the general level of interest rates or other
economic conditions, such transactions could also preclude the
Portfolio 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
Portfolio and the hedging vehicle so that the Portfolio's 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 Portfolio 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 Portfolio from
liquidating an unfavorable position and the Portfolio would remain
obligated to meet margin requirements and continue to incur losses
until the position is closed.
Most Portfolios 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 Portfolio 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 Portfolio 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 Portfolio's
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 Portfolio
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.
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WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
All Portfolios except the Market Manager Portfolio may purchase
securities on a when issued or delayed delivery basis if the
Portfolio 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 Portfolio 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 Portfolio's other assets.
Although a Portfolio would generally purchase securities on a when-
issued basis or enter into forward commitments with the intention of
acquiring securities, the Portfolio may dispose of a when-issued or
delayed delivery security prior to settlement if the Portfolio
Manager deems it appropriate to do so. The Portfolio may realize
short-term profits or losses upon such sales.
FOREIGN SECURITIES
Some Portfolios 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 Portfolio may invest in foreign branches of commercial banks and
foreign banks. See the "Banking Industry and Savings Industry
Obligations" discussion in this Statement of Additional Information
for further description of these securities.
Except for the Hard Assets Portfolio, each Portfolio 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
Portfolio 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 Portfolio may invest up to 35%
of its net assets in securities of issuers located in South Africa. A
Portfolio's 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 Portfolios 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 Portfolio 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.
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As discussed above "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 Portfolio 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 Portfolio
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
Portfolio 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 Portfolio 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" and "Debt Securities--Sovereign Debt".
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 Portfolio 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.
On January 1, 1999, certain members of the European Economic and
Monetary Union ("EMU"), namely Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxenbourg, the Netherlands, Portugal, and
Spain established a common European currency known as the "euro" and
each member's local currency became a denomination of the euro. It
is anticipated that each participating country will replace its local
currency with the euro on July 1, 2002. Any other European country
that is a member of the European Union and satisfies the criteria for
participation in the EMU may elect to participate in the EMU and may
supplement its existing currency with the euro. The anticipated
replacement of existing currencies with the euro on July 1, 2002
could market disruptions before or after July 1, 2002 and could
adversely affect the value of securities held by a Portfolio.
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 Portfolio 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 Portfolio will engage
in forward currency transactions in anticipation of or to protect
itself against fluctuations in currency exchange rates. A Portfolio
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 or
exposed to that currency which it anticipated purchasing.
A Portfolio may enter into forward foreign currency contracts in
two circumstances. When a Portfolio enters into a contract for the
purchase or sale of a security denominated in or exposed to a foreign
currency, the Portfolio 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 Portfolio will
be able to protect itself against a possible loss resulting from an
adverse change in
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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 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 Portfolio's securities
denominated in or exposed to 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
Portfolios will enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts
would obligate the Portfolio to deliver an amount of foreign currency
in excess of the value of the Portfolio's securities or other assets
denominated in that currency.
At the maturity of a forward contract, a Portfolio 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 Portfolio 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 Portfolio is obligated to
deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio 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 Portfolio's 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
Portfolio 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
Portfolio 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 Portfolio seeks to close out a forward currency position, and
in such an event, a Portfolio might not be able to effect a closing
purchase transaction at any particular time. In addition, a
Portfolio 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 Portfolios with respect to such contracts, see
"Foreign Currency Transactions" in this Statement of Additional
Information.
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 Portfolio may enter
into closing sale transactions with respect to such options, exercise
them, or permit them to expire.
A Portfolio may employ hedging strategies with options on
currencies before the Portfolio purchases a foreign security
denominated in the hedged currency that the Portfolio anticipates
acquiring, during the period the
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Portfolio 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.
COMMON STOCK AND OTHER EQUITY SECURITIES
Common Stocks represent an equity (ownership) interest in a
corporation. This ownership interest generally gives a Portfolio the
right to vote on measures affecting the company's organization and
operations.
Certain of the Portfolios 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 Portfolio, the Adviser or Portfolio Manager will
generally invest the Portfolio's 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 Portfolio 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 Portfolio's flexibility to participate in higher yielding debt
markets outside of the United States may allow the Portfolios to
achieve higher yields than those generally obtained by domestic money
market funds and short-term bond investments. When a Portfolio
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 Portfolio's 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 Portfolio is
invested in foreign securities, a weakening in the U.S. dollar
relative to the foreign currencies underlying a Portfolio's
investments should help increase the net asset value of the
Portfolio. Conversely, a strengthening in the U.S. dollar versus the
foreign currencies in which a Portfolio's securities are denominated
will generally lower the net asset value of the Portfolio. The
Manager or relevant Portfolio Manager attempts to minimize exchange
rate risk through active Portfolio 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 Portfolio.
HYBRID INSTRUMENTS
Hybrid Instruments (a type of potentially high-risk derivative)
have been developed and combine the elements of futures contracts or
options with those of debt, preferred equity, or a depository
instrument (hereinafter "Hybrid Instruments"). Generally, a Hybrid
Instrument will be a debt security, preferred stock, depository
share, trust certificate, certificate of deposit, or other evidence
of indebtedness on which a portion of or all interest payments,
and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices,
changes in prices, or differences between prices, of securities,
currencies, intangibles, goods, articles, or commodities
(collectively "Underlying Assets") or by another objective index,
economic factor, or other
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measure, such as interest rates, currency exchange rates, commodity indices,
and securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments
may take a variety of forms, including, but not limited to, debt instruments
with interest or principal payments or redemption terms determined by
reference to the value of a currency or commodity or securities index
at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular
commodity.
Hybrid Instruments can be an efficient means of creating exposure
to a particular market, or segment of a market, with the objective of
enhancing total return. For example, a Portfolio may wish to take
advantage of expected declines in interest rates in several European
countries, but avoid the transaction costs associated with buying and
currency-hedging the foreign bond positions. One solution would be to
purchase a U.S. dollar-denominated Hybrid Instrument whose redemption
price is linked to the average three-year interest rate in a
designated group of countries. The redemption price formula would
provide for payoffs of greater than par if the average interest rate
was lower than a specified level, and payoffs of less than par if
rates were above the specified level. Furthermore, the Portfolio
could limit the downside risk of the security by establishing a
minimum redemption price so that the principal paid at maturity could
not be below a predetermined minimum level if interest rates were to
rise significantly. The purpose of this arrangement, known as a
structured security with an embedded put option, would be to give the
Fund the desired European bond exposure while avoiding currency risk,
limiting downside market risk, and lowering transactions costs. Of
course, there is no guarantee that the strategy will be successful,
and the Portfolio could lose money if, for example, interest rates do
not move as anticipated or credit problems develop with the issuer of
the Hybrid Instrument.
The risks of investing in Hybrid Instruments reflect a combination
of the risks of investing in securities, options, futures and
currencies. Thus, an investment in a Hybrid Instrument may entail
significant risks that are not associated with a similar investment
in a traditional debt instrument that has a fixed principal amount,
is denominated in U.S. dollars, or bears interest either at a fixed
rate or a floating rate determined by reference to a common,
nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument,
but may include, without limitation, the possibility of significant
changes in the Benchmarks or the prices of Underlying Assets to which
the instrument is linked. Such risks generally depend upon factors
which are unrelated to the operations or credit quality of the issuer
of the Hybrid Instrument and which may not be readily foreseen by the
purchaser, such as economic and political events, the supply and
demand for the Underlying Assets, and interest rate movements. In
recent years, various Benchmarks and prices for Underlying Assets
have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options,
and forward contracts herein for a discussion of the risks associated
with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the
structure of the particular Hybrid Instrument, changes in a Benchmark
may be magnified by the terms of the Hybrid Instrument and have an
even more dramatic and substantial effect upon the value of the
Hybrid Instrument. Also, the prices of the Hybrid Instrument and the
Benchmark or Underlying Asset may not move in the same direction or
at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively,
Hybrid Instruments may bear interest at above market rates but bear
an increased risk of principal loss (or gain). The latter scenario
may result if "leverage" is used to structure the Hybrid Instrument.
Leverage risk occurs when the Hybrid Instrument is structured so that
a given change in a Benchmark or Underlying Asset is multiplied to
produce a greater value change in the Hybrid Instrument, thereby
magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the
instruments are often "customized" to meet the portfolio needs of a
particular investor, and therefore, the number of investors that are
willing and able to buy such instruments in the secondary market may
be smaller than that for more traditional debt securities. In
addition, because the purchase and sale of Hybrid Instruments could
take place in an over-the-counter market without the guarantee of a
central clearing organization or in a transaction between the Fund
and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party of issuer of the Hybrid Instrument would be an
additional risk
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factor which the Fund would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the Commodities
Futures Trading Commission, which generally regulates the trading
of commodity futures by U.S. persons, the SEC, which regulates the
offer and sale of securities by and to U.S. persons, or any other
governmental regulatory authority.
The various risks discussed above, particularly the market risk of
such instruments, may in turn cause significant fluctuations in the
net asset value of the Portfolio. Accordingly, the Portfolio will
limit its investments in Hybrid Instruments to 10% of total assets.
However, because of their volatility, it is possible that the
Portfolio's investment in Hybrid Instruments will account for more
than 10% of the Fund's return (positive or negative).
DOLLAR ROLL TRANSACTIONS
Certain Portfolios seeking a high level of current income may
enter into dollar rolls or "covered rolls" in which the Portfolio
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 Portfolio forgoes principal and interest paid on the securities
sold at the beginning of the roll period. The Portfolio 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 Portfolio may or may not take
delivery of the securities the Portfolio has contracted to purchase.
The Portfolio 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 Portfolio will not treat such obligations as senior
securities for purposes of the Investment Company Act of 1940.
"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
Portfolio.
EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY
SUPRANATIONAL ORGANIZATIONS
Portfolios 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 Portfolios may invest in securities that are
indexed to certain specific foreign currency exchange rates. The
terms of such securities 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 Portfolio 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
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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 Portfolio invests at least 25% of its assets in Bank
Obligations, the Portfolio's investments may be subject to greater
risk than a Portfolio 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 this 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).
RESTRICTED SECURITIES
The Portfolio 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 Portfolio to the extent that
qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the investment Portfolio.
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 Portfolio may also invest
in restricted securities that may not be sold under Rule 144A, which
presents certain risks. As a result, the Portfolio 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 bond holders. 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
Portfolio's limit on illiquid securities.
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BORROWING
Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a
Portfolio's net asset value; 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
Portfolio's shares. A Portfolio 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 below,
except those Portfolios that are permitted to engage in short sales
of securities with respect to an additional 15% of the Portfolio's
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 a Portfolio's borrowing limitations to the extent
that a Portfolio establishes and maintains liquid assets in a
segregated account with the Trust's custodian equal to the
Portfolio's 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 fluctuations 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 Portfolio
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 1940. Act
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 Portfolio's 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 Portfolio 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
Portfolio's 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.
The discount of zero-coupon and deferred interest bonds
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 Portfolio will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received
at the time of accrual, may require the liquidation of other
Portfolio securities to satisfy the Portfolio's distribution
obligations.
SMALL COMPANIES
Certain of the Portfolios 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 Portfolio 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 Portfolio to
dispose of such securities may be greatly limited, and a Portfolio
may have to continue to hold such securities during periods when the
Manager or a Portfolio Manager would otherwise have sold the
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security. It is possible that the Manager 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
Portfolio which it manages.
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of
the Portfolios as stated elsewhere in this Statement of Additional
Information certain of the Portfolios may, but are not required to,
utilize various investment strategies as described herein 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 Portfolio may purchase and
sell, to the extent not otherwise limited or restricted for such
Portfolios, 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, 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 Portfolios resulting from securities markets or
currency exchange rate fluctuations, to protect the Portfolio's
unrealized gains in the value of its Portfolio securities, to
facilitate the sale of such securities for investment purposes, to
manage the effective maturity or duration of the Portfolio, 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 Portfolio's 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 Portfolio 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 Portfolio 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 Portfolio management purposes.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, the relevant
Portfolios may make secured loans of portfolio securities.
Securities loans are made to banks, brokers and other financial
institutions pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the
value of the securities lent marked to market on a daily basis. The
collateral received will consist of cash, U.S. government securities,
letters of credit or such other collateral as may be permitted under
the Portfolio's investment program. While the securities are being
lent, the Portfolio will continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities, as well
as interest on the investment of the collateral or a fee from the
borrower. The Portfolio has a right to call each loan and obtain the
securities on five business day's notice or, in connection with
securities trading on foreign markets, within such longer period of
time which coincides with the normal settlement period for purchases
and sales of such securities in such foreign markets. The Fund will
not have the right to vote securities while they are being lent, but
it will call a loan in anticipation of any important vote. The risks
in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral
in the event the value of the collateral decreased below the value of
the securities loaned or of delay in recovering the securities loaned
or even loss of rights in the collateral should the borrower of the
securities fail financially. Loans will not be made unless, in the
judgement of the Portfolio Manager, the consideration to be earned
from such loans would justify the risk.
