As filed with the Securities and Exchange Commission on March 1, 1999
Registration Nos. 33-23512, 811-5629
FORM N-1A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Registration Statement under the Securities Act of 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 39 [X]
and/or
Registration Statement under the Investment Company Act of 1940 [X]
Amendment No. 40
(Check appropriate box or boxes)
THE GCG TRUST
(Exact Name of Registrant as Specified in Charter)
1001 Jefferson Street, Suite 400
Wilmington, DE 19801
(Address of Principal Executive Offices)
[302-576-3400]
(Registrant's Telephone Number, including Area Code)
Marilyn Talman, Esq.
Golden American Life Insurance Company
1001 Jefferson Street, Suite 400
Wilmington, DE 19801
(Name and Address of Agent for Service)
----------
Approximate Date of Proposed Public Offering
As soon as practical after the effective date of the Registration Statement
It is proposed that this filing will become effective (check appropriate
box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on __________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on __________ pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
----------
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PROSPECTUS #1
THE GCG TRUST
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<PAGE>
THE GCG TRUST
PROSPECTUS
___________ ____, 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
Hard Assets Series
Real Estate Series
All-Growth Series
Capital Appreciation Series
Rising Dividends Series
Value Equity Series
Strategic Equity Series
Small Cap Series
Growth Opportunities Series
Mid-Cap Growth Series
Research Series
Growth Series
Growth & Income Series
INTERNATIONAL/GLOBAL
Emerging Markets Series
Managed Global Series
Developing World 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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[Section is in Double-Column Format]
PAGE
INTRODUCTION ............................ 1
Investing Through Your Variable
Contract .............................
Why Reading This Prospectus is
Important ............................
A Word about Portfolio Diversity .......
Additional Information about the
Portfolios ...........................
Performance Information ................
Types of Funds .........................
General Risk Factors ...................
Non-Principal Investments and
Strategies ...........................
Temporary Defensive Positions ..........
Description of Market Indices ..........
The Year 2000 ..........................
PORTFOLIOS AT A GLANCE ..................
Liquid Asset Portfolio .................
Limited Maturity Bond Portfolio ........
Global Fixed Income Portfolio ..........
Total Return Portfolio .................
Equity Income Portfolio ................
Fully Managed Portfolio ................
Hard Assets Portfolio ..................
Real Estate Portfolio ..................
All-Growth Portfolio ...................
Capital Appreciation Portfolio .........
Rising Dividends Portfolio .............
Value Equity Portfolio .................
Strategic Equity Portfolio .............
Small Cap Portfolio ....................
Growth Opportunities Portfolio .........
Mid-Cap Growth Portfolio ...............
Research Portfolio .....................
Growth Portfolio .......................
Growth & Income Portfolio ..............
Emerging Markets Portfolio .............
Managed Global Portfolio ...............
Developing World Portfolio .............
FINANCIAL HIGHLIGHTS ....................
Liquid Asset Portfolio .................
Limited Maturity Bond Portfolio ........
Global Fixed Income Portfolio ..........
Total Return Portfolio .................
Equity Income Portfolio ................
Fully Managed Portfolio ................
Hard Assets Portfolio ..................
Real Estate Portfolio ..................
All-Growth Portfolio ...................
Capital Appreciation Portfolio .........
Rising Dividends Portfolio .............
Value Equity Portfolio .................
Strategic Equity Portfolio .............
Small Cap Portfolio ....................
PAGE
Growth Opportunities Portfolio .........
Mid-Cap Growth Portfolio ...............
Research Portfolio .....................
Growth Portfolio .......................
Growth & Income Portfolio ..............
Emerging Markets Portfolio .............
Managed Global Portfolio ...............
Developing World Portfolio .............
DESCRIPTION OF THE PORTFOLIOS ...........
Liquid Asset Portfolio .................
Limited Maturity Bond Portfolio ........
Global Fixed Income Portfolio ..........
Total Return Portfolio .................
Equity Income Portfolio ................
Fully Managed Portfolio ................
Hard Assets Portfolio ..................
Real Estate Portfolio ..................
All-Growth Portfolio ...................
Capital Appreciation Portfolio .........
Rising Dividends Portfolio .............
Value Equity Portfolio .................
Strategic Equity Portfolio .............
Small Cap Portfolio ....................
Growth Opportunities Portfolio .........
Mid-Cap Growth Portfolio ...............
Research Portfolio .....................
Growth Portfolio .......................
Growth & Income Portfolio ..............
Emerging Markets Portfolio .............
Managed Global Portfolio ...............
Developing World Portfolio .............
OVERALL MANAGEMENT OF THE TRUST .........
The Advisor ............................
Advisory Fee ...........................
SHARE PRICE .............................
DISTRIBUTION AND TAXES ..................
MORE INFORMATION ........................
Additional Investment Strategies .......
Portfolio Turnover .....................
Legal Counsel ..........................
Independent Auditors ...................
Year 2000 ..............................
IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION, WE
REFER TO THE SERIES OF THE GCG TRUST INDIVIDUALLY AS A "PORTFOLIO" AND
COLLECTIVELY AS THE "PORTFOLIOS."
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INTRODUCTION
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[Section is in Double-Column Format]
INVESTING THROUGH YOUR VARIABLE CONTRACT
Shares of the portfolios of the GCG Trust currently are sold to
segregated asset accounts ("Separate Accounts") of insurance companies
as funding choices for variable annuity contracts and variable life
insurance policies ("Variable Contracts"). Assets in the Separate
Account are invested in shares of the portfolios based on your
allocation instructions. Not all portfolios described in this
prospectus may be available under your Variable Contract. You do not
deal directly with the portfolios to purchase or redeem shares. The
accompanying Separate Account prospectus describes your rights as a
Variable Contract owner. We may sell shares of the portfolios to
qualified pension and retirement plans outside of the separate account
context.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, risks and strategy
of each of the portfolios of the GCG Trust. Reading the prospectus
will help you to decide whether a portfolio is the right investment
for you. We suggest that you keep this prospectus and the prospectus
for the Separate Account for future reference.
A WORD ABOUT PORTFOLIO DIVERSITY
Each portfolio in this prospectus, unless specifically noted in the
portfolio's investment objective, is diversified, as 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 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 INFORMATION ABOUT THE PORTFOLIOS
A Statement of Additional Information (dated ________ __, 1999) about
the portfolios is made a part of this prospectus. It identifies and
discusses non-principal investment strategies (along with associated
risks) of each portfolio, as well as investment restrictions,
secondary or temporary investments and their 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
(www.sec.gov).
PERFORMANCE INFORMATION
The performance information presented for each portfolio in this
prospectus 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.
TYPES OF FUNDS
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 |
|----------------------------------------------------------|
MONEY MARKET FUND. Money market instruments (also known as cash
investments) are debt securities issued by governments,
corporations, banks, or other financial institutions.
BOND FUND. Bonds are debt securities representing loans from
investors. A bond fund's share price - and therefore the value of
your investment - can rise or fall in value because of changing
interest rates or other factors.
BALANCED FUND. A balanced fund holds a mix of stocks, bonds, and
sometimes, cash investments. A balanced fund offers the
convenience of investing in both stocks and bonds through a single
fund.
STOCK FUND. Stocks - which represent shares of ownership in a
company - generally offer the greatest potential for long-term
growth of principal. Many stocks also provide regular dividends,
which are generated by corporate profits. While stocks have
historically provided the highest long-term returns, they have also
exhibited the greatest short-term price fluctuations - so a stock
fund has a higher risk of losing value over the short term.
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 (CONTINUED)
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GENERAL RISK FACTORS
Like all mutual funds, investing in the portfolios involves risk
factors and special considerations. A portfolio's risk is defined
primarily by its principal investment strategies, which are described
later in this prospectus. Investments in a portfolio are not insured
against loss of principal. As with any mutual fund, there can be no
assurance that a portfolio will achieve its investment objective.
Investing in shares of a portfolio should not be considered a complete
investment program. The share value of the portfolios (except for the
Liquid Asset Portfolio) will rise and fall. Although the Liquid Asset
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.
It is important to keep in mind one of the main axioms of investing:
The higher the risk of losing money, the higher the potential reward.
The lower the risk, the lower the potential reward. As you consider
an investment in one or more of the portfolios, you should take into
account your personal tolerance for investment risk.
GENERAL RISK:
o MANAGER RISK. A portfolio manager of a portfolio may do a
mediocre or poor job in selecting securities.
RISK RELATED TO STOCK INVESTING:
o MARKET AND COMPANY RISK. The price of a security held by a
portfolio may fall due to changing economic, political or market
conditions or disappointing earnings results. Stock prices in
general will decline over short or even extended periods. The
stock market tends to be cyclical, with periods when stock prices
generally rise and periods when stock prices generally decline.
Further, even though the stock market is cyclical in nature,
returns from a particular stock market segment in which a portfolio
may invest 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 for shorter-
term bonds, moderate for intermediate-term bonds, and high for
longer-term bonds. A bond's duration measures its sensitivity to
changes in interest rates. The longer the duration, the greater
the bond's price movement will be as interest rates change.
o CREDIT RISK. A bond issuer (debtor) may fail to repay interest
and principal in a timely manner. The price of a security held by
a portfolio may fall due to changing economic, political or market
conditions or disappointing earnings results.
o CALL RISK. During periods of falling interest rates, a bond
issuer may "call," or repay, its high yielding bond before the
bond's maturity date. Forced to invest the unanticipated proceeds
at lower interest rates, a portfolio would experience a 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 maturity
because changes in interest rates are increasingly difficult to
predict over longer periods of time. Fixed income securities with
longer maturities will therefore be more volatile than other fixed
income securities with shorter maturities. Conversely, fixed
income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with
longer maturities. The average maturity of a portfolio's fixed
income investments will affect the volatility of the portfolio's
share price.
Because of these and other risks that may be particular to a
portfolio, your investment could lose or not make any money.
2
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INTRODUCTION (CONTINUED)
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NON-PRINCIPAL INVESTMENTS AND STRATEGIES
This prospectus does not describe various types of securities,
strategies and practices which are available to, but are not the
principal focus of, a particular portfolio. The types of securities,
strategies and practices in which a portfolio may engage are
identified and discussed, together with their limitations and risks,
in the Statement of Additional Information.
TEMPORARY DEFENSIVE POSITIONS
This prospectus does not describe temporary defensive positions. A
portfolio may depart 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.
DESCRIPTION OF MARKET INDICES
An index is a measure in value changes among a group of similar
securities, with the gauge used to predict possible future movements.
The following are the indices that are referred to in this prospectus:
o Lehman Brothers Government/Corporate Bond Index - comprises of
U.S. government securities and investment-grade corporate debt
securities.
o Lehman Brothers Intermediate Government/Corporate Bond Index -
comprises of intermediate-term U.S. government securities and
investment-grade corporate debt securities.
o Merrill Lynch 1-5 Year Corporate/Government Bond Index -
comprises of government and investment-grade corporate debt
securities with remaining maturities of one to five years.
o Morgan Stanley Capital international All Country World Free Index
- comprises of equity securities in countries around the world,
including the United States, other developed countries and emerging
markets.
o Morgan Stanley Capital International Emerging Markets Free Index
- comprises of equity securities in emerging markets.
o 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.
o Russell Midcap Index - consists of the 800 smallest companies in
the Russell 1000 Index. The Russell 1000 Index contains the 1,000
largest companies in the U.S.
o Standard & Poor's 500 Index (S & P 500) - composed of 500 U.S.
stocks.
o Wilshire Real Estate Securities Index - consists of real estate
investment trusts (REITs) and real estate operating companies
(REOCs).