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SPECIAL SITUATIONS
A special situation arises when, in the opinion of the Portfolio
Manager, the securities of a particular company will, within a
reasonably estimable period of time, be accorded market recognition
at an appreciated value solely by reason of a development applicable
to that company, and regardless of general business conditions or
movements of the market as a whole. Developments creating special
situations might include, among others: liquidations,
reorganizations, recapitalizations, mergers, material litigation,
technical breakthroughs, and new management or management policies.
Investments in unseasoned companies and special situations often
involve much greater risk than in inherent in ordinary investment
securities.
WARRANTS
Certain Portfolios may, from time to time, invest in warrants.
Warrants are, in effect, longer-term call options. They give the
holder the right to purchase a given number of shares of a particular
company at specified prices within certain period of time. The
purchaser of a warrant expects that the market price of the security
will exceed the purchase price of the warrant plus the exercise price
of the warrant, thus giving him a profit. Of course, since the
market price may never exceed the exercise price before the
expiration date of the warrant, the purchaser of the warrant risks
the losses of the entire purchase price of the warrant. Warrants
generally trade in the open market and may be sold rather than
exercised. Warrants are sometimes sold in unit form with other
qualification as a regulated investment company and a Portfolio's
intent to continue to qualify as such. The result of a hedging
program cannot be foreseen and may cause a Portfolio to suffer losses
which it would not otherwise sustain.
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 Portfolio
will lose its entire investment in such warrant.
INVESTMENT OBJECTIVES AND ADDITIONAL
INVESTMENT STRATEGIES AND ASSOCIATED RISKS
EQUITY INCOME PORTFOLIO
Investment Objective: Substantial dividend income as well as long-
term growth of capital.
In addition to the investment strategies discussed in the
prospectus, the Portfolio may invest in foreign securities,
convertible stocks and bonds, warrants and certain potentially high-
risk derivatives described in this Statement of Additional
Information whose investment characteristics are consistent with the
Portfolio's investment program.
The Portfolio may invest in common and preferred stocks,
convertible securities and warrants, foreign securities, fixed income
securities, high-yield, high-risk bonds, hybrid instruments and
certain types of illiquid investments as private placements.
The Portfolio will hold a certain portion of its assets in money
market reserves. The Portfolio 's reserve position can consist of
shares of one or more T. Rowe Price internal money market portfolios
as well as short-term, high-quality U.S. and foreign dollar-
denominated money market securities, including repurchase agreements.
For temporary, defensive purposes, the Portfolio may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve as a short-term defense during periods of
unusual market volatility.
The Portfolio's emphasis on stocks of established, high dividend-
paying companies, as well as its possible exposure to fixed income
securities, could limit its potential for capital appreciation.
Sharply rising interest rates could also decrease the appeal of
stocks purchased by the Portfolio, further restraining total return.
In addition, the value approach includes the risks that 1) the market
will not recognize a security's intrinsic value for an
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unexpectedly long time, and 2) a stock that is judged to be undervalued
is actually appropriately priced due to intractable or fundamental
problems that are not yet apparent.
FULLY MANAGED PORTFOLIO
Investment Objective: Over the long-term, a high total investment
return, consistent with the preservation of
capital and with prudent investment risk.
The Fully Managed Portfolio seeks, over the long term, to achieve
a high total investment return, consistent with the preservation of
capital and with prudent investment risk. The Portfolio Manager uses
a value approach, which means looking for companies whose stocks and
other securities appear to be undervalued or out of favor with
investors. This value emphasis may lead to a "contrarian" approach,
resulting in purchases of stocks or other securities shunned by
investors due to earnings setbacks, unfavorable industry or economic
conditions, or negative publicity. Such investments may be
attractive if their prices appear to be excessively discounted and
prospects for appreciation are considered favorable.
The Portfolio holds a certain portion of its assets in money
market reserves. The Portfolio's reserve position can consist of
shares of one or more T. Rowe Price internal money market portfolios
as well as short-term, high-quality U.S. and foreign dollar-
denominated money market securities, including repurchase agreements.
For temporary, defensive purposes, the Portfolio may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve as a short-term defense during periods of
unusual market volatility.
To maximize potential return, the Portfolio Manager may utilize
the following investment methods: writing "covered" listed put and
call equity options, including 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
preferred 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 transactions for
hedging purposes; and borrowing from banks to purchase securities.
The Portfolio will not engage in short sales of securities other than
short sales "against the box." The Portfolio 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.
The Portfolio may invest in debt or preferred equity securities
and warrants. The Portfolio may also purchase foreign securities (up
to 25% total assets), debt securities, including junk bonds (up to
15% total assets) and hybrids (up to 10% total assets). In addition,
the Portfolio may purchase securities in private placements, subject
to a 15% net asset limit on illiquid securities. The total market
value of securities against which the Portfolio writes call or put
options may not exceed 25% of its total assets.
LIMITED MATURITY BOND PORTFOLIO
Investment Objective: Highest current income consistent with low
risk to principal and liquidity.
As discussed in the Prospectus, the Portfolio invests primarily in
short-to-intermediate term debt securities with actual remaining
maturities of seven years or less, and other debt securities with
special features (i.e., puts, variable floating coupon rates,
maturity extension arrangements, mortgage pass-throughs, etc.)
producing price characteristics similar to those of
short-to-intermediate term debt securities. The Portfolio will not
invest more than 25% of its total assets in a single industry. The
Portfolio will not invest more than 10% of its total assets in
foreign government securities.
The asset-backed securities in which the Portfolio may invest
include mortgage-backed U.S. government securities, mortgages pooled
by high quality financial institutions, and other asset-backed
securities representing pools of receivables unrelated to mortgage
loans. The Portfolio's investments in banking industry obligations
include certificates of deposit, time deposits, and bankers'
acceptances issued by commercial banks. The Portfolio's investments
in savings industry obligations include certificates of deposit and
time deposits issued by savings and loan associations. The
Portfolio's investments in commercial paper consist primarily of
unsecured
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notes with maturities of nine months or less issued to
finance short-term credit needs. The Portfolio's investments in
variable and floating rate securities have coupon rates which vary
with a designated money market index. The Portfolio will not invest
more than 10% of its total assets in foreign government securities.
The Portfolio may purchase securities on a when-issued and
delayed-delivery basis and may purchase or sell securities on a
forward commitment basis. When-issued or delayed-delivery
transactions arise when securities are purchased by the Portfolio
with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous price and yield to
the Portfolio at the time of entering into the transaction. A
forward commitment transaction is an agreement by the Portfolio to
purchase or sell securities at a specified future date. When the
Portfolio engages in these transactions, the Portfolio relies on the
buyer or seller, as the case may be, to consummate the sale. Failure
to do so may result in the Portfolio missing the opportunity to
obtain a price or yield considered to be advantageous. When-issued
and delayed-delivery transactions and forward commitment transactions
may be expected to occur a month or more before delivery is due.
However, no payment or delivery is made by a Portfolio until it
receives payment or delivery from the other party to the transaction.
A separate account containing only liquid assets, such as cash, U.S.
government securities, or other liquid assets equal to the value of
purchase commitments will be maintained until payment is made. Such
transactions have the effect of leverage on the Portfolio and may
contribute to volatility of a Portfolio's net asset value.
To increase current income, the Portfolio may lend its portfolio
securities in an amount up to 33% of its total assets to brokers,
dealers and financial institutions, provided certain conditions are
met, including the condition that each loan is secured continuously
by collateral maintained on a daily mark-to-market basis in an amount
at least equal to the current market value of the securities loaned.
These transactions involve a loan by the applicable Fund and are
subject to the same risks as repurchase agreements.
The Portfolio may enter into repurchase agreements with any bank
or broker-dealer which, in the opinion of the Board of Trustees,
presents a minimal risk of bankruptcy. Under a repurchase agreement,
the Portfolio acquires securities and obtain a simultaneous
commitment from the seller to repurchase the securities at a
specified time and at an agreed-upon yield. The agreements will be
fully collateralized and the value of the collateral, including
accrued interest, marked-to-market daily.
The Portfolio 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 Portfolio
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 Portfolio is restructuring its
portfolio in response to the changing interest rate environment. For
information on such contracts, see "Description of Securities and
Investment Techniques."
The Portfolio's dollar-weighted average maturity 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
Portfolio may invest in futures contracts, purchase and sell interest
rate futures contracts, and purchase and write options on such
futures contracts.
The Portfolio may invest in private placements of debt securities.
These investments may be considered to be restricted securities. The
Portfolio may invest up to 10% of its net assets in these and other
illiquid securities. The
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Portfolio 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 Statement of Additional Information
entitled "Description of Securities and Investment Techniques."
The Portfolio may write covered call options and purchase put
options, and purchase call and write put options to close out options
previously written by the Portfolio. The Portfolio may engage in
options transactions to reduce the effect of price fluctuations of
securities owned by the Portfolio (and involved in the options) on
the Portfolio's net asset value per share. This Portfolio 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 Portfolio will engage only in short
sales "against the box."
In addition to the limited maturity debt in which the Portfolio
invests, other investments may include other debt securities with
special features (e.g., puts, variable or floating coupon rates,
maturity extensions arrangements, mortgage pass-throughs, etc.)
producing price characteristics similar to those of short-to medium-
term debt securities. Generally, the Portfolio securities are
selected from as many as ten sectors of the fixed income market, each
representing a different type of fixed income investment.
HARD ASSETS PORTFOLIO
Investment Objective: Long-term capital appreciation.
The Hard Assets Portfolio provides a diversified portfolio with
protection against inflation or rapid economic activity. In economic
periods of rising inflation or when activity of companies within the
Hard Assets Portfolio tend to show rapid rises in earnings, it is
common to find that bonds and other equities perform poorly. As
such, the Hard Assets Portfolio may provide a source of
diversification to an overall portfolio. There can be no assurance
that an increased rate of return or reduced fluctuation of the
Portfolio will be achieved. Thus, an investment in the Portfolio's
shares should be considered part of an overall investment program
rather than a complete investment program.
The Portfolio may invest in securities of foreign issuers,
including up to 35% of its assets in securities of South African
issuers. The relative amount of the Portfolio's investment in foreign
issuers will change from time to time, and the Portfolio is subject
to certain guidelines for diversification of foreign security
investments. Investments by the Portfolio in securities of foreign
issuers may involve particular investment risks. See "Description of
Securities and Investment Techniques". The Portfolio normally
invests at least 65% of its total assets in Hard Asset Securities,
that is equity and debt securities of companies engaged in the
exploration, development, production, management and distribution of
assets such as gold and other precious metals, strategic metals, oil,
natural gas, coal and real estate investment trusts.
The Portfolio may invest over 25% of its assets in securities of
companies predominantly engaged in gold operations, although the
Portfolio will not invest in any such security or in gold bullion and
coins if, after such acquisition, more than 50% of the Portfolio's
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 Portfolio may also invest
directly in other commodities including petroleum and strategic
metals. The Portfolio may invest up to 35% of the value of its total
assets in non-hard asset securities.
Since a large percentage of the Portfolio's assets will be
invested in Hard Assets, the Portfolio might be deemed to have
concentrated in such investments. This may cause the Portfolio to
have greater exposure to risks associated with Hard Assets in
general.
During periods of less favorable economic and/or market
conditions, the Portfolio 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 Portfolio may engage in short sales, and may lend portfolio
securities. The Portfolio may not exceed a total of 25% of net assets
in short sales, but this amount is decreased by the amount the
Portfolio has borrowed.
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Short sales of unlisted securities may not exceed 10% of net assets.
The Portfolio 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 Portfolio may purchase securities on margin.
The Portfolio may borrow up to 10% of the value of its net assets and for
temporary purposes may increase this amount to 25%. The Portfolio 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 Portfolio may purchase and sell interest rate, gold,
and other futures contracts. The Portfolio 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 Portfolio 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 earnings or share prices for the
Hard Asset Companies in the Portfolio. 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 Portfolio seeks investment opportunities in the world's major
stock, bond and commodity markets. The Portfolio 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 with the exception of South Africa.
There is no limitation on the amount the Portfolio can invest in
emerging markets. The Portfolio may purchase 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 Portfolio may invest include
common stocks; preferred stocks (either convertible or non-
convertible); rights; warrants; direct equity interests in trusts;
partnerships; joint ventures and other incorporated 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 securities 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 Portfolio may invest
in certain derivatives. Derivatives are instruments whose value is
"derived" from an underlying asset. Derivatives in which the
Portfolio may invest include futures contracts, forward contracts,
options, swaps and structured notes and other similar securities as
may become available in the market. These instruments offer certain
opportunities and are subject to additional risks that are described
in the "Description of Securities and Investment Techniques." In
addition, the Portfolio 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 Portfolio 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 energy, base metal or agriculturals and their operations, the
Portfolio 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 Portfolio 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."
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REAL ESTATE PORTFOLIO
Investment Objective: Capital appreciation. Current income as a
secondary objective.
The Portfolio 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 Portfolio may invest more than
25% of its total assets in any of the foregoing sectors of the real
estate industry. The Portfolio's 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 Portfolio may invest up to 35% of its total assets in equity,
debt, or convertible 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 Portfolio 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
Portfolio will engage only in short sales "against the box."
In addition to the common and preferred stocks described above,
the Portfolio 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 Portfolio 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 Portfolio may also invest up to 20% of its assets, measured at
the time of investment, in high yield convertible 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." Since a large percentage of the Portfolio's assets
will be invested in the real estate industry, the Portfolio might be
deemed to have concentrated in this area. This may cause the
Portfolio to have greater exposure to risks associated with real
estate in general.
There are risks inherent in the Portfolio's investment policies.
These risks are discussed in "Description of Securities and
Investment Techniques."
ALL-GROWTH PORTFOLIO
Investment Objective: Capital appreciation.
While it has no present intention to do so, the Portfolio 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 Portfolio 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
Portfolio may invest in repurchase agreements. The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio will borrow
only up to 10% (for temporary purposes 25%) of its total net assets.
In connection with permissible borrowings the Portfolio may transfer
as collateral securities owned by the Portfolio.
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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 Portfolio may from time to
time realize short-term gains and losses. the Portfolio 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 Portfolio, portfolio
turnover can be expected to be fairly high.
The Portfolio may invest 100% of its assets in cash or U.S. dollar
denominated high quality instruments for temporary defensive
purposes, to maintain liquidity or when economic or market conditions
are unfavorable for investing. While these investments are generally
designed to limit the Portfolio's losses, they can prevent the
Portfolio from achieving its investment objective.
RISING DIVIDEND PORTFOLIO
Investment Objective: Capital appreciation. A secondary objective
is dividend income.
In seeking its objectives, the Portfolio normally invests its net
assets in equity securities of companies determined to be of high
quality by the Portfolio Manager, including, but not limited to,
companies with substantial dividend increases.
The individual security selection is overlaid with a sector
allocation discipline to avoid over-concentration in any single
sector. It is anticipated that the Portfolio's portfolio will
generally contain a minimum of 25 to 30 issues. It is the policy of
the Portfolio that no equity security will be acquired if, after its
acquisition, more than 15% of the Portfolio's 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 Portfolio's 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 Portfolio Manager periodically monitors the
Portfolio's equity securities to assure they meet the quality
criteria which include; regular dividend increases and at least 35%
of earnings reinvested annually; and a credit rating of "A" to "AAA".
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. 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. Equity
securities are deemed to include common stocks, securities
convertible into common stocks, or rights or warrants to subscribe
for or purchase common stocks.
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 Portfolio
may invest any amount of its assets in short-term fixed income
securities or in cash or cash equivalents.
EMERGING MARKETS PORTFOLIO
Investment Objective: Long-term capital appreciation.
At least 65% of the Portfolio's 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 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.
For purposes of allocating the Portfolio's 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.
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The Emerging Markets Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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
Portfolio 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" and "Debt Securities--Sovereign Debt"
in this Statement of Additional Information.
For temporary defensive purposes, the Portfolio 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 Portfolio may
invest significantly in such securities after receipt of new monies.
Most of the foreign securities in which the Portfolio invests will
be denominated in foreign currencies. The Portfolio 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 include 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 "Description of Securities and Investment Techniques-
- -Foreign Currency Transactions" in this Statement of Additional
Information.
The Emerging Markets Portfolio 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 index, foreign
securities and foreign currencies. The Portfolio may purchase and
sell interest rate, stock indexes and other financial instrument
futures contracts, and may purchase and write options on such futures
contracts. The Portfolio 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 Portfolio 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
Portfolio 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 Portfolio
may invest in up to 15% of its assets in illiquid securities. The
Portfolio may invest in warrants and restricted securities. The
Portfolio may make short sales "against the box." These investment
techniques are described under the heading "Description of Securities
and Investment Techniques" in this Statement of Additional
Information.
VALUE EQUITY PORTFOLIO
Investment Objective: Capital appreciation. Dividend income is a
secondary objective.
At least 65% of the Portfolio's assets normally will be invested
in equity securities. However, during adverse market conditions, as a
temporary investment posture, the Portfolio may invest significantly
in the debt securities and money market instruments.
The Portfolio may invest without limit in equity securities of
foreign issuers, including ADRs. However, it is expected that under
ordinary circumstances, the Portfolio 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 investment in foreign
issuers, see "Description of Securities and Investment Techniques--
Foreign Securities" in this Statement of Additional Information.
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It is the policy of the Portfolio that no equity security will be
acquired, if, with respect to 75% of the Portfolio's total assets,
after its acquisition, more than 25% of the Portfolio's total assets
would be invested in any one industry or more than 5% would be
invested in any one issuer. The Portfolio Manager periodically
monitors the Portfolio's equity securities to assure they meet the
selection criteria. A security may be sold from the portfolio when
(i) its price approaches its intrinsic value; (ii) a temporary,
dramatic, short-term price appreciation occurs; (iii) its
fundamentals deteriorate; or (iv) its relative attractiveness
diminishes. From time to time, the Portfolio 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 Portfolio's 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 Portfolio 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 Portfolio's policy that no more than 5% of the
Portfolio's total assets be invested in any one issuer. The
Portfolio may make short sales "against the box."
The Portfolio may also invest in restricted or illiquid
securities; however, the Portfolio Manager can not invest more than
15% of the Portfolio's assets in securities that, at the time of
investment, it believes to be illiquid. In pursuing its investment
objective or for hedging purposes, the Portfolio 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 discussion of the risks associated with
these investment techniques.
During unusual or adverse market conditions, the Portfolio may
invest significantly in U.S. Government and agency debt securities,
and in money market instruments such as certificates of deposit,
bankers' acceptances, high quality commercial paper, U.S. Treasury
bills, and repurchase agreements.
STRATEGIC EQUITY PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
Investment Objective
Strategic Equity: Capital appreciation.
Investment Objective
Capital Appreciation: Long-term capital growth.
Each Portfolio may invest, for temporary defensive purposes, all
or substantially all of its assets in investment grade (high quality)
corporate bonds, commercial paper, or U.S. Government obligations.
In addition, a portion of each Portfolio's assets may be held, from
time to time, in cash, repurchase agreements or other short-term debt
securities when such positions are deemed advisable in light of
economic or market conditions. Each Portfolio will invest in common
stocks, which fluctuate in price in response to many factors
including historical and prospective earnings of the issuer, the
value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity. Each Portfolio may also
invest in preferred stocks (which may be subject to optional or
mandatory redemption provisions) and convertible securities, without
regard to corporate bond ratings. Each Portfolio may invest in
corporate debt, which may be subject to call provisions that entitle
the issuer to repurchase such securities at a predetermined price
prior to their stated maturity. In the event that a security is
called during a period of declining interest rates, the portfolio may
be required to reinvest the proceeds in securities having a lower
yield. In addition, in the event that a security was purchased at a
premium over the call price, the portfolio will experience a capital
loss if the security is called. Adjustable rate corporate debt
securities may have interest rate caps and floors. The Portfolios
may invest in equity and/or debt securities issued by REITs. Such
investments will not exceed 25% of the total assets of each
Portfolio. To the extent that the Portfolios have the ability to
invest in REITs, each could conceivably own real estate directly as a
result of a default on securities it owns. The Portfolio, therefore,
may be subject to certain risks associated with the direct ownership
of real estate including difficulties in valuing and trading real
estate, declines in the value of real estate, risks related to
general and local economic
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conditions, and changes in zoning laws. Such trusts are also subject
to heavy cash flow dependency, defaults by borrowers, self liquidation,
and the possibility of failing to maintain exemption from the 1940 Act.
To the extent consistent with its respective investment objective,
each of the Portfolios may invest in foreign securities. The Capital
Appreciation Portfolio may invest up to 25% of its total assets in
foreign securities. The Strategic Equity Portfolio may invest up to
20% of its total assets in foreign securities.
For purposes of computing such limitation, American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other
securities representing underlying securities of foreign issuers are
treated as foreign securities. Each of the Portfolios may also
invest in foreign securities listed on recognized U.S. securities
exchanges or traded in the U.S. over-the-counter market. Each
Portfolio has the authority to deal in foreign exchange between
currencies of the different countries in which each will invest
either for the settlement of transactions or as a hedge against
possible variations in the foreign exchange rates between those
currencies. Each Portfolio will not speculate in foreign exchange,
nor commit a larger percentage of its total assets to foreign hedges
than the percentage of its assets that it could invest in foreign
securities.
The Strategic Equity Portfolio will not invest more than 15% of
its net assets in illiquid securities, including repurchase
agreements with maturities in excess of seven days. The Capital
Appreciation Portfolio will not invest more than 10% of its assets in
illiquid securities. The Portfolio may purchase privately placed
securities that are eligible for purchase and sale pursuant to Rule
144A under the Securities Act of 1933.
For the purpose of realizing additional income, the Portfolios may
each make secured loans of portfolio securities amounting to not more
than 33 1/3% of its total assets. Although it does not currently
intend to do so, the Strategic Equity Portfolio may invest in
"special situations, as described in this Statement of Additional
Information.
The Portfolio may also invest in U.S. Government Securities,
Repurchase Agreements, short sales and has the ability to use forward
contracts, futures contracts, options on securities, options on
indices, options on currencies and options on futures and in other
investment companies to the extent permitted by the 1940 Act, and
rules and regulation thereunder.
SMALL CAP PORTFOLIO
Investment Objective: Long-term capital appreciation.
The Portfolio invests at least 65% of its total assets in equity
securities of companies that, at the time of purchase of the
securities, have total market capitalization 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"), updated quarterly.
In order to afford the Portfolio 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.
The Portfolio 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 Portfolio's 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 selling stock index futures contracts and interest
rate futures contracts; purchasing 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
institutional borrowers of securities. The Portfolio may not exceed a
total of 25% of net assets in short sales, but this amount is
decreased by any amount the Portfolio has borrowed. The Portfolio
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.
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The Portfolio 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 Portfolio may transfer
as collateral securities owned by the Portfolio. The Portfolio may
invest up to 15% of its net assets in illiquid securities.
MANAGED GLOBAL PORTFOLIO
Investment Objective: Capital appreciation. Current income is
only an incidental consideration.
As discussed in the Prospectus, the Managed Global Portfolio may
invest in common stock traded in securities market around the world,
issued by any type of company, large or small. Investing in
securities of smaller, less well known companies may present greater
opportunities for capital appreciation, but may also involve greater
risks. The Portfolio may not acquire the securities of any issuer
if, as a result of such investment, more than 10% of the Portfolio's
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 Portfolio 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 Portfolio's basic
investment strategy inconsistent with the best interests of
shareholders. The Portfolio Manager may temporarily use alternative
strategies, primarily designed to reduce fluctuations in the value of
the Portfolio's assets. In implementing these "defensive" strategies
the Portfolio may invest in some of the following securities.
The Portfolio may invest solely in equity securities traded
primarily in U.S. markets. Also the Portfolio may add preferred
stocks to the portfolio. The Portfolio may purchase mortgage- and
asset-backed securities.
The Portfolio 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
instrumentalities, or by supranational entities ("foreign government
securities"); and (iii) debt securities of domestic or foreign
issuers. Debt securities purchased by the Portfolio may be of any
maturity, at the discretion of the Portfolio Manager.
The Portfolio 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.
The Managed Global Portfolio 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 securities indexes. The Managed Global
Portfolio 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 Portfolio
may purchase and sell futures contracts, and may purchase and write
options on such futures contracts, including stock index futures
contracts. The Portfolio may enter into foreign currency contracts
and currency exchange contracts on a spot basis. When deemed
appropriate by the Portfolio Manager, the Portfolio 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 Portfolio 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 Portfolio may invest in restricted
securities and warrants. The Portfolio may not invest more than 15%
of its net assets in illiquid securities. The Portfolio may not
exceed a total of 25% of net assets in short sales, but this amount
is decreased by any amount the Portfolio has borrowed. The Portfolio
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 Portfolio may transfer as collateral
securities owned by the Portfolio.
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For more information about the Portfolio's investments including
the risks of such investing see "Description of Securities and
Investment Techniques." The Portfolio Manager may invest in the above
or any other securities that it considers consistent with the
defensive strategies of the Portfolio. It is impossible to predict
when or for how long the Portfolio will use such alternative
strategies.
The Portfolio 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 Portfolio."
GROWTH OPPORTUNITIES PORTFOLIO
Investment Objective: Capital appreciation.
The Portfolio invests at least 65% of its total assets in equity
securities of domestic companies. Although such companies may be of
any size, the Portfolio targets companies having total market
capitalizations of $1 billion or more. The Portfolio Manager for the
Portfolio is Montgomery Asset Management, LLC.
The Portfolio also may invest up to 35% of its total assets in
highly rated debt securities. The Portfolio Manager does not expect
the Portfolio to be consistently totally invested in equity
securities. During periods that the Portfolio Manager deems
appropriate, the Portfolio may take a more defensive position and be
significantly invested in cash and cash equivalents.
The Portfolio may enter into repurchase agreements and reverse
repurchase agreements, 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 Portfolio 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 Portfolio 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 options with respect to more than 25% of its total
assets. The Portfolio may borrow up to one-third of its total net
assets, but will not purchase any securities while borrowings exceed
10%. The Portfolio 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 Portfolio
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 Portfolio may invest in forward currency contracts, but may not
invest more than one-third of its assets in such contracts. The
Portfolio may invest in futures, swaps, including equity swaps, and
options on futures. The Portfolio may invest up to 15% of its total
net assets in illiquid securities. See "Description of Securities
and Investment Techniques."