Indices referred to in this prospectus are trademarks or copyrights
owned by third parties.
THE YEAR 2000
The Trust could be adversely affected if the computer systems used by
the Trust's investment advisor and the Trust's other service providers
do not properly process and calculate date-related information from
and after January 1, 2000.
The Trust's investment advisor and independent technology consultants
are working to avoid year 2000-related problems in its systems and to
obtain assurances from other service providers that they are taking
similar steps. In addition, issuers of securities in which the Trust
invests may be adversely affected by year 2000-related problems. This
could have an impact on the value of the Trust's investments and its
shares.
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 stable $1
INVESTMENT net asset value and the investment strategy focuses on
STRATEGY 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 also designed to ensure adherence to regulatory
requirements.
Step One: A formal Approved List of high quality
companies is actively maintained
Step Two: Securities of Approved List issuers that meet
maturity guidelines and are rated top tier are
eligible for investment
Step Three: Diversification tests ensure concentration
limits are not exceeded
Step Four: Yield curve positioning decisions are made
based upon 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 GCG Trust 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 first tier 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. At the time of purchase, no
more than 5% of total assets may be invested in a
single issuer and no more than 10% of total assets
may be subject to demand features or guarantees
from a single institution.
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
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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 INTEREST RATE RISK
o CREDIT RISK o INCOME 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.
PERFORMANCE The value of your shares in a portfolio will fluctutate
depending on the investment performance of the
Portfolio. The following chart show the variability of
the Portfolio's returns for the indicated time periods.
The average annual total returns below include
reinvestment of dividends and distributions. Of
course, past performance does not necessarily indicate
future results.
[Performance Bar Chart Follows:]
LIQUID ASSET -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
7.67% 7.75% 5.66% 3.13% 2.64% 3.89% 5.51% 5.01% 5.07% [ ]
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN | | BEST QUARTER |
|-------------------------------------------------| |--------------------|
| 1 YEAR 5 YEAR 1/24/89 | | ________ XX, 19XX |
| (INCEPTION)| | ___ % |
| Portfolio's Average | | |
| Annual Total Return | | |
| | |--------------------|
| | | WORST QUARTER |
| | |--------------------|
| | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
ING Investment Management, LLC or its affiliate has
managed the Portfolio since August 13, 1996. Prior to
that date, different firms managed the Portfolio.
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 diversified
INVESTMENT portfolio of limited maturity debt securities with
STRATEGY 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.
To achieve the Portfolio's objective, the Portfolio
Manager:
o manages the portfolio's duration
o analyzes the shape of the yield curve to identify
risk reward trade-offs of maturity decisions and
market expectations of interest rates
o over-weights or under-weights sectors 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 Securities
o U.S. Government Agency Securities
o corporate Securities
o mortgage-Backed Securities
o asset-Backed Securities
Eligible security types include fixed rate bonds,
variable or floating rate bonds, mortgage-backed
securities, asset-backed securities, dollar-denominated
foreign securities, and money market instruments such
as commercial paper, certificates of deposit and
repurchase agreements.
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
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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 fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the index. The average annual total
returns below include reinvestment of dividends and
distributions. Of course, past performance does not
necessarily indicate future results.
[Performance Bar Chart Follows:]
LIMITED MATURITY BOND -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
9.69% 7.87% 11.27% 4.84% 6.20% -1.19% 11.72% 4.32% 6.67% [ ]
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/24/89 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Merrill Lynch 1-5 Year | | WORST QUARTER |
| Corporate/Government | |--------------------|
| Bond Index | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
ING Investment Management, LLC or its affiliate has
managed the Portfolio since August 13, 1996. Prior to
that date, different firms managed the Portfolio.
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 normally
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 earning of the issuer.
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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
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PORTFOLIOS AT A GLANCE (CONTINUED)
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PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. Since the Global Fixed Income Opportunities
Portfolio became available to investors on August 17,
1998, performance information on previous years is not
available. Baring International Investment Limited has
managed the firm since its inception.
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PORTFOLIOS AT A GLANCE (CONTINUED)
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TOTAL RETURN PORTFOLIO
INVESTMENT Above-average income (compared to a portfolio entirely
OBJECTIVE 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 in a
STRATEGY 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 upon fundamental analysis performed by
the Portfolio Manager and its group of equity research
analysts.
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 securities
o mortgage-backed and asset-backed securities
o corporate bonds
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
10
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
In selecting fixed income investments for the
Portfolio, the Portfolio Manager 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.
The Portfolio may invest up to 20% of its assets in
U.S. Government securities, mortgage pass-through
securities, American Depository Receipts and foreign
securities (including in emerging or developing
markets) and lower rated fixed income securities.
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 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 SECURITIES RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
o HIGH YIELD BOND RISK
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. 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
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
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 its
INVESTMENT assets in the common stocks of well-established companies
STRATEGY 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 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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
12
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods and the accompanying table shows the average
annual total return for the indicated time periods, as
compared to the applicable market indices. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
EQUITY INCOME -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
8.92% 4.74% 20.02% 1.88% 11.13% -1.18% 18.93% 8.77% 17.44% [ ]
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/24/89 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index | |--------------------|
| Lehman Brothers Inter- | | |
| mediate Government/ | | ________ XX, 19XX |
| Corporate Bond Index | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
T. Rowe Price Associates, Inc. has managed the
Portfolio since March 1, 1999. Prior to that date,
different firms managed the Portfolio.
13
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
FULLY MANAGED PORTFOLIO
INVESTMENT Over the long term, a high total investment return,
OBJECTIVE consistent with the preservation of capital and with
prudent investment risk
PRINCIPAL The Portfolio invests primarily in the common stocks of
INVESTMENT established companies the Portfolio believes to have
STRATEGY 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 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 manager's
ability to find companies that meet valuation criteria
rather than his market outlook.
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 INTEREST RATE RISK
o CALL RISK o INCOME RISK
o MARKET AND COMPANY RISKo CREDIT 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
14
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods and the accompanying table shows the average
annual total return for the indicated time periods, as
compared to the applicable market indices. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
FULLY MANAGED -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
3.90% -3.18% 28.93% 6.23% 7.59% -7.27% 20.80% 16.36% 15.27% [ ]
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/24/89 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index | |--------------------|
| Lehman Brothers Inter- | | |
| mediate Government/ | | ________ XX, 19XX |
| Corporate Bond Index | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
T. Rowe Price Associates, Inc. has managed the
Portfolio since January 1, 1995. Prior to that date, a
different firm managed the Portfolio.
15
<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 assets securities include equity
STRATEGY 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 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.
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
16
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
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 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 FOREIGN INVESTMENT AND CURRENCY RISK
o SECTOR CONCENTRATION RISK
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market indices. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
HARD ASSETS -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
18.96% -13.84% -4.70% -9.81% 49.93% 2.53% 10.69% 33.17% 6.22% [ ]
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/24/89 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index | |--------------------|
| Russell 2000 Index | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
Baring International Investment Limited has managed the
Portfolio since March 1, 1999. Prior to that date, a
different firm managed the Portfolio.
17
<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 securities of
INVESTMENT companies in the real estate industry that are listed on
STRATEGY 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 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 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 RISK
o INDUSTRY CONCENTRATION RISK
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
18
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market index. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
REAL ESTATE -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-1.22% -20.78% 34.06% 13.87% 17.27% 6.34% 16.59% 35.30% 22.79% [ ]
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/24/89 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index | |--------------------|
| Wilshire Real Estate | | |
| Securities Index | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
EII Realty Securities, Inc. has managed the Portfolio
since January 1, 1995. Prior to that date, a different
firm managed the Portfolio.
19
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
ALL-GROWTH PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests primarily in growth securities
INVESTMENT (such as common stocks) of middle-range capitalization
STRATEGY (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 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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
20
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods and the accompanying table shows the average
annual total return for the indicated time periods, as
compared to the applicable market index. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
ALL-GROWTH -- ANNUAL TOTAL RETURN
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
7.20% -7.35% 36.48% -2.59% 6.56% -10.77% 22.42% -0.57% 5.87% [ ]
</TABLE>
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/24/89 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index | |--------------------|
| Russell Midcap Index | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
Pilgrim Baxter & Associates Ltd. has managed the firm
since February 3, 1997. Prior to that date, different
firms managed the Portfolio.
21
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital growth
PRINCIPAL The Portfolio invests primarily in equity securities
INVESTMENT believed by the Portfolio Manager to be undervalued
STRATEGY 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 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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
22
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market index. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
CAPITAL APPRECIATION -- ANNUAL TOTAL RETURN
Year 1992 1993 1994 1995 1996 1997 1998
10.87% 8.31% -1.59% 30.16% 20.26% 28.95% [ ]
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 5/4/92 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index | |--------------------|
| | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
The Portfolio commenced operations in May, 1992. The
average annual total return for year 1992 as shown is
not annualized.
A I M Capital Management, Inc. has managed the Portfolio
since April 1, 1999. Prior to that date, different
firms managed the Portfolio.
23
<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 primarily in
STRATEGY equity securities that meet 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"
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 industry competitive
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 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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
24
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market index. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
RISING DIVIDENDS -- ANNUAL TOTAL RETURN
Year 1993 1994 1995 1996 1997 1998
3.10% 0.59% 31.06% 20.65% 29.82% [ ]
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 10/4/93 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index | |--------------------|
| | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
The Portfolio commenced operations in October, 1993.
The average annual total return for year 1993 as shown
is not annualized.
Kayne Anderson Investment Management, LLC has managed
the Portfolio since its inception.
25
<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 common
INVESTMENT stocks of domestic and foreign issuers which meet
STRATEGY 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 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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
26
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market indices. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
VALUE EQUITY -- ANNUAL TOTAL RETURN
Year 1995 1996 1997 1998
35.21% 10.62% 27.28% [ ]
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/3/95 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index | |--------------------|
| Russell Midcap Index | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
Eagle Asset Management, Inc. has managed the Portfolio
since its inception.
27
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
STRATEGIC EQUITY PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio invests principally in common stocks of
INVESTMENT medium- and small-sized growth companies. The
STRATEGY 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 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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
28
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market indices. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
STRATEGIC EQUITY -- ANNUAL TOTAL RETURN
Year 1995 1996 1997 1998
0.33% 19.39% 23.16% [ ]
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 10/2/95 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's 500 | | WORST QUARTER |
| Index | |--------------------|
| Russell Midcap Index | | |
| Russell 2000 Growth | | ________ XX, 19XX |
| Index | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
The Portfolio commenced operations in October, 1995.
The average annual total return for year 1995 as shown
is not annualized.
A I M Capital Management, Inc. has managed the Portfolio
since March 1, 1999. Prior to that date, a different
firm managed the Portfolio.
29
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
SMALL-CAP PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in equity securities of
INVESTMENT small-capitalization ("small-cap") companies. The
STRATEGY 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 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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
30
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market index. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
SMALL CAP -- ANNUAL TOTAL RETURN
Year 1996 1997 1998
20.10% 10.32% [ ]
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/3/96 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Russell 2000 Index | | WORST QUARTER |
| | |--------------------|
| | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
Fred Alger Management, Inc. has managed the Portfolio
since its inception.