DEVELOPING WORLD PORTFOLIO
Investment Objective: Capital appreciation.
As discussed in the Prospectus, the Developing World Portfolio
invests primarily in the equity securities of emerging market
companies. The Portfolio also 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 Portfolio 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 Portfolio will not enter
into any options 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 Portfolio may borrow up to one third of its
total net assets, but will not purchase any securities while
borrowings exceed 10%. The Portfolio 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 not exceed 5% of its
total assets. The Portfolio 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 Portfolio may invest in forward
currency
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contracts, but may not invest more than one-third of its
assets in such contracts. The Portfolio may invest in futures,
swaps, including equity swaps, and options on futures. The Portfolio
may invest up to 15% of its total net assets in illiquid securities.
See "Description of Securities and Investment Techniques."
MID-CAP GROWTH PORTFOLIO
Investment Objective: Long-term growth of capital.
The Portfolio seeks to achieve its objective by investing
primarily or at least 65% 0f it assets in equity securities of
companies with medium market capitalization which the Portfolio
Manager believes have above-average growth potential under normal
circumstances.
Shares of the Portfolio are subject to greater fluctuation in
value than shares of a conservative equity fund or of a growth fund
that invests entirely in proven growth stocks. Therefore, the
Portfolio is intended for long-term investors who understand and can
accept the risks entailed in seeking long-term growth of capital. The
Portfolio 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 Portfolio 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 Portfolio.
Debt securities of issuers in which the Portfolio 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 Portfolio may invest include securities in
the lower rating categories of recognized rating agencies (and
comparable unrated securities). Fixed income securities in which the
Portfolio 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" for a
discussion of the risks involved in investing in lower-rated
securities.
When the Portfolio Manager believes that investing for temporary
defensive purposes is appropriate, such as during periods of unusual
market conditions, part or all of the Portfolio's 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 Portfolio may invest 20% of its net assets in foreign
securities. 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" for a discussion of the risks
involved in foreign investing.)
The Portfolio 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 information about foreign
issuers.
The Portfolio may also purchase illiquid or restricted securities
(such as private placements). The Portfolio's may not invest more
than 15% of its net assets in illiquid securities.
The Portfolio is classified as a "non-diversified" investment
company as described above under "Diversification." See
"Diversification" for risks associated with investing in a non-
diversified Portfolio.
While it is not generally the Portfolio's policy to invest or
trade for short-term profits, the Portfolio 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. Portfolio 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
Portfolio turnover is not a limiting factor when a change in the
Portfolio is otherwise appropriate. Because the Portfolio is
expected to have a Portfolio turnover rate of over
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100%, transaction costs incurred by the Portfolio and the realized capital
gains and losses of the Portfolio may be greater than that of a Portfolio
with a lesser turnover rate.
The Portfolio 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 Portfolio at a future date usually beyond customary settlement
time), purchase restricted securities, options on securities, options
on stock indexes, options on foreign currencies, futures contracts,
options on futures contracts and forward foreign currency exchange
contracts.
RESEARCH PORTFOLIO
Investment Objective: Long-term growth of capital and future
income.
The Portfolio invests in debt securities, and may invest up to 10%
of its net assets in lower rated debt securities (e.g., rated BA or
lower by Moody's or BB or lower by S&P or Fitch), or in securities
the Portfolio Manager believes to be of comparable quality.
It is not the Portfolio's 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 Portfolio's achievement of its
investment objective may be more dependent on the Portfolio Manager's
own credit analysis than in the case of a Portfolio investing in
primarily higher quality bonds. From time to time, the Portfolio's
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 Portfolio may enter into repurchase agreements, make loans of
its securities, invest in ADRs, invest up to 20% of its net assets in
foreign securities, 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 Information for a discussion of the risks
involved with investing in the above listed securities transactions.
While it is not generally the Portfolio's policy to invest or
trade for short-term profits, the Portfolio 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. Portfolio 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
Portfolio turnover is not a limiting factor when a change in the
Portfolio is otherwise appropriate.
TOTAL RETURN PORTFOLIO
Investment Objective: Above-average income (compared to a
portfolio entirely invested in equity
securities) consistent with the prudent
employment of capital. A secondary goal
is the reasonable opportunity for growth
of capital and income.
As discussed in the Prospectus, the Total Return Portfolio is a
"balanced fund that invests in a combination of equity and fixed
income securities. The Portfolio may invest in mortgage pass-through
securities, which are securities representing interests in "pools" of
mortgage loans. Monthly payments of interest and principal by the
individual borrowers on mortgages 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-governmental 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 Portfolio may
invest in also include zero coupon bonds, deferred interest bonds and
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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 Portfolio 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 Portfolio may invest up to 20% of its net assets in foreign
securities (including investments 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 Investments" for a
discussion of the risks involved in foreign investing.)
In order to protect the value of the Portfolio's investments from
interest rate fluctuations, the Portfolio may enter into various
hedging transactions, such as interest rate swaps, and the purchase
or sale of interest rate caps, floors and collars.
The Portfolio 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 Investment Techniques" for more
information regarding these transactions and the risks associated
with them.
While it is not generally the Portfolio's policy to invest or
trade for short-term profits, the Portfolio 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. Portfolio 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
Portfolio turnover is not a limiting factor when a change in the
Portfolio is otherwise appropriate. Because the Portfolio is expected
to have a Portfolio turnover rate of over 100%, transactions costs
incurred by the Portfolio and the realized capital gains and losses
of the Portfolio may be greater than that of a Portfolio with a
lesser turnover rate.
GROWTH & INCOME PORTFOLIO
Investment Objective: Long-term total return.
As discussed in the Prospectus, the Growth & Income Portfolio
invests primarily in common stocks of companies where the potential
for change is significant. The Portfolio may at times invest a
substantial portion of its assets in securities traded in the over-
the-counter markets in foreign countries and not on any exchange,
which may affect the liquidity of the investment and expose the
Portfolio 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.
To hedge against changes in net asset value or to attempt to
realize a greater current return, the Portfolio may use the following
investment strategies and techniques. The Portfolio 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 Portfolio will not purchase futures or options on
futures or sell futures if, as a result, the sum of the initial
margin deposits on the Portfolio's existing futures positions and
premiums paid for outstanding options on futures contracts would
exceed 5% of the Portfolio's assets. (For options that are "in-the-
money" at the time of purchase, the amount by
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which the option is "in-the-money" is excluded from this calculation.)
The Portfolio may lend portfolio securities to broker-dealers and may
enter into repurchase agreements.
At times, the Portfolio Manager may judge that market conditions
make pursuing the Portfolio's 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
Portfolio's assets. In implementing these "defensive" strategies, the
Portfolio may invest in U.S. Government securities, other high-
quality debt instruments, and other securities the Portfolio Manager
believes to be consistent with the Portfolio's best interests. The
Portfolio may invest in domestic or foreign securities
GROWTH PORTFOLIO
Investment Objective: Capital appreciation.
In addition to the Growth Portfolio's primary strategies discussed
in the Prospectus, the Portfolio may engage in several other
strategies. To hedge against changes in net asset value or to
attempt to increase its investment return, the Portfolio 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; 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.
To the extent that the Portfolio hold positions is futures
contracts and related options that do not fall within the definition
of bona fide hedging transactions, the aggregate initial margin and
premiums required to establish such positions will not exceed 5% of
the fair market value of the Portfolio's net assets, after taking
into account unrealized profits and unrealized losses on any such
contracts it has entered into.
When the Portfolio Manager believes that market conditions are not
favorable for profitable investing or when the Portfolio Manager is
otherwise unable to locate favorable investment opportunities, a
Portfolio's investments may be hedged to a greater degree and/or its
cash or similar investments may increase. In other words, the
Portfolio does not always stay fully invested in stocks and bonds.
Cash or similar investments are a residual -- they represent the
assets that remain after a portfolio manager has committed available
assets to desirable investment opportunities. Larger hedged
positions and/or larger cash positions may serve as a means of
preserving capital in unfavorable market conditions.
Securities that the Portfolio may invest in as a means of
receiving a return on idle cash include high-grade commercial paper,
certificates of deposit, repurchase agreements or other short-term
obligations. The Portfolio may also invest in money market funds
(including funds managed by the Portfolio Manager). When a Portfolio
is hedged or its investments in cash or similar investments increase,
it may not participate in stock or bond market advances or declines
to the same extent that it would if the Portfolio was not hedged or
remained more fully invested in stocks or bonds.
At times the Portfolio 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 Portfolio would only
concentrate its investments in a particular market sector if the
Portfolio's 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 Portfolio
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 Portfolio than if it had not
concentrated its assets in that sector.
The Portfolio may enter into repurchase agreements. These
transactions must be fully collateralized at all times, but involve
some risk to the Portfolio if the other party should default on its
obligations and the Portfolio is delayed or prevented from recovering
the collateral.
At times, the Portfolio Manager may judge that market conditions
make pursuing the Portfolio's 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
Portfolio's
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assets. In implementing these "defensive" strategies, the
Portfolio may invest in U.S. Government securities, other high-
quality debt instruments, and other securities the Portfolio Manager
believes to be consistent with the Portfolio's best interests.
During extremely unusual conditions, the Portfolio may take a
position of cash and cash equivalents.
The length of time a Portfolio has held a particular security is
not generally a consideration in investment decisions. The
investment policies of a Portfolio may lead to frequent changes in
the Portfolio's investments, particularly in periods of volatile
market movements. Such portfolio turnover generally involves some
expense to a Portfolio, including brokerage commissions or dealer
markups and other transaction costs on the sale of securities and
reinvestment in other securities. Such sales may result in
realization of taxable capital gains.
GLOBAL FIXED INCOME PORTFOLIO
Investment Objective: High total return
The investment objective of the Global Fixed Income Portfolio is
to provide high total return. The Portfolio will seek to achieve its
objective by investing at least 65% of its assets 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.
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 Portfolio 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
Securities and Investment Techniques.")
The Portfolio's 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 Portfolio is invested. In pursuing the
Portfolio's investment objective, however, the Portfolio Manager
actively manages the Portfolio in an effort to minimize the effect of
such factors on the Portfolio's net asset value per share. In
extremely unusual conditions the Portfolio may take a defensive
position of 100% U.S. cash.
LIQUID ASSET PORTFOLIO
Investment Objective: High level of current income consistent with
the preservation of capital and liquidity.
The Liquid Asset Portfolio seeks to achieve a high level of
current income consistent with the preservation of capital and
liquidity. The Portfolio is permitted to invest in asset-backed
securities, subject to the rating and quality requirements specified
with respect to the Portfolio. Through the use of trusts and special
purpose subsidiaries, various types of assets, primarily home equity
loans and automobile and credit card receivables, are being
securitized in pass-through structures similar to the mortgage pass-
through structures described above. Consistent with the Portfolio's
investment objectives, policies and quality standards, the Portfolio
may invest in these and other types of asset-backed securities which
may be developed in the future.
Asset-backed securities involve certain risks that are not posed
by mortgage-related securities, resulting mainly from the fact that
asset-backed securities do not usually contain the benefit of a
complete security interest in the related collateral. For example,
credit card receivables generally are unsecured and the debtors are
entitled to the protection of a number of state and Federal consumer
credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, due to various legal
and economic factors, proceeds from repossessed collateral may not
always be sufficient to support payments on these securities. The
risks
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associated with asset-backed securities are often reduced by
the addition of credit enhancements such as a letter of credit from a
bank, excess collateral or a third-party guarantee.
The Portfolio may invest in shares of other open-end management
investment companies, subject to the limitations of the 1940 Act and
subject to such investments being consistent with the overall
objective and policies of the Portfolio, provided that any such
purchases will be limited to short-term investments in shares of
unaffiliated investment companies, and will not, in the aggregate,
exceed 10% of the Portfolio's net assets. The purchase of securities
of other mutual funds results in duplication of expenses such that
investors indirectly bear a proportionate share of the expenses of
such mutual funds including operating costs and investment advisory
and administrative fees.
The Portfolio may also make limited investments in guaranteed
investment contracts ("GIC") issued by U.S. insurance companies. The
Portfolio will purchase a GIC only when the Manager has determined,
under guidelines established by the Board of Trustees, that the GIC
presents minimal credit risks to the Portfolio and is of comparable
quality to instruments that are rated high quality by certain
nationally recognized statistical rating organizations.
The Portfolio may purchase securities on a when-issued and
delayed-delivery basis and may purchase or sell securities on a
forward commitment basis. When-issued or delayed-delivery
transactions arise when securities are purchased by a Portfolio with
payment and delivery taking place in the future in order to secure
what is considered to be an advantageous price and yield to the
Portfolio at the time of entering into the transaction. A forward
commitment transaction is an agreement by a portfolio to purchase or
sell securities at a specified future date. When a portfolio engages
in these transactions, the Portfolio relies on the buyer or seller,
as the case may be, to consummate the sale. Failure to do so may
result in the Portfolio missing the opportunity to obtain a price or
yield considered to be advantageous. When-issued and delayed-
delivery transactions and forward commitment transactions may be
expected to occur a month or more before delivery is due. However,
no payment or delivery is made by a Portfolio until it receives
payment or delivery from the other party to the transaction. A
separate account containing only liquid assets, such as cash, U.S.
government securities, or other liquid assets equal to the value of
purchase commitments will be maintained until payment is made. Such
transactions have the effect of leverage on the Portfolio and may
contribute to the volatility of a Portfolio's net asset value.
To increase current income, the Portfolio may lend its portfolio
securities in an amount up to 33% of each such Portfolio's total
assets to brokers, dealers and financial institutions, provided
certain conditions are met, including the condition that each loan is
secured continuously by collateral maintained on a daily mark-to-
market basis in an amount at least equal to the current market value
of the securities loaned. These transactions involve a loan by the
applicable Portfolio and are subject to the same risks as repurchase
agreements.
The Portfolio may enter into repurchase agreements with any bank
or broker-dealer which, in the opinion of the Board of Trustees,
presents a minimal risk of bankruptcy. Under a repurchase agreement,
the Portfolio acquire securities and obtain a simultaneous commitment
from the seller to repurchase the securities at a specified time and
at an agreed-upon yield. The agreements will be fully collateralized
and the value of the collateral, including accrued interest, marked-
to-market daily.
The Portfolio 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 Portfolio 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 limitation shall not apply to U.S. government securities. In the
event that an instrument acquired by the Portfolio is downgraded or
otherwise ceases to be of the quality that is eligible for the
Portfolio, the Portfolio Manager, under procedures approved by the
Board of Trustees (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
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mature within five business days), shall promptly reassess
whether such security presents minimal credit risk and determine
whether to retain the instrument.
The Portfolio shall engage only in short sales "against the box."
The Portfolio may also 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 Portfolio may transfer as collateral
securities owned by the Portfolio. See "Description of Securities and
Investment Techniques" for descriptions of these techniques.
MARKET MANAGER PORTFOLIO
Investment Objective: The Portfolio seeks favorable equity market
performance by purchasing over-the-counter
call options on the S&P 500 and other
indexes of publicly traded common stocks of
large and mid-cap companies.
The call options into which the Portfolio will enter will be
negotiated on behalf of the Portfolio by the Portfolio Manager in an
attempt to provide the Portfolio with the right to receive a
percentage of the price appreciation on the stocks included in the
indexes for all or a portion of the period from the Investment Start
Date through the Target Maturity Date. The price appreciation on the
S&P 500 and other indexes does not include the value of dividends
paid by in the indexes. The Portfolio Manager has advised the Trust
that it initially intends to invest as of the Investment Start Date
in call options on the S&P 500 and in call options on up to two other
equity indexes, and that these options would give the Portfolio the
right to receive approximately 110%-118% of the price appreciation of
a composite of these indexes from the Investment Start Date through
the Target Maturity Date, based upon the expected weighting of the
Portfolio's relative positions in call options on these indexes.
The Portfolio will seek to preserve capital (without regard to
expenses) by investing a portion of its assets in zero coupon bonds
issued by the U.S. Government and its agencies and instrumentalities
and by private issuers which, at the time of investment, are rated A
or better by Moody's Investors Service, Inc. ("Moody's") or Standard
& Poor's Corporation ("S&P).
This strategy for pursuit of preservation of capital does not take
into account expenses of the Portfolio so that if the Portfolio
Manager is successful in its strategy, an investor in the Portfolio
cannot be assured that the value of his or her investment as of the
Target Maturity Date will equal the value of the investment as of the
Investment Start Date. Similarly, the strategy for pursuit of
preservation of capital does not take into account any expenses of
the Variable Contracts whose proceeds are invested in the Portfolios.
The purchaser of a Variable Contract would pay the expenses of the
Variable Contract, which could further detract from the value of a
Variable Contract Owner's investment as of the Target Maturity Date.
For more information on expenses under the Variable Contract, see the
Variable Contract prospectus.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective should be read, together
with the investment restrictions set forth below. These are broken
into two sections for different groups of Portfolios into fundamental
and non-fundamental policies. Fundamental policies and restrictions
of each Portfolio may not be changed with respect to any Portfolio
without the approval of a majority of the outstanding voting shares
of that Portfolio. The vote of a majority of the outstanding voting
securities of a Portfolio 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 Portfolio are present or
represented by proxy; or (b) more than 50% of the outstanding voting
securities of such Portfolio. 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.
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FUNDAMENTAL INVESTMENT RESTRICTIONS
FOR THE EQUITY INCOME PORTFOLIO, THE FULLY MANAGED PORTFOLIO, THE
LIMITED MATURITY BOND PORTFOLIO, THE HARD ASSETS PORTFOLIO, THE REAL
ESTATE PORTFOLIO, THE ALL-GROWTH PORTFOLIO, THE CAPITAL APPRECIATION
PORTFOLIO, THE RISING DIVIDENDS PORTFOLIO, THE EMERGING MARKETS
PORTFOLIO, THE VALUE EQUITY PORTFOLIO, THE STRATEGIC EQUITY
PORTFOLIO, THE SMALL CAP PORTFOLIO, THE MANAGED GLOBAL PORTFOLIO, THE
MARKET MANAGER PORTFOLIO, AND THE LIQUID ASSET PORTFOLIO:
Under these restrictions, a Portfolio 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
Portfolio;
(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
Portfolio, to securities or obligations issued by U.S. banks,
(c) with respect to the Market Manager Portfolio, to options
on stock indexes issued by eligible broker-dealers or banks,
as described in the Market Manager Portfolio's Prospectus; (d)
with respect to the Managed Global Portfolio, 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 Portfolio, 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 Portfolio, 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 Portfolios 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio
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;
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(7) Issue senior securities, except insofar as a Portfolio
may be deemed to have issued a senior security by reason of
borrowing money in accordance with that Portfolio's 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 Portfolio may be deemed to be an underwriter
under the federal securities laws;
(9) With respect to the Equity Income, Fully Managed, Limited
Maturity Bond, Hard Assets, Real Estate, All-Growth, Capital
Appreciation and Liquid Asset Portfolio, make short sales of
securities, except short sales against the box, and except
that this restriction shall not apply to the, Hard Assets, All-
Growth or Capital Appreciation Portfolio, which may engage in
short sales within the limitations described in the Statement
of Additional Information;
(10) Borrow money or pledge, mortgage, or hypothecate its
assets, except that a Portfolio 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
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 Portfolio's assets);
(11) With respect to the Equity Income, Fully Managed, Limited
Maturity Bond, Hard Assets, Real Estate, All-Growth, Capital
Appreciation, and Liquid Asset Portfolio, 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 Portfolio, except for the All-Growth Portfolio, and
more than 15% of the total assets (10% for the Capital
Appreciation Portfolio) of the Portfolio, (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 Portfolio 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 Equity Income and Strategic Equity Portfolio may
engage in futures contracts on gold; and
(d) this restriction shall not apply to the Managed Global
and the Hard Assets Portfolio.
(13) With respect to all Portfolios except the Managed Global
Portfolio, 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 Portfolio may engage in
transactions in options, futures contracts, and options on
futures.
FOR THE TOTAL RETURN PORTFOLIO, RESEARCH PORTFOLIO, MID-CAP GROWTH
PORTFOLIO AND GLOBAL FIXED INCOME PORTFOLIO:
A Portfolio may not:
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(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 Portfolio 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
Portfolio or the Mid-Cap Growth Portfolio;
(2) invest more than 25% of the value of the Portfolio 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 Portfolio of the Trust is
required to maintain asset coverage (including borrowings) of
300% for all borrowings), except Global Fixed Income Portfolio
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
Portfolio 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 Portfolio reserve the freedom of
action to hold and to sell real estate or mineral leases,
commodities or commodity contracts acquired as a result of the
ownership of securities. The Mid-Cap Growth, Research and
Total Return Portfolio 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 Portfolio
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
Portfolio shares of beneficial interest except as permitted
under the Investment Company Act of 1940 or by order of the
SEC.
FOR THE GROWTH PORTFOLIO:
The Portfolio 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 Portfolio investment
policies and restrictions and by applicable law, except as
required in connection with otherwise permissible options,
futures and commodity activities as described elsewhere this
Statement;
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(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 Portfolio 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 Portfolio 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 extent that the Portfolio
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 Portfolio 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 Portfolio 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 PORTFOLIO:
The Portfolio may not:
(1) issue any class of securities which is senior to the
Portfolio shares of beneficial interest, except that the
Portfolio may borrow money to the extent contemplated by
Restriction 3 below;
(2) purchase securities on margin (but a Portfolio 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);
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(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 Portfolio
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 Portfolio 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 Portfolio total assets (taken at current value)
would then be invested in securities of a single issuer, or
(ii) more than 25% of the Portfolio 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 PORTFOLIO:
A Portfolio 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 than 5% of the total
assets of a Portfolio 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 Portfolio 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
Portfolio 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 Portfolio 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 Portfolio, 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
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(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 Portfolio 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 Portfolio 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 Portfolio's 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 PORTFOLIO, EMERGING MARKETS PORTFOLIO, VALUE
EQUITY PORTFOLIO, STRATEGIC EQUITY PORTFOLIO, SMALL CAP PORTFOLIO,
MANAGED GLOBAL PORTFOLIO AND MARKET MANAGER PORTFOLIO:
A Portfolio 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 Portfolio,
which may make short sales within the limitations described in
the Prospectus and elsewhere in this Statement of Additional
Information); and
(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 Portfolio (taken at market
value at the time of such investment) would be invested in
such securities.
FOR THE MANAGED GLOBAL PORTFOLIO:
The Portfolio 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 Portfolio 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 PORTFOLIO, RESEARCH PORTFOLIO, MID-CAP GROWTH
PORTFOLIO AND GLOBAL FIXED INCOME PORTFOLIO:
A Portfolio may not:
(1) invest more than 10% (except 15% with respect to the
Global Fixed Income Portfolio, Mid-Cap Growth Portfolio and
Total Return Portfolio) of the net assets of a Portfolio
(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
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<PAGE>
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 Portfolio 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 GROWTH PORTFOLIO:
The Portfolio may not invest, in the aggregate, more than 10% of
its net assets in illiquid securities.
FOR THE GROWTH & INCOME PORTFOLIO:
The Portfolio may not:
(1) invest in warrants (other than warrants acquired by the
Portfolio 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 Portfolio net assets, provided that not more than
2% of the Portfolio 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 Portfolio 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 Portfolio total assets would
be invested in such securities, or (ii) more than 5% of the
Portfolio 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 Portfolio 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;
(7) purchase any security if, as a result, the Portfolio
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 Portfolio 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;
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(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 Portfolio in respect of any
such transactions then outstanding would exceed 5% of its
total assets.
FOR THE GROWTH OPPORTUNITIES AND DEVELOPING WORLD PORTFOLIO:
A Portfolio 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
Portfolio.
(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 Portfolio's
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.
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 R. Brock Armstrong, Barnett
Chernow, 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 R. Brock Armstrong, Barnett
Chernow, Myles R. Tashman, and Mary Bea Wilkinson.
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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
R. Brock Armstrong Trustee, President and Chairman of the GCG
Golden American Life President and Trust since February 1999. Director of
Insurance Cpompany; Chairman of Golden American Life Insurance Company
1475 Dunwoody Drive the GCG Trust and President of Equitable Life
West Chester, PA 19380 Insurance Company of Iowa since April,
1999. Director and Chairman of the Board
of First Golden American Life Insurance
Company of New York since December, 1998
and Group Executive of ING Group since
October, 1998. Senior Vice President,
Individual Insurance, The Prudential
Insurance Company of America, April 1997
- February 16, 1999; Executive Vice
President, Operations, London Life
Insurance Co., Executive Vice
President, Life and Health Operations,
London Insurance Group, Chairman,
Security First Group, Chairman,
Security First Group; 1994 to April
1997 Executive Vice President, U.S.
Insurance Operations, President and
Chief Executive Officer, Security
First Group, 1991 to 1994. Age 52.
Barnett Chernow Trustee and President and Director, Golden American
Golden American Life Vice President Life Insurance Company; President,
Insurance Co. Directed Services, Inc.; Executive Vice
1475 Dunwoody Drive President and then President,
West Chester, PA 19380 First Golden American Life Insurance
Company of New York; formerly,
Senior Vice President and Chief
Financial Officer, Reliance Insurance
Company, August 1977 to April 1998.
Age 49.
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 53.
R. Barbara Gitenstein Trustee President, The College of New Jersey
Office of the President since January, 1999; Trustee Provost,
The College of New Jersey Drake University from July 1992 to
December 1998;
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200 Pennington Road Assistant Provost, State University
Ewing, NJ 08628-0718 of New York from August, 1991 to
July, 1992; Associate Provost,
State University of New York
-Oswego from January, 1989 to
August, 1991. Age 50.
Robert A. Grayson Trustee Co-founder, Grayson
Grayson Associates Associates, Inc.; Adjunct
108 Loma Media Road Professor of Marketing, New
Santa Barbara, CA 93103 York University School of
Business Administration;
former Director, The Golden
Financial Group, Inc.;
former Senior Vice
President, David & Charles
Advertising. Age 71.
Myles R. Tashman Secretary Executive Vice President,
Golden American Life Secretary and General Counsel,
Insurance Co. Golden American Life Insurance
1475 Dunwoody Drive Company; Director, Executive Vice
West Chester, PA 19380 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. Age 56.