31
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL
INVESTMENT The Portfolio invests primarily in equity securities of
STRATEGY 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
32
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
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 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 a portfolio will fluctuate
depending on the investment performance of the
portfolio. 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.
33
<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 its
INVESTMENT assets in common stocks and related equity securities
STRATEGY (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.
Mid-cap companies are defined by the Portfolio 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 upon
fundamental analysis performed by the Portfolio Manager
and its group of equity research analysts.
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.
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
34
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
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 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 a portfolio will fluctuate
depending on the investment performance of the
portfolio. 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.
35
<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 its
INVESTMENT assets in common stocks and related securities (such
STRATEGY 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 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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
36
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. 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.
37
<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 stocks of
INVESTMENT growth companies that have favorable relationships
STRATEGY 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 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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
38
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. Since the Growth Portfolio became available
to investors on August 17, 1998, performance
information on previous 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.
39
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
GROWTH & INCOME PORTFOLIO
INVESTMENT
OBJECTIVE Long-term total return
PRINCIPAL
INVESTMENT The Portfolio invests primarily in common stocks of
STRATEGY companies where the potential for change (earnings
acceleration) is significant. The Portfolio Manager
applies a growth-oriented investment philosophy
defined by the following:
o EARLY RECOGNITION OF CHANGE
o Value is created through the dynamics of changing
economic, industry and company fundamentals
o 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
40
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
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 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 a portfolio will fluctuate
depending on the investment performance of the
portfolio. 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.
41
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in equity securities of
INVESTMENT companies in at least six different emerging market
STRATEGY 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 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 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 RISK
o VALUE INVESTING RISK
o FOREIGN INVESTMENT AND CURRENCY RISK
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
42
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market index. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
EMERGING MARKETS -- ANNUAL TOTAL RETURN
Year 1993 1994 1995 1996 1997 1998
24.40% -15.18% -10.11% 7.28% -9.37% [ ]
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/3/96 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Morgan Stanley Capital | | WORST QUARTER |
| International Emerging | |--------------------|
| Markets Free Index | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
The Portfolio commenced operations in October, 1993.
The average total return for year 1993 as shown is not
annualized.
Putnam Investment Management, Inc. has managed the
Portfolio since March 3, 1997. Prior to that date, a
different firm managed the Portfolio.
43
<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 stocks traded
INVESTMENT in securities markets throughout the world. The
STRATEGY 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 earning of the issuer.
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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
44
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market index. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[Performance Bar Chart Follows:]
MANAGED GLOBAL -- ANNUAL TOTAL RETURN
Year 1992 1993 1994 1995 1996 1997 1998
0.10% 6.59% -13.21% 7.56% 12.27% 12.17% [ ]
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/3/96 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Morgan Stanley Capital | | WORST QUARTER |
| International All | |--------------------|
| Country World Free | | |
| Index | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
The Portfolio commenced operations in October, 1992.
The average annual total return for year 1992 as shown
is not annualized.
Putnam Investment Management, Inc. has managed the
Portfolio since March 3, 1997. Prior to that date,
different firms managed the Portfolio.
45
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
DEVELOPING WORLD PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Developing World Portfolio invests primarily in
INVESTMENT emerging market companies. The Portfolio normally invests
STRATEGY 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 emerging or developing. A list of
such countries is set forth under "Description of the
Portfolios - Developing World Portfolio."
The Portfolio Manager uses a proprietary, quantitative
asset allocation model in selecting securities. The
Portfolio invests in those countries that are expected
to have the lowest risk with accompanying highest
return when incorporated into a total portfolio
context. The Portfolio Manager combines this "top-
down" country selection with "bottom-up" fundamental
industry analysis that includes stock selection based
on original research and publicly available information
and company visits.
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 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
[TO BE INSERTED: RISK COMPARISON LINE CHART INDICATING THE
RELATIVE RISK OF INVESTING IN THIS PORTFOLIO AS COMPARED TO OTHER
PORTFOLIOS.]
46
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
PORTFOLIOS AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in a portfolio will fluctuate
depending on the investment performance of the
portfolio. 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
firm since March 1, 1999. Prior to that date, a
different firm managed the Portfolio.
47
<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
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.050 0.049 0.054 0.040
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.050 0.049 0.054 0.040
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (0.050) (0.049) (0.054) (0.040)
------------------------------------------------
TOTAL DISTRIBUTIONS (0.050) (0.049) (0.054) (0.040)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
=======================================================================================
TOTAL RETURN 5.07% 5.01% 5.51% 3.89%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $59,453 $39,096 $38,589 $46,122
Ratio of Operating Expenses to
Average Net Assets 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 4.99% 4.89% 5.39% 3.89%
- ---------------------------------------------------------------------------------------
</TABLE>
* Since August 13, 1996, ING Investment Management, LLC or its affliate
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 $ $10.43 $11.15 $ 9.98 $10.62
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.60 0.59 0.60 0.51
Net Realized and Unrealized
Gain(Loss) on Investments 0.09 (0.13) 0.57 (0.64)
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.69 0.46 1.17 (0.13)
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.81) (1.15) -- (0.51)
Distributions from Capital Gains -- (0.03) -- --
------------------------------------------------
TOTAL DISTRIBUTIONS (0.81) (1.18) -- (0.51)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $10.31 $10.43 $11.15 $ 9.98
=======================================================================================
TOTAL RETURN 6.67% 4.32% 11.72% (1.19)%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $53,839 $81,317 $90,081 $72,213
Ratio of Operating Expenses to
Average Net Assets 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 5.71% 5.33% 5.58% 4.73%
Portfolio Turnover Rate 81% 250% 302% 209%
- ---------------------------------------------------------------------------------------
</TABLE>
* Since August 13, 1996, ING Investment Management, LLC or its affliate
has managed the Limited Maturity Bond Portfolio. Prior to that date,
different firms managed the Portfolio.
48
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
GLOBAL FIXED INCOME PORTFOLIO*
- ------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------
12/31/98
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
INVESTMENT OPERATIONS
Net Investment Income
Net Realized and Unrealized Gain(Loss) on Investments
TOTAL FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income
Distributions from Capital Gains
TOTAL DISTRIBUTIONS
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD
========================================================================
TOTAL RETURN
========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)
Ratio of Operating Expenses to Average Net Assets
Ratio of Net Investment Income to Average Net Assets
Portfolio Turnover Rate
- ------------------------------------------------------------------------
* The Global Fixed Income Portfolio commenced operations on August 14,
1998.
+ Annualized
++ Non-annualized
TOTAL RETURN PORTFOLIO*
- ------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------
12/31/98
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
INVESTMENT OPERATIONS
Net Investment Income
Net Realized and Unrealized Gain(Loss) on Investments
TOTAL FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income
Distributions from Capital Gains
TOTAL DISTRIBUTIONS
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD
========================================================================
TOTAL RETURN
========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)
Ratio of Operating Expenses to Average Net Assets
Ratio of Net Investment Income to Average Net Assets
Portfolio Turnover Rate
- ------------------------------------------------------------------------
* The Total Return Portfolio commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
49
<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 $ $12.41 $12.52 $11.33 $11.89
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.57 0.56 0.58 0.42
Net Realized and Unrealized
Gain(Loss) on Investments 1.58 0.52 1.56 (0.56)
-------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.15 1.08 2.14 (0.14)
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.55) (0.58) (0.45) (0.42)
Distributions from Capital Gains (0.92) (0.61) (0.50) --
------------------------------------------------
TOTAL DISTRIBUTIONS (1.47) (1.19) (0.95) (0.42)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $13.09 $12.41 $12.52 $11.33
=======================================================================================
TOTAL RETURN 17.44% 8.77% 18.93% (1.18)%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $264,599 $272,791 $307,691 $299,392
Ratio of Operating Expenses to
Average Net Assets 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 3.88% 3.86% 4.42% 3.56%
Portfolio Turnover Rate 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 $ $14.82 $13.79 $11.70 $12.99
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.39 0.56 0.45 0.35
Net Realized and Unrealized
Gain(Loss) on Investments 1.86 1.69 1.98 (1.29)
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.25 2.25 2.43 (0.94)
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (0.41) (0.56) (0.34) (0.35)
Distributions from Capital Gains (0.93) (0.66) -- --
------------------------------------------------
TOTAL DISTRIBUTIONS 1.34) (1.22) (0.34) (0.35)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $15.73 $14.82 $13.79 $11.70
=======================================================================================
TOTAL RETURN 15.27% 16.36% 20.80% (7.27)%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in 000's) $ $169,987 $136,660 $118,589 $ 99,854
Ratio of Operating Expenses to
Average Net Assets 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 2.67% 3.83% 3.41% 2.62%
Portfolio Turnover Rate 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.
50
<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 $ $17.85 $15.04 $13.88 $13.89
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.14 0.05 0.15 0.13
Net Realized and Unrealized
Gain(Loss) on Investments 0.99 4.92 1.34 0.23
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.13 4.97 1.49 0.36
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.13) (0.07) (0.13) (0.13)
Distributions from Capital Gains (3.80) (2.09) (0.20) (0.24)
------------------------------------------------
TOTAL DISTRIBUTIONS (3.93) (2.16) (0.33) (0.37)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $15.05 $17.85 $15.04 $13.88
=======================================================================================
TOTAL RETURN 6.22% 33.17% 10.69% 2.53%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in 000's) $ $46,229 $43,903 $27,147 $32,879
Ratio of Operating Expenses to
Average Net Assets 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 0.76% 0.34% 0.89% 1.01%
Portfolio Turnover Rate 124% 96% 24% 25%
- ---------------------------------------------------------------------------------------
</TABLE>
* 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>
<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 $ $15.98 $12.63 $11.29 $11.18
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.69 0.70 0.75 0.60
Net Realized and Unrealized
Gain(Loss) on Investments 2.93 3.70 1.12 0.11#
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 3.62 4.40 1.87 0.71
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (0.63) (0.77) (0.53) (0.60)
Distributions from Capital Gains (0.70) (0.28) -- --
------------------------------------------------
TOTAL DISTRIBUTIONS (1.33) (1.05) (0.53) (0.60)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $18.27 $15.98 $12.63 $11.29
=======================================================================================
TOTAL RETURN 22.79% 35.30% 16.59% 6.34%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $75,530 $51,135 $34,975 $37,336
Ratio of Operating Expenses to
Average Net Assets 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 4.49% 5.53% 5.79% 5.31%
Portfolio Turnover Rate 41% 31% 53% 64%
- ---------------------------------------------------------------------------------------
</TABLE>
* 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.
51
<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 $ $13.39 $13.78 $11.86 $13.42
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income (0.06) 0.14 0.18 0.11
Net Realized and Unrealized
Gain(Loss) on Investments 0.84 (0.23) 2.47 (1.56)
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 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 (0.37) (0.16) (0.59) --
------------------------------------------------
TOTAL DISTRIBUTIONS (0.40) (0.30) (0.73) (0.11)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $13.77 $13.39 $13.78 $11.86
=======================================================================================
TOTAL RETURN 5.87% (0.57)% 22.42% (10.77)%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $73,856 $78,750 $93,198 $71,218
Ratio of Operating Expenses to
Average Net Assets 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 (0.47)% 0.86% 1.42% 1.08%
Portfolio Turnover Rate 325% 118% 81% 196%
- ---------------------------------------------------------------------------------------
</TABLE>
* Since February 3, 1997, Pilgrim Baxter & Associates, Ltd. has
managed the All-Growth Portfolio. Prior to that date, different
firms managed the Portfolio.