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 70.
Mary Bea Wilkinson Treasurer Senior Vice President & Treasurer,
Golden American Life First Golden American Life Insurance
Insurance Co. Company of New York; Senior
1475 Dunwoody Drive Vice President and Treasurer, Golden
West Chester, PA 19803 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 42.
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 53.
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Elizabeth J. Newell Trustee President and Chief
KRAGIE/NEWELL, Inc. Executive Officer of
2633 Fleur Drive KRAGIE/NEWELL, Inc. Age 52.
Des Moines, IA 50321
As of March 31, 1998, none of the Trustees directly owns shares of
the Portfolio. In addition, as of March 31, 1998, 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 Portfolio 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,
1998, the Trust paid Trustees' Fees aggregating $151,000. The
following table shows 1998 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 $ 24,000 N/A N/A $ 24,000
Trustee
R. Barbara Gitenstein $ 24,750 N/A N/A $ 24,750
Trustee
Robert A. Grayson $ 24,000 N/A N/A $ 24,000
Trustee
Stanley B. Seidler $ 24,750 N/A N/A $ 24,750
Trustee
Elizabeth J. Newell $ 24,000 N/A N/A $ 24,000
Trustee
Roger B. Vincent $ 24,000 N/A N/A $ 24,000
Trustee
M. Norvell Young $ 6,000 N/A N/A $ 6,000
Trustee*
</TABLE>
---------------
* Mr. Young served as a Trustee until his death in February of 1998.
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 Portfolio as of March
31, 1998. The address for each record owner is c/o Golden American
Life Insurance Company, 1475 Dunwoody Drive, West Chester, PA 19380-1478.
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NAME PORTFOLIO PERCENTAGE
- ---- --------- ----------
David & Anita Swann Market Manager 14.76%
Charitable Remainder
Trust
Darald Libby Market Manager 9.21%
Charitable Remainder
Unit Trust
George Berman Market Manager 8.21%
Charitable Remainder
Trust
Sanford Lugar Market Manager 6.58%
Ivan DeAnda Growth Opportunities 5.89%
In addition, as of December 31, 1998 the General Account of Golden
American owned 9.83% of the shares of the Emerging Markets Portfolio,
53.74% of the Growth Opportunities Portfolio; 41.91% of the
Developing World Portfolio.
THE MANAGEMENT AGREEMENT
Directed Services, Inc. ("DSI" or the "Manager") serves as Manager
to the Portfolio pursuant to a Management Agreement (the "Management
Agreement") between the Manager and the Trust. DSI's address is 1475
Dunwoody Drive, West Chester, PA 19380-1478. DSI is a New York
corporation that is a wholly owned subsidiary of Equitable of Iowa
Companies, Inc. ("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 Portfolios
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 Portfolios other
than the investment advisory services performed by the Portfolio
Managers. These services include, but are not limited to, (i)
coordinating for all Portfolios, at the Manager's expense, all
matters relating to the operation of the Portfolios, including any
necessary coordination among the Portfolio Managers, Custodian,
Dividend Disbursing Agent, Portfolio Accounting Agent (including
pricing and valuation of the Portfolio's portfolios), accountants,
attorneys, and other parties performing services or operational
functions for the Trust; (ii) providing the Trust and the Portfolio,
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 Portfolios 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
Portfolios required by applicable law; (v) preparing and filing and
arranging for the distribution of proxy materials and periodic
reports to shareholders of the Portfolios as required by applicable
law in connection with the Portfolios; (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 Portfolio; (vii) taking such other action with
respect to
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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
Portfolios contemplated in he 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
Portfolio.
Pursuant to the Management Agreement, the Manager is authorized to
exercise full investment discretion and make all determinations with
respect to the day-to-day investment of a Portfolio's assets and the
purchase and sale of portfolio securities for one or more Portfolios
in the event that at any time no Portfolio Manager is engaged to
manage the assets of such Portfolio.
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 November 17, 1998. The Management
Agreement may be terminated without penalty by vote of the Trustees
or the shareholders of the Portfolio 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, 1998 were as follows: Equity Income Portfolio--
$2,628,164; Strategic Equity Portfolio--$614,438, Fully Managed
Portfolio--$2,036,662; Limited Maturity Bond Portfolio--$554,541;
Hard Assets Portfolio--$370,049; Real Estate Portfolio--$738,372; All-
Growth Portfolio--$723,616; Capital Appreciation Portfolio--
$2,170,004; Rising Dividends Portfolio--$3,933,978; Emerging Markets
Portfolio--$559,306; Liquid Asset Portfolio--$796,602; Value Equity
Portfolio--$1,033,315, Small Cap Portfolio--$922,032; Managed Global
Portfolio--$1,476,351, and the Market Manager Portfolio--$72,140.
The above amounts represent 0.98% as a percentage of average daily
net assets for the Equity Income, Strategic Equity, Fully Managed,
Hard Assets, Real Estate, All-Growth, Capital Appreciation, Rising
Dividends, Value Equity and the Small Cap Portfolios. The above
amounts represent 0.59% as a percentage of average daily net assets
for the Liquid Assets Portfolio, 0.60% for the Limited Maturity Bond
Portfolio, 1.25% for the Managed Global Portfolio, 0.89 % for the
Market Manager Portfolio, and 1.75% for the Emerging Markets
Portfolio.
For the period from August 17, 1998 (commencement of operations)
to December 31, 1998, the Mid-Cap Growth Portfolio paid Manager fees
of $708,271; the Research Portfolio paid Manager fees of $1,716,605;
the Growth Portfolio paid Manager fees of $725,286; the Total Return
Portfolio paid Manager fees of $1,372,818; the Growth & Income
Portfolio paid Manager fees of $994,126, the Global Fixed Income
Portfolio paid Manager fees of $118,137. For the period of June 1,
1998 (commencement of operations) to December 31, 1998 the Growth
Opportunities Portfolio paid Manager fees of $78,500, and the
Developing World Portfolio paid Manager fees of $94,921
The above Portfolios did not operate for a full year. The Trust
paid the Manager an advisory fee at the following annual rates (as a
percentage of average net assets of a portfolio or combined assets of
the indicated groups of portfolios): 1.60% for the Global Fixed
Income Portfolio; 1.00% of the first $250 million, 0.95% of next $400
million, 0.90% of next $450 million, and 0.85% of amounts in excess
of 1.1 billion (all of combined assets) for the Total Return,
Research and Mid Cap Growth Portfolios; 1.10% of first $250 million
1.05% of next $400
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million, 1.00% of next $450 million and 0.95% of amounts in excess of
1.1 billion, each for the Growth & Income, Growth and Growth Opportunities
Portfolios; 1.75% for the Developing World Portfolio.
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: Equity Income Portfolio--
$2,635,937; Strategic Equity Portfolio --$349,342; Fully Managed
Portfolio--$1,489,989; Limited Maturity Bond Portfolio--$454,759;
Hard Assets Portfolio--$462,391; Real Estate Portfolio--$610,484; All-
Growth Portfolio--$730,308; Capital Appreciation Portfolio--
$1,664,222; Rising Dividends Portfolio --$1,794,223; Emerging Markets
Portfolio--$845,128; Liquid Asset Portfolio--$289,064; Small Cap
Portfolio--$472,567; Value Equity Portfolio--$591,757; Managed Global
Portfolio--$1,238,851 and Market Manager Portfolio--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: Equity Income Portfolio--
$2,892,936; Strategic Equity Portfolio--$195,979; Fully Managed
Portfolio--$1,266,104; Limited Maturity Bond Portfolio--$497,345;
Hard Assets Portfolio--$362,600; Real Estate Portfolio--$371,844; All-
Growth Portfolio--$910,039; Capital Appreciation Portfolio--
$1,335,410; Rising Dividends Portfolio--$989,772; Emerging Markets
Portfolio--$791,005; Liquid Asset Portfolio--$240,479; Small Cap
Portfolio--$180,699 and Value Equity Portfolio--$379,126.
For the period from September 1, 1996 to December 31, 1996 the
Managed Global Portfolio paid the Manager fees of $349,038. For the
period from January 1 to August 30, 1996 and the fiscal year ended
December 31, 1995, the predecessor of the Managed Global Portfolio of
the Portfolio paid management fees of $211,615, and $293,930,
respectively.
PORTFOLIO MANAGERS
The Trust, DSI, and each Portfolio Manager entered into Portfolio
Management Agreements dated and effective as of October 24, 1997.
The Portfolio Management Agreements were approved by the Trustees of
the Trust at a meeting held on November 17, 1998 and were approved by
shareholders of each Portfolio of the Trust at a meeting held on
April 28, 1998.
Pursuant to the separate Portfolio Management Agreements, the
Manager (and not the Trust) pays each Portfolio Manager for its
services a monthly fee at annual rates which are expressed as
percentages of the average daily net assets of each Portfolio.
For the fiscal year ended December 31, 1998, the Manager (and not
the Trust) paid the Portfolio Managers the following amounts: Zweig
Advisors Inc.--$ 1,349,052 for the Equity Income Portfolio and--
$315,395 for the Strategic Equity Portfolio, T. Rowe Price
Associates, Inc.--$1,045,430 for the Fully Managed Portfolio; ING
Investment Management, LLC--$236,197 for the Limited Maturity Bond
Portfolio, and $186,305 for the Liquid Asset Portfolio; Van Eck
Associates Corp.--$189,949 for the Hard Assets Portfolio; Chancellor
LGT Asset Management, Inc.--$1,113,876 for the Capital Appreciation
Portfolio; Kayne, Anderson Investment Management, L.P.--$2,019,334
for the Rising Dividends Portfolio; EII Realty Securities, Inc.--
$376,011 for the Real Estate Portfolio; Eagle Asset Management, Inc.-
- -$530,407 for the Value Equity Portfolio; and Pilgrim Baxter &
Associates--$408,580 for the All-Growth Portfolio; Robertson,
Stephens & Company Investment Management, L.P.---++$371,191 for the
Growth Portfolio and --$490,723 for the ++Growth & Income Portfolio;
Putnam Investment Management, Inc.--$319,604 for the Emerging Markets
Portfolio; and --$826,757 for the Managed Global Portfolio;
Massachusetts Financial Services Company--++$535,501 for the Total
Return; and --++$626,679 for the Research Portfolio; and --++$300,581
for the Mid-Cap Portfolio. Baring International Investment Limited--
++$33,226 for the Global Fixed Income Portfolio; Montgomery Asset
Management, LLC --+$36,739 for the Growth Opportunities Portfolio and
- --+$47,417 for the Developing World Portfolio; Fred Alger Management,
Inc.--$473,285 for the Small Cap Portfolio; and ING Investment
Management, LLC, .--$36,070 for the Market Manager Portfolio.
++For the period from August 17, 1998 (commencement of operations)
to December 31, 1998.
+For the period February 18, 1998 (commencement of operations) to
December 31, 1998.
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Van Eck Associate Corp.; Zweig Advisor Inc; Chancellor LGT Asset
Management, L. P.; Pilgrim Baxter & Associates; Robertson, Stephens &
Company Investment Management, Putnam Investment Management, Inc.,
and Montgomery Asset Management, LLC. are no longer managers of the
GCG Trust Portfolios. A I M Capital Management, Inc. ("AIM") has been
the Portfolio Manager of the Capital Appreciation Portfolio since
April 1, 1999 and the Strategic Equity Portfolio since March 1, 1999.
The Manager pays AIM the following fees for each Portfolio: 0.50% for
the first $250 million, 0.45% for the next $250 million and 0.40% on
assets over $500 million.
Barings International Investment Limited ("Barings") has been the
Portfolio Manager of the Hard Assets and Developing World Portfolios
since March 1, 1998. The Manager pays Barings 0.90% of assets with
respect to the Developing World Portfolio and 0.40% with respect to
the Hard Assets Portfolio. T. Rowe Price Associates, Inc. ("T. Rowe
Price") has been the Portfolio Manager of the Equity Income Portfolio
since March 1, 1999. The Manager pays T. Rowe Price 0.40% of assets
to serve as the Portfolio's manager. Alliance Capital Management
L.P. ("Alliance") has been the Portfolio Manger of the Growth &
Income Portfolio since April 1, 1999. The Manager pays Alliance
0.75% on the first $10 million, 0.625% on the next $10 million; 0.50%
on the next $20 million, 0.375% on the next $20 million and 0.25% of
net assets on amounts in excess of $60 million. Janus Capital
Corporation ("Janus") has been the Portfolio Manager of the Growth
Portfolio since March 1, 1999. The Manager pays Janus 0.55% on the
first $100 million, 0.50% on the next $400 million, and 0.45% on
amounts in excess of $500 million.
The above amounts represent .14% (of daily net assets) for the
Liquid Assets Portfolio, .25% for the Limited Bond Maturity Bond
Portfolio, .50% for the Equity Income, Fully Managed, Rising
Dividends, Value Equity, Strategic Equity, Capital Appreciation,
Small Cap, Real Estate and the Hard Assets Portfolios. The amounts
represent .55% of net assets for the All-Growth Portfolio, .70% for
the Managed Global Portfolio, 2.05% for the Market Manager Portfolio,
and 1.75% for the Emerging Markets Portfolio. The Preceding
Portfolios were in operation for the full year. For Portfolios that
commenced operation in 1998 and did not operate for a full year, the
Manager pays the following portfolio management fees (based on the
average daily net assets of a portfolio): .45% for the Managed
Global Portfolio, .37% for the Total Return Portfolio, .35% for the
Research Portfolio, .40% for the Mid Cap Growth Portfolio, .54% for
the Growth & Income Portfolio, .90% for the Developing World
Portfolio, and .50% for the Growth Opportunities Portfolio.