<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 $ $15.06 $13.51 $11.34 $11.76
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.16 0.16 0.19 0.23
Net Realized and Unrealized
Gain(Loss) on Investments 4.19 2.57 3.22 (0.42)
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.35 2.73 3.41 (0.19)
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.16) (0.17) (0.15) (0.23)
Distributions from Capital Gains (1.60) (1.01) (1.09) --
------------------------------------------------
TOTAL DISTRIBUTIONS (1.76) (1.18) (1.24) (0.23)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $17.65 $15.06 $13.51 $11.34
=======================================================================================
TOTAL RETURN 28.95% 20.26% 30.16% (1.59)%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $193,986 $148,752 $122,227 $ 88,890
Ratio of Operating Expenses to
Average Net Assets 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% 1.12% 1.53% 1.96%
Portfolio Turnover Rate 51% 64% 98% 84%
- ---------------------------------------------------------------------------------------
</TABLE>
# Per share numbers have been calculated using the monthly average
share method, which more appropriately represents the per share
data for the period.
* 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.
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 $ $15.81 $13.30 $10.22 $10.30
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.14 0.14 0.13 0.14
Net Realized and Unrealized
Gain(Loss) on Investments 4.57 2.61 3.04 (0.08)
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.71 2.75 3.17 0.06
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.13) (0.13) (0.09) (0.14)
Distributions from Capital Gains (0.35) (0.11) -- --
------------------------------------------------
TOTAL DISTRIBUTIONS (0.48) (0.24) (0.09) (0.14)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $20.04 $15.81 $13.30 $10.22
=======================================================================================
TOTAL RETURN 29.82% 20.65% 31.06% 0.59%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $252,191 $126,239 $ 81,210 $ 50,712
Ratio of Operating Expenses to
Average Net Assets 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 0.96% 0.99% 1.24% 1.88%
Portfolio Turnover Rate 26% 15% 43% 26%
- ---------------------------------------------------------------------------------------
</TABLE>
<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 $ $13.92 $13.18 $10.00
--------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.16 0.22 0.08
Net Realized and Unrealized
Gain(Loss) on Investments 3.63 1.18 3.44
--------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 3.79 1.40 3.52
- -----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.18) (0.19) (0.06)
Distributions from Capital Gains (1.40) (0.47) (0.28)
--------------------------------------
TOTAL DISTRIBUTIONS (1.58) (0.66) (0.34)
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $16.13 $13.92 $13.18
=============================================================================
TOTAL RETURN 27.28% 10.62% 35.21%
=============================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $80,048 $44,620 $28,830
Ratio of Operating Expenses to
Average Net Assets 0.99% 1.00% 1.01%
Decrease Reflected in Above
Expense Ratio Due to
Expense Limitations -- -- --
Ratio of Net Investment Income
to Average Net Assets 1.31% 1.80% 1.53%
Portfolio Turnover Rate 128% 131% 86%
- -----------------------------------------------------------------------------
</TABLE>
* The Value Equity Portfolio commenced operations on January 3, 1995.
53
<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 $ $11.68 $10.01 $10.00
--------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.20 0.23 0.06
Net Realized and Unrealized
Gain(Loss) on Investments 2.49 1.71 (0.03)#
--------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.69 1.94 0.03
- -----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.19) (0.14) (0.02)
Distributions from Capital Gains (0.55) (0.13) --
--------------------------------------
TOTAL DISTRIBUTIONS (0.74) (0.27) (0.02)
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $13.63 $11.68 $10.01
=============================================================================
TOTAL RETURN 23.16% 19.39% 0.33%++
=============================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $51,789 $30,423 $ 8,067
Ratio of Operating Expenses to
Average Net Assets 0.99% 1.00% 1.00%+
Decrease Reflected in Above
Expense Ratio Due to
Expense Limitations -- -- --
Ratio of Net Investment Income
to Average Net Assets 1.88% 2.05% 4.04%+
Portfolio Turnover Rate 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>
SMALL CAP PORTFOLIO
YEAR ENDED
- -------------------------------------------------------------------
12/31/98 12/31/97 12/31/96*
- -------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $12.01 $10.00
----------------------------
INVESTMENT OPERATIONS
Net Investment Income (0.03) (0.01)
Net Realized and Unrealized
Gain(Loss) on Investments 1.27 2.02
----------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.24 2.01
- -------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- --
Distributions from Capital Gains -- --
----------------------------
TOTAL DISTRIBUTIONS -- --
- -------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $13.25 $12.01
===================================================================
TOTAL RETURN 10.32% 20.10%++
===================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $66,396 $34,365
Ratio of Operating Expenses to
Average Net Assets 0.99% 0.99%++
Decrease Reflected in Above
Expense Ratio Due to
Expense Limitations -- --
Ratio of Net Investment Loss
to Average Net Assets (0.34)% (0.08)%++
Portfolio Turnover Rate 130% 117%
- -------------------------------------------------------------------
</TABLE>
* The Small Cap Portfolio commenced operations on January 3, 1996.
++ Non-annualized
54
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
GROWTH OPPORTUNITIES PORTFOLIO
- ------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------
12/31/98
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
INVESTMENT OPERATIONS
Net Investment Income
Net Realized and Unrealized Gain(Loss) on Investments
TOTAL FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income
Distributions from Capital Gains
TOTAL DISTRIBUTIONS
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD
========================================================================
TOTAL RETURN
========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)
Ratio of Operating Expenses to Average Net Assets
Ratio of Net Investment Income to Average Net Assets
Portfolio Turnover Rate
- ------------------------------------------------------------------------
* The Growth Opportunities Portfolio commenced operations on February
18, 1998.
+ Annualized
++ Non-annualized
MID-CAP GROWTH PORTFOLIO*
- ------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------
12/31/98
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
INVESTMENT OPERATIONS
Net Investment Income
Net Realized and Unrealized Gain(Loss) on Investments
TOTAL FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income
Distributions from Capital Gains
TOTAL DISTRIBUTIONS
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD
========================================================================
TOTAL RETURN
========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)
Ratio of Operating Expenses to Average Net Assets
Ratio of Net Investment Income to Average Net Assets
Portfolio Turnover Rate
- ------------------------------------------------------------------------
* The Mid-Cap Portfolio commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
55
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
RESEARCH PORTFOLIO*
- ------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------
12/31/98
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
INVESTMENT OPERATIONS
Net Investment Income
Net Realized and Unrealized Gain(Loss) on Investments
TOTAL FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income
Distributions from Capital Gains
TOTAL DISTRIBUTIONS
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD
========================================================================
TOTAL RETURN
========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)
Ratio of Operating Expenses to Average Net Assets
Ratio of Net Investment Income to Average Net Assets
Portfolio Turnover Rate
- ------------------------------------------------------------------------
* The Research Portfolio commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
GROWTH PORTFOLIO(*)(**)
- ------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------
12/31/98
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
INVESTMENT OPERATIONS
Net Investment Income
Net Realized and Unrealized Gain(Loss) on Investments
TOTAL FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income
Distributions from Capital Gains
TOTAL DISTRIBUTIONS
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD
========================================================================
TOTAL RETURN
========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)
Ratio of Operating Expenses to Average Net Assets
Ratio of Net Investment Income to Average Net Assets
Portfolio Turnover Rate
- ------------------------------------------------------------------------
** The Growth Portfolio commenced operations on August 14, 1998.
+ Annualized
++ Non-annualized
56
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
GROWTH & INCOME PORTFOLIO(*)(**)
- ------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------
12/31/98
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
INVESTMENT OPERATIONS
Net Investment Income
Net Realized and Unrealized Gain(Loss) on Investments
TOTAL FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income
Distributions from Capital Gains
TOTAL DISTRIBUTIONS
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD
========================================================================
TOTAL RETURN
========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)
Ratio of Operating Expenses to Average Net Assets
Ratio of Net Investment Income to Average Net Assets
Portfolio Turnover Rate
- ------------------------------------------------------------------------
* 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
<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 $ $ 9.72 $ 9.06 $10.08 $12.44
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income (0.01) 0.04 0.04 --
Net Realized and Unrealized
Gain(Loss) on Investments (0.90) 0.62 (1.06) (1.89)
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (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 $ $ 8.80 $ 9.72 $ 9.06 $10.08
=======================================================================================
TOTAL RETURN (9.37)% 7.28% (10.11)% (15.18)%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $39,436 $51,510 $47,974 $65,224
Ratio of Operating Expenses to
Average Net Assets 1.80% 1.55% 1.53% 1.73%
Decrease Reflected in Above
Expense Ratio Due to
Expense Limitations -- -- -- --
Ratio of Net Investment Income
to Average Net Assets (0.09)% 0.38% 0.40% 0.03%
Portfolio Turnover Rate 170% 136% 141% 106%
- ---------------------------------------------------------------------------------------
</TABLE>
* 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.
57
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------
<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 $ $11.13 $ 9.96 $ 9.26 $10.67
--------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 0.02 0.04 0.05 0.07
Net Realized and Unrealized
Gain(Loss) on Investments 1.33 1.18 0.65 (1.48)
--------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.35 1.22 0.70 (1.41)
- -----------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.17) -- -- --
Distributions from Capital Gains (0.07) -- -- --
--------------------------------------------------
TOTAL DISTRIBUTIONS (1.02) (0.05) -- --
- -----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $11.46 $11.13 $ 9.96 $ 9.26
=========================================================================================
TOTAL RETURN 12.17% 12.27% 7.56% (13.21)%
=========================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $105,305 $ 86,376 $ 72,375 $ 86,209
Ratio of Operating Expenses to
Average Net Assets 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 0.06% 0.39% 0.51% 0.69%
Portfolio Turnover Rate 199% 141% 44% N/A
- -----------------------------------------------------------------------------------------
</TABLE>
* 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.
DEVELOPING WORLD PORTFOLIO(*)(**)
- ------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------
12/31/98
- ------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD
INVESTMENT OPERATIONS
Net Investment Income
Net Realized and Unrealized Gain(Loss) on Investments
TOTAL FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income
Distributions from Capital Gains
TOTAL DISTRIBUTIONS
- ------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD
========================================================================
TOTAL RETURN
========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's)
Ratio of Operating Expenses to Average Net Assets
Ratio of Net Investment Income to Average Net Assets
Portfolio Turnover Rate
- ------------------------------------------------------------------------
* 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
58
<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 stable $1 net
INVESTMENT asset value and the investment strategy focuses on safety of
STRATEGY principal, liquidity and yield, in order of importance, to
achieve this goal. The management team implements its
strategy through a four-step investment process also
designed to ensure adherence to regulatory requirements.
Step One: A formal Approved List of high quality
companies is actively maintained
Step Two: Securities of Approved List issuers that meet
maturity guidelines and are rated top tier are
eligible for investment
Step Three: Diversification tests ensure concentration
limits are not exceeded
Step Four: Yield curve positioning decisions are made
based upon 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 GCG Trust 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 first tier 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 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
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
59
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
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 following
RISKS principal risks described under "Introduction - General Risk
Factors":
o MANAGER RISK o INTEREST RATE RISK
o CREDIT RISK o INCOME 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 ON THE ING Investment Management, LLC (or an affiliate of ING)
PORTFOLIO Investment Management) has 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. ING Investment Management is a subsidiary of ING
Groep N.V. and is affiliated with Directed Services, Inc.