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 Equity Income Portfolio and
$200,373 for the Strategic Equity Portfolio; T. Rowe Price
Associates, Inc.--$757,091 for the Fully Managed Portfolio; Putnam
Investment Management, Inc.--$462,738 for the Emerging Markets
Portfolio and $664,883 for the Managed Global Portfolio; Van Eck
Associates Corp.--$234,949 for the Hard Assets Portfolio; Chancellor
LGT Asset Management Inc. --$845,622 for the Capital Appreciation
Portfolio; Kayne Anderson Investment Management, L.P.--$911,678 for
the Rising Dividends Portfolio; EII Realty Securities, Inc.--$310,198
for the Real Estate Portfolio; Eagle Asset Management, Inc.--$301,429
for the Value Equity Portfolio; and Pilgrim Baxter & Associated, Ltd.-
- - $396,195 for the All-Growth Portfolio; Equitable Investment
Services, Inc.--$84,766 for Liquid Assets Portfolio, $198,601 for
Limited Maturity Bond Portfolio and $31,614 for Market Manager
Portfolio; and Fred Alger Management, Inc.--$240,119 for Small Cap
Portfolio.
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 Equity Income Portfolio and $98,793
for the Strategic Equity Portfolio; T. Rowe Price Associates, Inc.--
$638,243 for the Fully Managed Portfolio; Bankers Trust Company--
$395,503 for the Emerging Markets Portfolio and $28,992 for the
Market Manager Portfolio; Van Eck Associates Corp.--$182,786 for the
Hard Assets Portfolio; Chancellor LGT Asset Management Inc. --
$673,180 for the Capital Appreciation Portfolio; Kayne Anderson
Investment Management, L.P.--$498,776 for the Rising Dividends
Portfolio; EII Realty Securities, Inc.--$187,447 for the Real Estate
Portfolio; Eagle Asset Management, Inc. ---$191,117 for the Value
Equity Portfolio; and Warburg, Pincus Counsellors, Inc.--$458,750 for
the All-Growth Portfolio.
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 Portfolio. For the
fiscal period
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January 1, 1996 to August 31, 1996, Warburg, Pincus Counsellors, Inc.
received $317,424 from the predecessor of the Managed Global Portfolio.
For the fiscal period of January 1, 1996 to August 12, 1996 the Manager
paid Bankers Trust Company $44,413 for the Liquid Asset Portfolio and
$135,897 for the Limited Maturity Bond Portfolio. 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 Portfolio and
$79,768 for the Limited Maturity Bond Portfolio.
DISTRIBUTION OF TRUST SHARES
DSI serves as the Portfolio's Distributor. DSI is not obligated to
sell a specific amount of the Portfolio's 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Portfolio are made by its Portfolio
Manager of each Portfolio. Each Portfolio Manager has investment
advisory clients other than the Portfolio. A particular security may
be bought or sold by a Portfolio Manager for 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 Portfolio may receive research
services from many broker-dealers with which the Portfolio Manager
places the Portfolio's 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 Portfolio), although not all of these
services are necessarily useful and of value in managing a Portfolio.
BROKERAGE AND RESEARCH SERVICES
The Portfolio Manager for a Portfolio places all orders for the
purchase and sale of portfolio securities, options, and futures
contracts for a Portfolio 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
Portfolio 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 Portfolio usually includes an
undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Portfolio includes a disclosed, fixed
commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges and other agency transactions
involve
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the payment by the Portfolio 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
Portfolio may receive research services from many broker-dealers with
which the Portfolio Manager places the Portfolio's 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 Portfolio), although not all of these services are necessarily
useful and of value in managing a Portfolio. The advisory fee paid
by the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 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, Zweig Securities
Corp., Robertson Stephens Securities Corp., Raymond James &
Associates, Inc., and Fred Alger & Company, Incorporated Montgomery
Securities, Inc. are registered broker-dealers, and each is an
affiliate of a Portfolio Manager. Barings Securities Corporation,
Furman Selz Securities Corp. and ING Securities are also registered
broker-dealers and each is an affiliate of Directed Services, Inc.
the Manager to the CGC Trust. 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
Portfolio in accordance with these rules and procedures.
For the fiscal year ended December 31, 1998, the Equity Income
Portfolio, Strategic Equity Portfolio, Fully Managed Portfolio,
Limited Maturity Bond Portfolio, Emerging Markets Portfolio, Liquid
Asset Portfolio, Market Manager Portfolio, Hard Assets Portfolio,
Real Estate Portfolio, Capital Appreciation Portfolio, Rising
Dividends Portfolio, Value Equity Portfolio, All-Growth Portfolio,
Small Cap Portfolio, Developing World Portfolio, Growth Opportunities
Portfolio, Mid-Cap Growth Portfolio, Global Fixed Income Portfolio,
Growth & Income Portfolio,
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Growth Portfolio, Research Portfolio, Total Return Portfolio and Managed
Global Portfolio paid brokerage commissions of $263,419, $170,714, $202,689,
$0, $190,071, $0, $0, $282,693, $104,920, $365,400, $583,931, $490,592,
$204,680, $266,848, $36,384, $24,964, $200,333, $0, $612,148, $330,923,
$468,656, $189,846, $636,858, respectively. The Equity Income Portfolio
paid brokerage commissions of $568 (.22% of its total brokerage commissions)
to Barings Securities Corporation, $30,928 (11.74% of its total brokerage
commissions) to Zweig Securities Corp., $2484 (0.88% of its total brokerage
commissions) to Raymond James & Associates. The All-Growth Portfolio paid
brokerage commissions of $978 (0.48% of its total brokerage commissions)
to Furman Selz Securities Corp.. The Value Equity Portfolio paid brokerage
commissions of $1,032 (0.21 % of its total brokerage commissions) to
Furman Selz Securities Corp. and $12,768 (2.60% of its total
brokerage commissions) to Raymand James & Associates. The Capital
Appreciation Portfolio is paid $9,000 (2.97% of its brokerage
commissions) to Furman Selz. The Emerging Markets Portfolio paid
$5,638 (2.97% of its total brokerage commissions) to Barings
Securities Corporation and $611 (0.48% of its brokerage commissions)
to ING Securities. The Managed Global Portfolio paid $1,041 (0.16%
of its total commissions) to Barings Securities and $55 (0.01% of its
total commissions) to ING Securities. The Fully Managed Portfolio
paid $225 (0.11% of its total brokerage commissions) to Furman Selz
Securities. The Real Estate Portfolio paid $1,344 (1.28% of its
brokerage commissions) to Furman Selz Securities. The Strategic
Equity Portfolio paid $160 (0.09% of its total brokerage commissions)
to Zweig Securities Corp. The Growth & Income Portfolio paid $4.404
(0.72% of its total commissions) to Furman Selz Securities and
$70,671 (11.54% of its total brokerage commissions) to Robertson
Stephens Securities Corp. The Growth Opportunities Portfolio paid
$78 (0.31% of its total brokerage commissions) to Furman Selz
Securities. The Growth Portfolio paid $6,624 (2.00% of its total
brokerage commissions) to Furman Selz Securities and $4,963 (1.50% of
its total brokerage commissions) to Robertson Stephens Securities
Corp. The Small-Cap Portfolio paid $262,004 (98.18% of its total
brokerage commissions) to Fred Alger & Company.
For the fiscal year ended December 31, 1997, the Equity Income
Portfolio, Strategic Equity Portfolio, Fully Managed Portfolio,
Limited Maturity Bond Portfolio, Emerging Markets Portfolio, Liquid
Asset Portfolio, Market Manager Portfolio, Hard Assets Portfolio,
Real Estate Portfolio, Capital Appreciation Portfolio, Rising
Dividends Portfolio, Value Equity Portfolio, Managed Global
Portfolio, All-Growth Portfolio and Small Cap Portfolio 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 Equity Income Portfolio
and Strategic Equity Portfolio 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 Portfolio paid
brokerage commissions of $13,239 (6.03% of its total brokerage
commissions) to Raymond James & Associates, Inc. The Hard Assets
Portfolio paid brokerage commissions of $900 (0.36% of its total
brokerage commissions) to Raymond James & Associates, Inc. The Small
Cap Portfolio 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 Equity Income
Portfolio, Strategic Equity Portfolio, Fully Managed Portfolio,
Limited Maturity Bond Portfolio, Emerging Markets Portfolio, Liquid
Asset Portfolio, Market Manager Portfolio, Hard Assets Portfolio,
Real Estate Portfolio, Capital Appreciation Portfolio, Rising
Dividends Portfolio, Value Equity Portfolio, Managed Global
Portfolio, and All-Growth Portfolio 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 Equity Income Portfolio paid brokerage commissions of $42,834
(9.07% of its total brokerage commissions) to Zweig Securities. The
Value Equity Portfolio paid brokerage commissions of $2,550 (2.09% of
its total brokerage commissions) to Raymond James & Associates, Inc.
The Capital Appreciation Portfolio paid brokerage commissions of
$1,920 (1.02% of its total brokerage commissions) to Raymond James &
Associates, Inc. The Fully Managed Portfolio paid brokerage
commissions of $150 (0.12% of its total brokerage commissions) to
Raymond James & Associates, Inc. The Hard Assets Portfolio paid
brokerage commissions of $150 (0.11% of its total brokerage
commissions) to Raymond James & Associates, Inc. The Small Cap
Portfolio paid brokerage commissions of $33,058 (78.34% of its total
brokerage commissions) to Fred Alger. The Emerging Markets Portfolio
paid brokerage commissions of $64,131 and $2,113 (11.84% and 0.39% of
its total brokerage commissions) to Jardine
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Fleming, respectively. The Managed Global Portfolio paid brokerage
commissions of $3,041 (1.59% of its total brokerage commissions) to
Jardine Fleming. The Strategic Equity Portfolio paid brokerage
commissions of $435 (0.79% of its total brokerage commissions) to
Zweig Securities.
Barings Securities Corporation is an affiliate of Barings
International Investment Limited, an affiliate of the Manager and
Portfolio Manager of the Hard Assets, Developing World and Global
Fixed Income Portfolios. Zweig Securities Corp. is an affiliate of
Zweig Advisors, Inc., the former Portfolio Manager to the Strategic
Equity and Equity Income (formerly, the Multiple Allocation Series)
Portfolios. Raymond James & Associates is an affiliate of Eagle
asset Management, Inc., Portfolio Manager of the Value Equity
Portfolio. Furman Selz Securities Corp. is an affiliate of the
Manager, as each is owned by ING Groep. Robertson, Stephens
Securities Corp. is an affiliate of Robertson, Stephens & Company
Investment Management, LP, the former Portfolio Manager of the Growth
Portfolio and the Growth & Income Portfolio. Fred Alger & Company is
an affiliate of Fred Alger Management, Inc., Portfolio Manager to the
Small Cap Portfolio.
Jardine Fleming Securities and Robert Fleming Securities are both
affiliates of T. Rowe Price Associates, Inc., Portfolio Manager to
the Fully Managed Portfolio since September, 1999 and to the Equity
Income Portfolio since March, 1999.
The Manager, Directed Services, Inc., is an affiliate of the GCG
Trust.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectuses, the
Portfolio's 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.
The Liquid Asset Portfolio's 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 Portfolio would receive if it sold the instrument. During such
periods the yield to investors in the Portfolio 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 Portfolio 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 Portfolio's 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 Portfolio 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.
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PERFORMANCE INFORMATION
The Trust may, from time to time, include the current yield and
effective yield of its Liquid Asset Portfolio, the yield of the
remaining Portfolios, and the total return of all Portfolios in
advertisements or sales literature. In the case of Variable
Contracts, performance information for the Portfolio will not be
advertised or included in sales literature unless accompanied by
comparable performance information for a separate account to which
the Portfolio offer their shares.