The address of ING Investment Management is 5780 Powers
Ferry Road, N.W., Suite 300, Atlanta, Georgia 30327.
The following person at ING Investment Management is
primarily responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Jennifer J. Thompson, CFA Portfolio Manager
Ms. Thompson has been employed by ING
Investment Management since August 1998.
Prior to that, Ms. Thompson served as a
Senior Investment Analyst for Fidelity
Investments.
ING Investment Management also manages the Limited
Maturity Bond Portfolio.
60
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
LIMITED MATURITY BOND PORTFOLIO
PORTFOLIO
MANAGER ING Investment Management, LLC
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 diversified portfolio
INVESTMENT of limited maturity debt securities. These short-to-
STRATEGY 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, and
asset-backed 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 Investor Service
("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 equivalent 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.
Various security types are eligible for investment
including:
o fixed rate bonds
o variable and floating rate bonds
o mortgage-backed securities
61
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
o asset-backed 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
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 it principal investment strategies. Frequent
trading increases transactionn costs, which could
detract from the Portfolio's performance.
PRINCIPAL An investment in the Portfolio is subject to the following
RISKS principal risks described under "Introduction - General Risk
Factors":
o MANAGER RISK o INCOME RISK
o CALL 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 ON THE ING Investment Management, LLC (or an affiliate of ING)
PORTFOLIO Investment Management) has 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. ING Investment Management is a subsidiary of ING
Groep N.V. and is affiliated with Directed Services, Inc.
The address of ING Investment Management is 5780 Powers
Ferry Road, N.W., Suite 300, Atlanta, Georgia 30327.
The following person at ING Investment Management is
primarily responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Jennifer J. Thompson, CFA Portfolio Manager
Ms. Thompson has been employed by ING
Investment Management since August 1998.
Prior to that, Ms. Thompson served as a
Senior Investment Analyst for Fidelity
Investments.
ING Investment Management also manages the Liquid Asset
Portfolio.
62
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
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 fixed income
STRATEGY 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.
The Portfolio Manager allocates the Portfolio's
investments among those markets, companies and currencies
that offer the most attractive combination of high income
and
63
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
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 GCG Trust 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 following
RISKS 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.
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 ON THE Baring International Investment Limited ("Baring
PORTFOLIO International") since its 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
Bishopgate, London.
64
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
Baring 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
provides advisory services to institutional investors,
offshore investment companies, insurance companies and
private clients. As of December 31, 1998, Baring 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 Professional
Mr. Thursby has been an Investment
Professional 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.
65
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
TOTAL RETURN PORTFOLIO
PORTFOLIO
MANAGER Massachusetts Financial Services Company
INVESTMENT Above-average income (compared to a portfolio entirely
OBJECTIVE 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 in a
STRATEGY combination of equity and fixed income 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 upon fundamental analysis performed by the
Portfolio Manager and its group of equity research
analysts.
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 equity securities of these
companies may be undervalued because:
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).
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
specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible
security generally provides:
66
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
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 which pay a fixed interest rate, which
include:
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 fund to a
share of the principal and interest payments made on
the underlying mortgage, car loan, or credit card.
For example, if the fund invests in a pool that
includes your mortgage loan, a share of the principal
and interest payments on your mortgage would pass to
the fund, 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 Depository 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 following
RISKS principal risks described under "Introduction - General Risk
Factors":
o MANAGER RISK o INTEREST RATE RISK
o INCOME RISK o CALL RISK
o CREDIT 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 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.
67
<PAGE>
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- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
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 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 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 ON THE Massachusetts Financial Services Company ("MFS") has
PORTFOLIO managed the Portfolio since its inception. MFS is
MANAGER America's oldest mutual fund organization. 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.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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The following persons at MFS are primarily responsible
for the day-to-day investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
David M. Calabro Senior Vice President
Mr. Calabro has been employed by MFS since
1992. He heads the Portfolio's management
team and manages the common stock portion
of the Portfolio.
Constantinos G. Mokas Vice President
Mr. Mokas has been employed by MFS since
1990. He manages the convertible
securities portion of the Portfolio.
Geoffrey L. Kurinsky Senior Vice President
Mr. Kurinsky has been employed by MFS
since 1987. He manages the fixed income
portion of the Portfolio.
Lisa B. Nume Portfolio Manager
Ms. Nume has been employed by MFS since
1987. She manages the common stock
portion of the Portfolio.
Maura A. Shaughnessy Senior Vice President
Ms. Shaughnessy has been employed by MFS
since 1991. She manages the common stock
portion of the Portfolio.
Kenneth J. Enright Vice President
Mr. Enright has been employed by MFS since
1986. He manages the common stock portion
of the portfolio.
MFS also manages the Mid-Cap Growth Portfolio and the
Research Portfolio.
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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 its assets in
INVESTMENT the common stocks of well-established companies paying
STRATEGY 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 finanacial
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 Portolio'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 following
RISKS 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.
MORE ON THE T. Rowe Price Associates, Inc. has managed the Portfolio
PORTFOLIO since March 1, 1999. Prior to that, different firms at
MANAGER different times served as portfolio manager. T. Rowe Price
was founded in 1937 by the late Thomas Rowe Price, Jr. As of
December 31, 1998, the firm and its affiliates managed
approximately $147 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,
as Committee Chair, has day-to-day responsibility for
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 1989. He joined T. Rowe Price in 1982 and has been
managing investments since 1989.
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 Over the long-term, a high total investment return,
OBJECTIVE consistent with the preservation of capital and with
prudent investment risk.
PRINCIPAL The Portfolio invests primarily in the common stocks of
INVESTMENT established companies the Portfolio believes to have
STRATEGY 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 prices when we buy them are considered
low in terms of company assets, earnings, or other
factors.
o the smaller category comprises opportunistic
investments whose prices we expect to rise in the
short term but not necessaritly 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 loses, 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 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:
(1) shares of the Reserve Investment Fund, an
internally managed money market fund of T. Rowe
Price
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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(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 or 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 following
RISKS principal risks described under "Introduction - General Risk
Factors":
o MANAGER RISK o INTEREST RATE RISK
o CREDIT RISK o CALL RISK
o INCOME RISK o MARKET AND COMPANY 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 ON THE T. Rowe Price Associates, Inc. has managed the Portfolio
PORTFOLIO since January, 1995. T. Rowe Price was founded in 1937
MANAGER by the late Thomas Rowe Price, Jr. As of December 31,
1998, the firm and its affiliates managed approximately
$147 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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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.
STRATEGY Hard asset companies produce a commodity which the Portfolio
Manager is able to price on a daily or weekly basis.
Hard asset securities in which the Portfolio may invest
include equity securities of hard asset companies and
securities, including structured notes, whose value is
linked to the price of a hard asset commodity or a
commodity index. 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 may invest in:
o securities of foreign issuers, including up to 35%
in South Africa
o companies not engaged in natural resources 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
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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o derivatives
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 preferred stock
o rights
o warrants
o direct equity interests in trusts
o partnerships
o joint ventures
o "when-issued" securities
o "partly paid" securities
o restricted 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 following
RISKS 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 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 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 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
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 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 ON THE Baring International Investment Limited ("Baring
PORTFOLIO International") has managed the Portfolio since March 1,
MANAGER 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 Bishopgate,
London.
Baring 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
provides advisory services to institutional investors,
offshore investment companies, insurance companies and
private clients. As of December 31, 1998, Baring managed
approximately $45.6 billion of assets.
The following person at Baring International Investment
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.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 securities of
INVESTMENT companies in the real estate industry that are listed on
STRATEGY 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
which derives a majority 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 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 following
RISKS 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 to tenants, leveraging of
interests in real estate, and increase in interest
rates.
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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.
MORE ON THE EII Realty Securities, Inc. has managed the Portfolio
PORTFOLIO since January 1995. EII Realty and its parent company,
MANAGER European Investors, Inc., have provided advisory services
to employee benefit plans, corporations, and high 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 Securities are
primarily responsible for the day-to-day investment
decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Richard J. Adler Managing Director
Cydney C. Donnell Managing Director
For the past ten years, Mr. Adler and Ms.
Donnell have been portfolio managers or
real estate securities analysts for EII
Realty Securities and/or its affiliates.
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ALL-GROWTH PORTFOLIO
PORTFOLIO
MANAGER Pilgrim Baxter & Associates, Ltd.
INVESTMENT
OBJECTIVE Capital appreciation
PRINCIPAL The Portfolio normally invests primarily in growth
INVESTMENT securities (such as common stocks) of middle-range
STRATEGY 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 following
RISKS 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 invests
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 ON THE Pilgrim Baxter & Associates, Ltd. has managed the
PORTFOLIO Portfolio since February 1997. Pilgrim Baxter provides
MANAGER advisory services to pension and profit 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:
Name Position and Recent Business Experience
---- ---------------------------------------
Jeffrey Wrona Investment Professional
Mr. Wrona has been an investment
professional with Pilgrim Baxter since
1997. Before joining Pilgrim Baxter, Mr.
Wrona
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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worked as a Senior Portfolio Manager
at Munder Capital Management for seven
years.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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CAPITAL APPRECIATION PORTFOLIO
PORTFOLIO
MANAGER A I M Capital Management, Inc.
INVESTMENT
OBJECTIVE Long-term capital growth
PRINCIPAL The Portfolio invests primarily in equity securities
INVESTMENT believed by the Portfolio Manager to be undervalued
STRATEGY 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 invetment
obejectives. 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 securitites.
The Portfolio Manager focuses on undervalued equity
securities of:
o out-of-favor cyclical growth companies
o established growth companies that are undervalued
companred 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 following
RISKS 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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MORE ON THE A I M Capital Management, Inc. has managed the Portfolio
PORTFOLIO since April 1, 1999. A I M Capital is an indirect
MANAGER subsidiary of 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
---- ---------------------------------------
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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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 primarily in equity securities that
STRATEGY meet 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"
There may from time to time be other 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 industry competitive 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 25-30 different
securities. These securities are diversified by
industry. Selection of a security is also disciplined to
avoid over-concentration in any single sector or company.
PRINCIPAL An investment in the Portfolio is subject to the following
RISKS 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.
MORE ON THE The Portfolio has been managed by Kayne Anderson
PORTFOLIO Investment Management, LLC or its predecessor since its
MANAGER inception. Kayne Anderson 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
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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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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 common stocks of
INVESTMENT domestic and foreign issuers which meet quantitative
STRATEGY 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; price-to-
sales; 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 following
RISKS principal risks described under "Introduction - General Risk
Factors":
o MANAGER RISK o CREDIT RISK
o CALL 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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MORE ON THE Eagle Asset Management, Inc. has managed the Portfolio
PORTFOLIO since its inception. Eagle Asset is in the business of
MANAGER 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.
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.
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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 stocks of
INVESTMENT medium- and small-sized growth companies. The Portfolio
STRATEGY 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 following
RISKS 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 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 investors 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, 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.
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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, 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 ON THE A I M Capital Management, Inc. has managed the Portfolio
PORTFOLIO since March 1, 1999. A I M Capital is an indirect
MANAGER subsidiary of 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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SMALL CAP PORTFOLIO
PORTFOLIO
MANAGER Fred Alger Management, Inc.
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL
INVESTMENT The Portfolio invests primarily in equity securities of
STRATEGY 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 following
RISKS 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
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-cap companies offers potential for above-
average returns, the companies may not succeed and
the value of stock shares could decline
significantly.
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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.
MORE ON THE Fred Alger Management, Inc. has managed the Portfolio
PORTFOLIO since its inception. Fred Alger has been in the business
MANAGER of providing 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 Management, Inc. 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.
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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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 securities of
STRATEGY 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 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 following
RISKS 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 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.
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
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 ON THE Montgomery Asset Management, LLC or its affiliates has
PORTFOLIO managed the Portfolio since its inception. Montgomery
MANAGER advises private 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 following persons at Montgomery Asset Management, LLC
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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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 its assets
INVESTMENT in common stocks and related securities (such as preferred
STRATEGY 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.
Mid-cap companies are defined by the Portfolio 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 December 31, 1998, the top of
the Russell Midcap Growth Index was $______ 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 upon fundamental
analysis performed by the Portfolio Manager and its group
of equity research analysts.
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.
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.
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PRINCIPAL An investment in the Portfolio is subject to the following
RISKS 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 invests
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 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 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 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
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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 ON THE Massachusetts Financial Services Company ("MFS") has
PORTFOLIO managed the Portfolio since its inception. MFS is
MANAGER America's oldest mutual fund organization. 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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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 its assets
INVESTMENT in common stocks and related securities (such as preferred
STRATEGY 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 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 fund'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 following
RISKS 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 OTC securities market can involve greater risk
than is customarily associated with investing in
securities traded on the New York or American Stock
Exchanges since OTC securities are generally
securities of companies which are smaller or newer
than those listed on the New York or American Stock
Exchange. For example, these companies often have
limited product lines, markets, or financial
resources, may be dependent for management on one or
a few key persons, and can be more susceptible to
losses. Also, their securities may be thinly traded
(and therefore have to be sold at a discount from
current prices or sold in small lots over an extended
period of time), may be followed by fewer investment
research analysts and may be subject to wider price
swings and thus may create a greater risk of loss
than securities of larger capitalization or
established companies. Shares of the Portfolio,
therefore, are subject to greater fluctuation in
value than shares of a conservative equity fund or of
a growth fund which invests entirely in proven growth
stocks.
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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 ON THE Massachusetts Financial Services Company ("MFS") has
PORTFOLIO managed the Portfolio since its inception. MFS is
MANAGER America's oldest mutual fund organization. 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 Portfolios.
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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 growth
INVESTMENT companies that have favorable relationships between
STRATEGY 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.
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.
PRINCIPAL An investment in the Portfolio is subject to the following
RISKS 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
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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 ON THE Janus Capital Corporation has managed the Portfolio since
PORTFOLIO March 1, 1999. Janus Capital has been an investment advisor
MANAGER since 1970, and 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.
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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 of
STRATEGY companies where the potential for change (earnings
acceleration) is significant.
The Portfolio Manager applies a growth-oriented
investment philosophy defined by the following:
o EARLY RECOGNITION OF CHANGE
o Value is created through the dynamics of changing
economic, industry and company fundamentals
o 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 $3 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")
o "zero-coupon" bonds
o "payment-in-kind" bonds
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 following
RISKS 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 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 ON THE Alliance Capital Management LP has managed the Portfolio
PORTFOLIO since March 1,1999. Alliance Capital Management
MANAGER Corporation, its general partner, is an indirect subsidiary
of The Equitable Life Assurance Society of the
United 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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EMERGING MARKETS PORTFOLIO
PORTFOLIO
MANAGER Putnam Investment Management, Inc.
INVESTMENT
OBJECTIVE Long-term capital appreciation
PRINCIPAL The Portfolio invests primarily in equity securities of
INVESTMENT companies in at least six different emerging market
STRATEGY 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.
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.
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
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 following
RISKS 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
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 ON THE Putnam Investment Management, Inc. has managed the Portfolio
PORTFOLIO since March 1997. Prior to that, different firms at different
MANAGER times served as portfolio manager. Putnam Investment has been
managing mutual funds since 1937. Putnam Investment 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 Investment is One Post
Office Square, Boston, Massachusetts 02109.
An investment committee at Putnam Investment is
responsible for the day-to-day investment decisions of
the Portfolio.
Putnam Investment also manages the Managed Global
Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 traded in
INVESTMENT securities markets throughout the world. The Portfolio may
STRATEGY invest up to 100% of its assets in securities traded in
securities markets outside the United States. The
Portfolio generally invests at least 65% of its 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 following
RISKS 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 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,
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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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 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, 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.
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 ON THE Putnam Investment Management, Inc. has managed the
PORTFOLIO Portfolio since March, 1997. Putnam Investment
MANAGER Management has been managing mutual funds since 1937.
Putnam Investment Management 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 Investment Management 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 in
INVESTMENT emerging market companies. The Portfolio normally
STRATEGY 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 considered by
the World Bank or the United Nations 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 Portugal Egypt
Jamaica Malaysia Russia Ghana
Mexico Pakistan Turkey Ivory Coast
Peru Philippines Croatia Kenya
Trinidad and Singapore Astonia Morocco
Tobago
Uruguay Sri Lanka Nigeria
Venezuela Taiwan South Africa
Thailand Tunisia
Vietnam Zimbabwe
Hong Kong
The Portfolio may in the future invest in other emerging
market countries.
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 is designed to
deliver superior risk adjusted returns by evaluating key
investment factors at both the macro and micro level,
which our research shows contribute to superior emerging
market performance. Such factors include accelerating
GDP growth, earnings surprise and favorable valuation
characteristics. Our investment process is a combination
of top-down country allocation and bottom-up stock
selection. Stock selection is driven by structured
fundamental research supported by quantitative analysis
at both the country and company level.
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. The Portfolio may invest in certain
debt securities issued by the governments of emerging
market countries that are, or may be eligible for,
conversion into investments in emerging market companies
under debt conversion programs sponsored by such
governments. If such securities are convertible to
equity investments, the Portfolio considers them to be
equity derivative securities.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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PRINCIPAL An investment in the Portfolio is subject to the following
RISKS 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
related 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.
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MORE ON THE Baring International Investment Limited ("Baring
PORTFOLIO International") has managed the Portfolio since March 1,
MANAGER 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 Bishopgate,
London.
Baring 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
provides advisory services to institutional investors,
offshore investment companies, insurance companies and
private clients. As of December 31, 1998, Baring managed
approximately $45.6 billion of assets.
The following person at Baring International Investment
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.
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OVERALL MANAGEMENT OF THE GCG TRUST
- -------------------------------------------------------------------------
THE ADVISER Directed Services, Inc. ("DSI") is the overall 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 ("Golden American") issues. Golden American is a
stock life insurance company organized under the laws of
the State of Delaware.
DSI has overall responsibility, subject to the
supervision of the Board of Trustees, for hiring
portfolio managers and for monitoring and evaluating the
each portfolio manager's management of portfolio assets
by the portfolio managers. DSI monitors and evaluates
the portfolio managers on a periodic basis, and considers
their performance records in light of the investment
objective(s) and policies of each portfolio.
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 exercises 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.
ADVISORY FEE The GCG Trust pays DSI for its services an advisory fee,
payable monthly, based on the average daily net assets of
a portfolio (or the combined net assets of portfolio) at
the following annual rates of the average daily net
assets of the portfolio(s):
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<TABLE>
<S> <C>
PORTFOLIO FEE
(based on combined assets of the
indicated groups of portfolios)
Equity Income, Fully Managed, 1.00% on the first $750 million in combined assets
Hard Assets, Real Estate, of these portfolios;
All-Growth, Capital Appreciation, 0.95% on the next $1.25 billion;
Rising Dividends, Value Equity, 0.90% on the next $1.5 billion; and
Strategic Equity, and Small Cap 0.85% on the amount in excess of $3.5 billion
Mid-Cap Growth, Total Return, 1.00% of first $250 million in combined assets
and Research of these portfolios;
0.95% of next $400 million;
0.90% of next $450 million; and
0.85% of amount in excess of $1.1 billion
Growth & Income, Growth, 1.10% of first $250 million;
and 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
Managed Global 1.25% on the first $500 million; and
1.05% on the amount in excess of $500 million.
Global Fixed Income 1.60%
Emerging Markets and Developing 1.75%
World
Limited Maturity Bond 0.60% on the first $200 million in combined assets
and Liquid Asset of these portfolios;
0.55% on the next $300 million; and
0.50% on the amount in excess of $500 million
</TABLE>
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.
- -------------------------------------------------------------------------
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
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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 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 DISTRIBUTION
- -------------------------------------------------------------------------
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.
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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 are urged to consult with
your tax advisor for more detailed information regarding
taxes applicable to the Contracts and the holders
thereof.
- -------------------------------------------------------------------------
MORE INFORMATION
- -------------------------------------------------------------------------
ADDITIONAL The description of each portfolio in this prospectus does
INVESTMENT not describe all of the non-principal investments,
STRATEGIES techniques and strategies the portfolio may use to achieve its
investment objective. No portfolio is obligated to use any
of these techniques or strategies at any given time or
under any particular economic condition. For further
information on these investments, techniques and
strategies, please refer to the Statement of Additional
Information.
Certain portfolios may take temporary defensive positions
inconsistent with their respective investment policies to
adjust their investment exposure during uncertain
periods, such as periods when the portfolio manager
determines that adverse market, economic, political or
other conditions exist. These positions generally
involve investing in a manner different than that in
which the portfolio invests under normal market
conditions. To the extent a portfolio assumes a
temporary investment position, it may not achieve its
investment objective. For more detailed information on
each portfolio's temporary defensive positions, please
refer to the Statement of Additional Information.
PORTFOLIO Before investing in a portfolio, you should review its
TURNOVER 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 "Financial Highlights" in this prospectus.
LEGAL COUNSEL Sutherland Asbill & Brennan LLP, 1275 Pennsylvania
Avenue, N.W., Washington, D.C. 20004-2404 serves as
counsel to the GCG Trust.
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INDEPENDENT Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116-
AUDITORS 5072 serves as independent auditors of the GCG Trust.
YEAR 2000 Based on a study of its computer software systems and
hardware, DSI, in conjunction with an affiliate, Golden
American, have determined their exposure to the year 2000
change of the century date issue. Some of these systems
support certain trust operations. The Adviser believes
its and Golden American's systems are or will be
substantially compliant by year 2000 and has engaged
external consultants to validate this assumption. The
Adviser is in contact with the GCG Trust's portfolio
managers and third party vendors to ensure that their
systems will be substantially compliant by year 2000. To
the extent these portfolio managers and third parties
would be unable to transact business in the year 2000 and
thereafter, the GCG Trust's operations could be adversely
affected.
114
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<PAGE>
TO OBTAIN
MORE
INFORMATION
Two documents are available that offer further
information on the portfolios:
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS. The
GCG Trust's annual reports include a discussion of
the market conditions and investment strategies that
significantly affected the portfolios' performance
during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION. The
Statement of Additional Information contains
additional information about the portfolios. A
current Statement of Additional Information has
been filed with the Securities and Exchange
Commission, and is made a part of this
prospectus by reference.