Current yield for Liquid Asset Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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,
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 Portfolio will be
expressed in terms of the average annual compounded rate of return of
a hypothetical investment in the Portfolio over certain periods that
will include periods of one, five, and ten years (or, if less, up to
the life of the Portfolio), 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 Portfolio 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, 1998 and for the five- and one-year periods ended
December 31, 1998 the average annual total return for each Portfolio
was as follows: 9.75%, 10.21% and 8.26% for the Equity Income
Portfolio; 9.02%, 9.73%, and 9.02% for the Fully Managed Portfolio;
6.80%, 5.59%, and 6.86% for the Limited Maturity Bond Portfolio;
5.93%, 4.72%, and 9.52% for the All-Growth Portfolio; 9.65%, 12.26%,
and (13.45)% for the Real Estate Portfolio; 5.11%, 2.48%, and
(29.58)% for the Hard Assets Portfolio; and 5.15%, 4.88%, and 5.13%
for the Liquid Asset Portfolio. For the period of May 4, 1992
(inception of the Capital Appreciation Portfolio) to December 31,
1998 and for the five- and one-year period ended December 31, 1997,
the average total return for the Capital Appreciation Portfolio was
16.00%, 17.48%, and 12.68%. For the period of October 1, 1993
(inception of the Rising Dividends and Emerging Markets Portfolio) to
December 31, 1998 and for the five-year and one-year periods ended
December 31, 1998, the average total return
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for the Rising Dividends Portfolio was 18.47% and 18.70% and 14.13%
and the average annual total return for the Emerging Markets Portfolio
was (6.58)% and (10.86)%. and (24.09)%. For the period of November 14,
1994 (inception of the Market Manager Portfolio) to December 31, 1997
and for the one-year period ended December 31, 1998, the average total
return for the Market Manager Portfolio was 24.60% and 24.55%. For
the period of January 1, 1995 (inception of the Value Equity
Portfolio) to December 31, 1998 and for the one-year period ended
December 31, 1998, the average total return for the Value Equity
Portfolio was 17.96% and 1.55%. For the period of October 2, 1995
(inception of the Strategic Equity Portfolio) to December 31, 1998
and for the one-year period ended December 31, 1998, the average
total return for the Strategic Equity Portfolio was 13.02% and 0.84%.
For the period ended January 3, 1996 (inception for the Small Cap
Portfolio) to December 31, 1997, and for the one-year period ended
December 31, 1998 the total return for the Small Cap Portfolio was
17.07% and 20.98%.
The Managed Global Portfolio 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 Portfolio, a newly created Portfolio 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, 1998, the average
total return for the Managed Global Portfolio was 8.12%, 8.84% and
29.31%, respectively.
For the period of August 17, 1998 (commencement of operations) to
December 31, 1998, the total return (not annualized) was 16.12% for
the Mid-Cap Portfolio; 14.54% for the Research Portfolio; 14.60% for
the Growth Portfolio; 6.90% for the Total Return Portfolio; 10.19%
for the Growth & Income Portfolio; 7.99% for Global Fixed Income
Portfolio; For the period of February 18, 1998 (commencement of
operations) to December 31, 1998 the total return (not annualized)
was (2.28)% for the Growth Opportunities Portfolio; (26.27)% and for
the Developing World Portfolio.
Each Portfolio 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
Portfolio average or median market capitalization may also be cited.
Certain other statistical measurements may be used to provide
measures of a Portfolio's 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 Portfolio's
various securities and their earnings per share. Duration is a
weighted-average term-to-maturity of the bond's cash flows, the
weights being present value of each cash flow as a percentage of the
bond's full price.
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 Portfolio 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 Portfolio. Unmanaged indexes may assume the reinvestment of
dividends but generally do not reflect deductions for administrative
and management costs and expenses.
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Reports and promotional literature may also contain other
information including (i) the ranking of any Portfolio 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 Portfolio's
investment returns, or returns in general, which may by 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
Portfolio (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
Portfolio, 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 Portfolio is intended,
based upon each Portfolio's investment objectives.
In the case of Variable Contracts, quotations of yield or total
return for a Portfolio will not take into account charges and
deductions against any Separate Accounts to which the Portfolio
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 Portfolio
reflects only the performance of a hypothetical investment in the
Portfolio during the particular time period on which the calculations
are based. Performance information should be considered in light of
the Portfolio's 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.
TAXES
Shares of the Portfolios are offered only to the Separate Accounts
that fund Variable Contracts. See the respective prospectuses for
the Variable Contracts for a discussion of the special taxation of
insurance companies with respect to the Separate Accounts and of the
Variable Contracts and the holders thereof.
Each Portfolio has qualified, and expects to continue to qualify,
for treatment as a regulated investment company (?RIC?) under the
Internal Revenue Code of 1986, as amended (the ?Code?). In order to
qualify for that treatment, a Portfolio must distribute to its
shareholders for each taxable year at least 90% of its investment
company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain
foreign currency transactions) (?Distribution Requirement?) and must
meet several additional requirements. These requirements include the
following (1) the Portfolio must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with
respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived
with respect to its business of investing in securities or those
currencies (?Income Requirement?); (2) at the close of each quarter
of the Portfolio's taxable year, at least 50% of the value of its
total assets must be represented by cash and cash items, U.S.
Government securities, securities of other RICs, and other securities
that, with respect to any one issuer, do not exceed 5% of the value
of the Portfolio's total assets and that do not represent more than
10% of the outstanding voting securities of the issuer; and (3) at
the close of each quarter of the Portfolio's taxable year, not more
than 25% of the value of its total assets may be invested in
securities (other than U.S. Government securities or the securities
of other RICs) of any one issuer. If each Portfolio qualifies as a
regulated investment company and distributes to its shareholders
substantially all of its net income and net capital gains, then each
Portfolio should have little or no income taxable to it under the
Code.
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Each Portfolio must, and intends to also comply with, the
diversification requirements imposed by section 817(h) of the Code
and the regulations thereunder. These requirements, which are in
addition to the diversification requirements mentioned above, place
certain limitations on the proportion of each Portfolio's assets that
may be represented by any single investment (which includes all
securities of the same issuer). For purposes of section 817(h), all
securities of the same issuer, all interests in the same real
property project, and all interest in the same commodity are treated
as a single investment. In addition, each U.S. Government agency or
instrumentality is treated as a separate issuer, while the securities
of a particular foreign government and its agencies,
instrumentalities and political subdivisions all will be considered
securities issued by the same issuer.
If a Portfolio fails to qualify as a regulated investment company,
the Portfolio will be subject to federal, and possibly state,
corporate taxes on its taxable income and gains (without any
deduction for its distributions to its shareholders) and
distributions to its shareholders will constitute ordinary income to
the extent of such Portfolio's available earnings and profits.
Owners of Variable Contracts which have invested in such a Portfolio
might be taxed currently on the investment earnings under their
contracts and thereby lose the benefit of tax deferral. In addition,
if a Portfolio failed to comply with the diversification requirements
of section 817(h) of the Code and the regulations thereunder, owners
of Variable Contracts which have invested in the Portfolio could be
taxed on the investment earnings under their contracts and thereby
lose the benefit of tax deferral. For additional information
concerning the consequences of failure to meet the requirements of
section 817(h), see the prospectuses for the Variable Contracts.
Generally, a RIC must distribute substantially all of its ordinary
income and capital gains in accordance with a calendar year
distribution requirement in order to avoid a nondeductible 4% excise
tax. However, the excise tax does not apply to certain Portfolios
whose only shareholders are segregated asset accounts of life
insurance companies held in connection with Variable Contracts. To
avoid the excise tax, each Portfolios that does not qualify for this
exemption intends to make its distributions in accordance with the
calendar year distribution requirement.
The use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts and entering into forward
contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the income
received in connection therewith by the Portfolios. Income from the
disposition of foreign currencies (except certain gains therefrom
that may be excluded by future regulations); and income from
transactions in options, futures, and forward contracts derived by a
Portfolio with respect to its business of investing in securities or
foreign currencies, are expected to qualify as permissible income
under the Income Requirement.
Foreign Investments -- Portfolios investing in foreign securities
or currencies include may be required to pay withholding, income or
other taxes to foreign governments or U.S. possession. Foreign tax
withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any Portfolio that
invests in foreign securities or currencies is reduced by these
foreign taxes. Owners of Variable Contracts investing in such
Portfolios bear the cost of any foreign taxes but will not be able to
claim a foreign tax credit or deduction for these foreign taxes. Tax
conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and foreign
countries generally do not impose taxes on capital gains in respect
of investments by foreign investors.
The Portfolios listed above may invest in securities of "passive
foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests:
(1) at least 75% of its gross income is passive or (2) an average of
at least 50% of its assets produce, or are held for the production
of, passive income. A Portfolio investing in securities of PFICs may
be subject to U.S. Federal income taxes and interest charges, which
would reduce the investment yield of a Portfolio making such
investments. Owners of Variable Contracts investing in such
Portfolios would bear the cost of these taxes and interest charges.
In certain cases, a Portfolio may be eligible to make certain
elections with respect to securities of PFICs which could reduce
taxes and interest charges payable by the Portfolio. However, a
Portfolio's intention to qualify annually as a regulated investment
company may limit a Portfolio's elections with respect to PFIC
securities and no assurance can be given that such elections can or
will be made.
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The foregoing is only a general summary of some of the important
Federal income tax considerations generally affecting the Portfolios
and their shareholders. No attempt is made to present a complete
explanation of the Federal tax treatment of each Portfolio's
activities, and this discussion and the discussion in the
prospectuses and/or statements of additional information for the
Variable Contracts are not intended as a substitute for careful tax
planning. Accordingly, potential investors are urged to consult
their own tax advisors for more detailed information and for
information regarding any state, local, or foreign taxes applicable
to the Variable Contracts and the holders thereof.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust dated August 3, 1988, an open-end
management investment company and currently consists of twenty-four
Portfolios. The twenty-three Portfolios that are discussed in this
Statement of Additional Information and accompanying prospectuses and
a Portfolio 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 Portfolios (with different
investment objectives and fundamental policies) at any time in the
future. Establishment and offering of additional Portfolios 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
Portfolio of the Trust, each shareholder is entitled to receive his
or her pro rata share of the net assets of that Portfolio. All of
the Trust's Portfolios are diversified with the exception of Global
Fixed Income and Mid-Cap Growth.
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.
VOTING RIGHTS
Shareholders of the Portfolio are given certain voting rights.
Each share of each Portfolio 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 Portfolio, 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.
PURCHASE OF SHARES
Shares of a Portfolio 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 Portfolios serving as
investment mediums for variable contracts. Shares of the Portfolios
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
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investors arising from offering the Trust's shares to
separate accounts of unaffiliated insurers, separate accounts funding
both life insurance polices and annuity contracts in 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 sometime 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 or 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, in 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 Portfolio 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.
REDEMPTION OF SHARES
Shares of any Portfolio 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 Portfolio. 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 Portfolio to make payment wholly or partly in cash,
the Portfolio may pay the redemption price in whole or part by a
distribution in kind of securities from the portfolio of the
Portfolio, 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.
EXCHANGES
Shares of any one Portfolio may be exchanged for shares of any of the
other Portfolios described in the Prospectus. Exchanges are treated
as a redemption of shares of one Portfolio and a purchase of shares
of one or more of the other Portfolios and are effected at the
respective net asset values per share of each Portfolio 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
Portfolios, and should refer to the Prospectus for the applicable
variable contract for information on allocation of premiums and on
transfers of contract value among divisions of the pertinent
insurance company separate account that invest in the Portfolio.
The Trust reserves the right to discontinue offering shares of one or
more Portfolios at any time. In the event that a Portfolio ceases
offering its shares, any investments allocated by an insurance
company to such Portfolio will be invested in the Liquid Asset
Portfolio or any successor to such Portfolio.
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Portfolio 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 Portfolio.
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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 December 31, 1998 for
all Portfolios (except the Fund for Life Portfolio), including notes
thereto, are incorporated by reference in this Statement of
Additional Information from the Trust's Annual Report dated as of
December 31, 1998.
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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.
DESCRIPTION OF MOODY'S RATINGS OF NOTES AND VARIABLE RATE DEMAND
INSTRUMENTS:
Moody's ratings for state and municipal short-term obligations
will be designated Moody's Investment Grade or MIG. Such ratings
recognize the differences between short-term credit and long-term
risk. Short-term ratings on issues with demand features (variable
rate demand obligations) are differentiated by the use of the VMIG
symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payments relying on
external liquidity.
MIB 1/VMIG 1: This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market
for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection
are ample although not as large as in the preceding group.
DESCRIPTION OF MOODY'S TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations which have an
original maturity not exceeding nine months. Moody's makes no
representation that such obligations are exempt from registration
under the Securities Act of 1933, nor does it represent that any
specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following
A-1
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designations, all judged to be investment grade, indicate the relative
repayment ability of rated issuers of securities in which the Trust may
invest:
PRIME-1: Issuers rates Prime-1 (or supporting institutions) have
a superior ability for repayment of senior short-term promissory
obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have
a strong ability for repayment of senior short-term promissory
obligations.
DESCRIPTION OF S&P'S RATINGS FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only in
a small degree.
A: Debt rated "A" has 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: Debt rated "BBB" is 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
to pay interest and repay principal for debt in this category than in
higher rated categories.
SPECULATIVE GRADE
BB, B, CCC, CC: Debt rated in these categories is regarded as
having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. While such debt will
likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI: The "CI" rating is reserved for income bonds on which no
interest is being paid.
D: Debt rated "D" is in default, and repayment of interest
and/or repayment of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
DESCRIPTION OF S&P'S RATINGS FOR INVESTMENT GRADE MUNICIPAL NOTES AND
SHORT-TERM DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or
strong capacity to pay principal and interest. Those issued
determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory
capacity to pay principal and interest.
DESCRIPTION OF S&P'S RATINGS FOR DEMAND OBLIGATIONS AND TAX-EXEMPT
COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the
likelihood of timely repayment of debt having an original maturity of
no more than 365 days. The two rating categories for securities in
which the Trust may invest are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics will be denoted with
a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
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