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 WILMINGTON, DELAWARE
G3059 ___/99 811-5629
<PAGE>
<PAGE>
PROSPECTUS #2
MARKET MANAGER SERIES
<PAGE>
<PAGE>
THE GCG TRUST
PROSPECTUS
___________ ____, 1999
MARKET MANAGER 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>
- -------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------
PAGE
INTRODUCTION ..........................................
Investing Through Your Variable Contract .............
Why Reading This Prospectus is Important .............
Non-Principal Investments and Strategies .............
Temporary Defensive Positions ........................
Additional Information about the Portfolio ...........
Performance Information ..............................
Description of Market Indices ........................
The Year 2000 ........................................
THE PORTFOLIO AT A GLANCE .............................
FINANCIAL HIGHLIGHTS ..................................
DESCRIPTION OF THE PORTFOLIO ..........................
MANAGEMENT OF THE TRUST ...............................
The Adviser ..........................................
Portfolio Manager ....................................
Distributor ..........................................
Expenses .............................................
Portfolio Transactions ...............................
SHARE PRICE ...........................................
TAXES AND DISTRIBUTION ................................
MORE INFORMATION ......................................
Additional Investment Strategies .....................
Portfolio Turnover ...................................
Legal Counsel ........................................
Independent Auditors .................................
Year 2000 ............................................
AN INVESTMENT IN THE MARKET MANAGER 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.
i
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- -------------------------------------------------------------------------
INTRODUCTION
- -------------------------------------------------------------------------
[Section is in two-column format.]
INVESTING THROUGH YOUR VARIABLE CONTRACT
Shares of the Market Manager Portfolio of the GCG Trust currently are
sold to segregated asset accounts ("Separate Accounts") of insurance
companies as funding choices for variable annuity contracts ("Variable
Contracts"). Assets in the Separate Account are invested in shares of
the Portfolio based on your allocation instructions. You do not deal
directly with the Portfolio to purchase or redeem shares. The
accompanying Separate Account prospectus describes your rights as a
Variable Contract owner.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, risks and strategy
of the Portfolio. Reading the prospectus will help you to decide
whether the Portfolio is the right investment for you. We suggest
that you keep this prospectus and the prospectus for the Separate
Account for future reference.
NON-PRINCIPAL INVESTMENTS AND STRATEGIES
This prospectus does not describe non-principal investments and
strategies which are available to, but are not the principal focus of,
the Portfolio. The types of investments and strategies are identified
and discussed, together with their limitations and risks, in the
Statement of Additional Information.
TEMPORARY DEFENSIVE POSITIONS
This prospectus does not describe temporary defensive positions. The
Portfolio may depart from its principal investment strategies by
temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While the Portfolio invests
defensively, it may not be able to pursue its investment objective.
The types of defensive positions in which the Portfolio may engage are
identified and discussed, together with their risks, in the Statement
of Additional Information.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
The Statement of Additional Information (dated ________ __, 1999)
about the Portfolio is made a part of this prospectus. It contains
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 (www.sec.gov).
PERFORMANCE INFORMATION
The performance information presented for the Portfolio 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.
THE YEAR 2000
The Trust could be adversely affected if the computer systems used by
the Trust's investment adviser and the Trust's other service providers
do not properly process and calculate date-related information from
and after January 1, 2000.
The Trust's investment adviser and independent technology consultants
are working to avoid year 2000-related problems in its systems and to
obtain assurances from other service providers that they are taking
similar steps. In addition, issuers of securities in which the Trust
invests may be adversely affected by year 2000-related problems. This
could have an impact on the value of the Trust's investments and its
share.
AN INVESTMENT IN THE MARKET MANAGER 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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PORTFOLIO AT A GLANCE
- -------------------------------------------------------------------------
MARKET MANAGER PORTFOLIO
INVESTMENT Favorable equity market performance and at the same
OBJECTIVE time preserve capital (without taking into account
expenses) for investments in the Portfolio held until
the Target Maturity Date of March 6, 2001.
PRINCIPAL
INVESTMENT The Portfolio seeks to return the following to its
STRATEGY shareholders on the Target Maturity Date:
o the principal amount invested in the Portfolio
(without regard to expenses)
o a percentage of the price appreciation from the
Portfolio's Investment Start Date through the
Target Maturity Date on common stocks that are
publicly traded in the United States, as
represented by the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500) and other indexes of
publicly traded common stocks of large and mid-cap
companies.
The Portfolio allocates its assets among the following
two types of investments:
o over-the-counter call options of the S&P 500 and
other indexes of publicly traded common stocks of
large and mid-cap companies
o zero coupon bonds issued by the U.S. Government,
and its agencies and instrumentalities and by
private issuers which are rated A or better by
Moody's Investors Service, Inc. or Standard &
Poor's Corporation ("S&P)
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.
This is a limited offering. The Portfolio will no
longer accept investments in the Portfolio as of March
3, 1995.
PRINCIPAL Like all funds, an investment in the Portfolio involves
RISKS risk. Investment in the Portfolio is not insured against
loss of principal. We cannot assure that the Portfolio
will achieve its investment objective. Investing in
shares of the Portfolio should not be considered a complete
investment program. The share value of the Portfolio
will rise and fall.
An investment in the Portfolio is subject to the
following principal risks described under "Description
of the Portfolio":
o MANAGER RISK o MARKET AND COMPANY RISK
Risks Related to Coupon Bond Investing:
o INTEREST RATE RISK o CREDIT RISK.
Risks Related to OTC Call Options:
o CREDITWORTHINESS OF DEALER
o Investment Concentration in the Securities
Industry
Because of these risks, your investment could lose or
not make any money.
2
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PORTFOLIO AT A GLANCE (CONTINUED)
- -------------------------------------------------------------------------
PERFORMANCE The value of your share in the Portfolio will fluctuate
depending on the investment performance of the
Portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market indices. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[[Performance Bar Chart Follows:]
MARKET MANAGER -- ANNUAL TOTAL RETURN
Year 1994 1995 1996 1997 1998
0.44% 24.33% 19.40% 33.82% [ ]
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 1/14/94 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| S&P 500 | | WORST QUARTER |
| S&P Midcap 400 Index | |--------------------|
| Russell Midcap | | |
| | | ________ XX, 19XX |
| | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
The Portfolio commenced operations in November, 1994.
The average annual total return for year 1994 as shown
is not annualized.
ING Investment Management, LLC has managed the
Portfolio since January 2, 1998. From March 3, 1997 to
January 1, 1998, Equitable Investment Services, Inc.,
an affiliate of ING, managed the Portfolio. Prior to
that date, the Portfolio was managed by other portfolio
managers.
3
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FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------
The following financial highlights tables are intended to help you
understand the Portfolio's financial performance for the past 5 years.
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 the
Portfolio's financial statements, are included in the annual report,
which is available upon request.
<TABLE>
<CAPTION>
MARKET MANAGER 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 $ $13.22 $12.03 $10.02 $10.00
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income(Loss) 0.36 0.46 0.37 0.02
Net Realized and Unrealized
Gain(Loss) on Investments 4.11 1.89 2.06 0.02
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.47 2.35 2.43 0.04
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.36) (0.46) (0.37) (0.02)
Distributions from Capital Gains (0.86) (0.70) (0.05) --
------------------------------------------------
TOTAL DISTRIBUTIONS (1.22) (1.16) (0.42) (0.02)
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $16.47 $13.22 $12.03 $10.02
=======================================================================================
TOTAL RETURN 33.82% 19.40% 24.33% 0.44%++
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $6,791 $5,585 $5,952 $2,754
Ratio of Operating Expenses to
Average Net Assets 1.01% 1.02% 0.89% --
Decrease Reflected in Above
Expense Ratio Due to
Expense Limitations -- -- 0.13%
0.13%++
Ratio of Net Investment Income
to Average Net Assets 2.19% 3.06% 3.42% 0.65%
Portfolio Turnover Rate -- -- 5.00% --
- ---------------------------------------------------------------------------------------
</TABLE>
* The Market Manager Portfolio commenced operations on November 14,
1994.
** On January 2, 1998, ING Investment Management, LLC ("IIM") became
the Portfolio Manager of the Series. From March 3, 1997 to
January 1, 1998, Equitable Investment Services, Inc., and
affiliate of IIM, was the Portfolio Manager of the Series. Prior
to March 3, 1997, the Series had been advised by other Portfolio
Managers.
+ Annualized
++ Non-annualized
4
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DESCRIPTION OF THE PORTFOLIO
- -------------------------------------------------------------------------
MARKET MANAGER PORTFOLIO
PORTFOLIO
MANAGER ING Investment Management, LLC
INVESTMENT Favorable equity market performance and at the same time
OBJECTIVE preserve capital (without taking into account expenses)
for investments in the Portfolio held until the Target
Maturity Date of March 6, 2001.
PRINCIPAL
INVESTMENT The Portfolio seeks to return the following to its
STRATEGY shareholders on the Target Maturity Date:
o the principal amount invested in the Portfolio
(without regard to expenses)
o a percentage of the price appreciation from the
Portfolio's Investment State Date through the Target
Maturity Date on common stocks that are publicly
traded in the United States, as represented by the
Standard & Poor's 500 Composite Stock Price Index
("S&P 500") and other indexes of publicly traded
common stocks of large and mid-cap companies.
There are two components of the Portfolio's investment
objective: (1) seeking favorable equity market
performance, and (2) seeking preservation of capital.
The Portfolio Manager allocates the assets of the
Portfolio among the investments described below:
o FAVORABLE EQUITY PERFORMANCE. 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. An index of publicly
traded common stocks will generally be considered an
index of large and mid-cap companies if the companies
represented in the index have a median market
capitalization of at least $300 million.
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 indices 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 indices.
The Portfolio will initially invest on or about the
Investment Start Date between 25% and 45% of the
Portfolio's assets in call options on equity indexes. If
at the option's maturity or when the Portfolio seeks to
close out the option there is no price appreciation on
the S&P 500 or another index with respect to which the
Portfolio holds a call option, the Portfolio will not
benefit from the investment and will lose its investment
in the option. The Portfolio will seek to enter into
call options that provide an absolute right for the
Portfolio to cause the issuing dealer to repurchase the
call at any time.
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PRESERVATION OF CAPITAL. 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"), or, if not rated, are of a
comparable quality as determined by the Portfolio
Manager. The Portfolio will usually invest in zero
coupon bonds with a maturity date on or close to the
Target Maturity Date, so the length to maturity of the
fixed income securities held by the Portfolio can be
expected to decrease as the Portfolio nears its Target
Maturity Date. The Portfolio may hold any or all of the
zero coupon bonds in which it invests until their
maturity date or until or close to the Portfolio's Target
Maturity Date, although, alternatively, the Portfolio may
dispose of one or more of such bonds prior to this time
if deemed by the Portfolio Manager in its sole discretion
to be in the Portfolio's best interests or to be
necessary or appropriate under applicable law.
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.
OFFERING PERIOD. The Commencement Date is November 14,
1994. The Portfolio will be offered from the
Commencement Date through March 3, 1995. This period is
referred to as the Offering Period. The Investment Start
Date is March 6, 1995.
The Portfolio will cease issuing new shares at the end of
the Offering Period (other than shares of the Portfolio
issued in connection with reinvestment of the Portfolio's
dividends and distributions). However, it is anticipated
that other series with substantially similar investment
objectives and policies may be offered in the future.
TARGET MATURITY DATE. The Target Maturity Date of the
Portfolio is March 6, 2001. On or about this date, the
Portfolio will be converted to cash (after deduction of
any unpaid Portfolio expenses). The proceeds will be
available for reinvestment in other investment options
available for annuity contracts, according to the
allocation instructions received from Golden American.
It is anticipated that Golden American will ask owners of
the annuity contracts whose proceeds are invested in the
Portfolio to choose their desired allocation. If no
instructions are given, liquidation proceeds will be
invested automatically in a series substantially similar
to the Portfolio, if any is being offered at the time,
and if not, to the Liquid Asset Series of the Trust.
PRINCIPAL Like all funds, an investment in the Portfolio involves
RISKS risk. Investment in the Portfolio is not insured against
loss of principal. We cannot assure that the Portfolio
will achieve its investment objective. Investing in
shares of the Portfolio should not be considered a
complete investment program. The share value of the
Portfolio will rise and fall.
An investment in the Portfolio is subject to the
following principal risks:
o MANAGER RISK. The Portfolio Manager may do a
mediocre or poor job in selecting securities.
o MARKET AND COMPANY RISK. The price of a
security held by the Portfolio may fall due to
changing economic, political or
market conditions
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or disappointing earnings results. Stock prices
in general will decline over short or even
extended periods. The stock market tends to be
cyclical, with periods when stock prices
generally rise and periods when stock prices
generally decline.
Risks Related to Coupon Bond Investing:
o INTEREST RATE RISK. The value of debt
instruments generally rises and falls inversely
with interest rate. Therefore, bond prices
overall will decline over short or even extended
periods due to rising interest rates. Further,
changes in value in response to changing interest
rates may be more pronounced in zero coupon bonds
than in interest-bearing bonds having the same
maturity.
o CREDIT RISK. A bond issuer (debtor) may fail
to repay interest and principal in a timely
manner. The price of a security held by a
portfolio may fall due to changing economic,
political or market conditions or disappointing
earnings results.
Risks Related to OTC Call Options:
o CREDITWORTHINESS OF DEALER. Under the terms
of the over-the-counter call options that will be
acquired by the Portfolio, the Portfolio must
look to the issuing dealer to repurchase the
option and for payment upon exercise. Thus, it
is likely that the Portfolio will be subject to
the creditworthiness of the dealers throughout
the Target Maturity Date. Nonperformance by a
dealer as a result of insolvency or otherwise may
result in material losses to the Portfolio.
o CONCENTRATION IN THE SECURITIES INDUSTRY.
Since at least 25% of the Portfolio will be
invested in over-the-counter options, the
Portfolio might be deemed to have concentrated
its investments in issuers in the securities
industry. The concentration of the Portfolio's
assets in firms in the securities industry will
cause the Portfolio to have greater exposure to
risks associated with the securities industry in
general.
Because of these risks, your investment could lose or not
make any money.
MORE ON THE ING Investment Management, LLC (or investment advisors
PORTFOLIO acquired by ING Investment Management) has managed the
MANAGER Portfolio since March, 1997. 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 Management is 5780
Powers Ferry Road, N.W., Suite 300, Atlanta, Georgia
30327. ING Investment Management is a subsidiary of ING
Groep N.V. and is affiliated with Directed Services, Inc.
The following person at ING Investment Management is
primarily responsible for the day-to-day investment
decisions of the Portfolio:
Name Name and Recent Business Experience
---- -----------------------------------
Robert F. Bowman Senior Portfolio Manager
Mr. Bowman has been employed by the
Portfolio Manager as a Managing Director
since January 2, 1998. Prior to that he
served as the Portfolio's portfolio
manager while working for Equitable
Investment Services, Inc. ("EISI"). He
joined EISI as Executive Vice President in
1986, and has over 18 years of direct
investment experience.
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MANAGEMENT OF THE TRUST
- -------------------------------------------------------------------------
THE ADVISER Directed Services, Inc. ("DSI") is the overall adviser to
the GCG Trust. The Trust is an open-end management
investment company organized as a Massachusetts business
trust. DSI is a New York corporation and is a wholly
owned subsidiary of ING Groep N.V. ("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 ("Golden American")
issues. Golden American is a stock life insurance
company organized under the laws of the State of Delaware
and a subsidiary of ING.
The Trust pays DSI, as adviser, for its services a
quarterly fee at the annual rate of 1.0% of the value of
the average daily net assets of the Portfolio. The Trust
pays DSI, adviser to the manager, for management services
a quarterly fee equal to an annual rate of 1.0% of the
average daily net assets of the Portfolio.
The Trust is distinct in that the expense structure of
the Portfolio is simpler and more predictable than most
mutual funds. Many of the ordinary expenses for the
Portfolio, including custodial, administrative, transfer
agency, portfolio accounting, auditing, and ordinary
legal expenses are paid by DSI, whereas most mutual funds
pay for these expenses directly from their own assets.
As adviser, DSI is responsible, subject to the
supervision of the Board of Trustees, for providing
administrative and other services necessary for the
ordinary operation of the Portfolio in addition to
advisory services. DSI, as adviser, provides the overall
business management and administrative services necessary
for the Portfolio's operation and provides or procures
the services and information necessary to the proper
conduct of the business of the Portfolio. DSI is
responsible for providing or procuring, at its own
expense, the services reasonably necessary for the
ordinary operation of the Portfolio. DSI is also
responsible for ensuring that the Portfolio operate in
compliance with applicable legal requirements and for
monitoring the Portfolio Manager for compliance with
requirements under applicable law and the their
investment policies and restrictions of the Portfolio.
DSI does not bear the expense of brokerage fees and other
transaction expenses for securities or other asset,
taxes, if any, paid by the Portfolio, interest on
borrowing, fees and expenses of the independent trustees,
and extraordinary expenses, such as litigation or
indemnification expenses.
PORTFOLIO DSI and the Trust have retained an affiliate, ING
MANAGER Investment Management, LLC ("ING") to manage the assets
of the Portfolio. As Portfolio Manager, ING Investment
makes all determinations on the investment of the
Portfolio's assets consistent with the investment
objectives, policies, and restrictions of the
Portfolio. ING is compensated by DSI. DSI pays ING a
fee, payable monthly, based on the average daily net
assets of the Portfolio at the annual rate of 0.50%. See
"Description of the Portfolio -- More on the Portfolio
Manager."
DISTRIBUTOR DSI acts as distributor of shares of the Portfolio, in
addition to serving as manager to the Trust. As
distributor, DSI is a registered broker-dealer and a
member of the National Association of Securities Dealers,
Inc., and acts as distributor without remuneration from
the Trust.
EXPENSES DSI, as manager, bears the expenses of the ordinary
operations of the Portfolio. The Trust bears the expense
of taxes (if any) paid by the Portfolio, the fees and
expense of its independent trustees, any extraordinary
expense, such as any litigation or
indemnification
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expenses, as well as other expenses as described under
"Management of the Trust." Any such Trust expenses
directly attributable to the Portfolio are charged to the
Portfolio; other expenses are allocated among all the
portfolios of the Trust. For the fiscal year ended
December 31, 1998, total Portfolio expenses (net of fee
waiver) were ____ of the Portfolio's net assets.
PORTFOLIO Shares of the Portfolio may be offered for purchase by
TRANSACTIONS separate accounts of Golden American to serve as an
investment medium for the Variable Contracts issued by
the insurer. Shares of the Portfolio will be sold
during the Offering Period at the net asset value
(without a sales charge) next computed after receipt of
a purchase order by Golden American. Shares will not be
available after the Offering Periods (other than for
reinvestment of any dividends and distributions).
Shares of the 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 Trust may suspend the
right of redemption or postpone the payment date 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 is restricted.
Shares of the Portfolio may be exchanged for shares of
any other portfolio of the Trust, other than The Fund For
Life, at any time. Exchanges of shares of other
portfolios of the Trust into the Portfolio will only be
permitted during the Offering Period. 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
shares of each portfolio on the date of the exchange.
The Portfolio will be managed to achieve its investment
object as of the Target Maturity Date, and is intended
for investors who desire to maintain their holding in the
Portfolio for the duration of the Portfolio through the
Target Maturity Date. Variable Contract Owners who
withdraw their interest earlier may be subject to a
greater risk that the Portfolio will not achieve its
investment objective and to the risk that the assets in
which the Portfolio will invest have not yet reached
their full potential return.
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SHARE PRICE
- -------------------------------------------------------------------------
NET ASSET The net asset value per share of the Portfolio is
VALUE calculated at or about 4:00 p.m. (New York City time),
Monday through Friday, on each day that the New York
Stock Exchange is open for trading, exclusive of
federal holidays. Net asset value per share is
calculated by dividing the aggregate value of the
Fund's assets less all liabilities by the number of the
Portfolio's outstanding shares.
The assets of the Portfolio consist primarily of the
mutual funds, which are valued at their respective net
asset values under the 1940 Act. Each mutual fund is
required to value securities in its portfolio for which
market quotations are readily available at their current
market value (generally the last reported sale price) and
all other securities and assets at fair value pursuant to
methods established in good faith by the board of
directors of the underlying fund. Money market funds
with portfolio securities that mature in one year or less
may use the amortized cost or penny-rounding methods to
value their securities. Securities having 60 days or
less remaining to maturity generally are valued at their
amortized cost, which approximates market value.
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Other assets of the Portfolio are valued at their current
market value if market quotations are readily available
and, if market quotations are not available, they are
valued at fair value pursuant to methods established in
good faith by the Board of Trustees. Securities having
60 days or less remaining to maturity are valued at their
amortized cost.
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TAXES AND DISTRIBUTION
- -------------------------------------------------------------------------
The GCG Trust pays net investment income, if any, on your
shares of each Portfolio annually. Any net realized long-
term capital gains for the 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 the
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 the Portfolio will reduce the per share
net asset value by the per share amount paid.
The Portfolio 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 a qualified regulated investment
company, the Portfolio is 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 the
Portfolio's intention to distribute all such income and
gains.
Shares of the 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 the
Portfolio and you. Please refer to the Statement of
Additional Information for more information about the tax
status of the Portfolio. You are urged to consult with
your tax advisor for more detailed information regarding
taxes applicable to the Contracts and the holders
thereof.
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MORE INFORMATION
- -------------------------------------------------------------------------
ADDITIONAL The description of the Portfolio in this prospectus does
INVESTMENT not describe all of the non-principal investments,
STRATEGIES techniques and strategies the Portfolio may use to achieve
its investment objective. The Portfolio is not obligated
to use any of these techniques or strategies at any given
time or under any particular economic condition. For
further information on these investments, techniques and
strategies, please refer to the Statement of Additional
Information.
The Portfolio may take temporary defensive positions
inconsistent with their respective investment policies to
adjust their investment exposure during uncertain
periods, such as periods when the portfolio manager
determines that adverse market, economic, political or
other conditions exist. These positions generally
involve investing in a manner
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different than that in
which the portfolio invests under normal market
conditions. To the extent the Portfolio assumes a
temporary investment position, it may not achieve its
investment objective. For more detailed information on
the Portfolio's temporary defensive positions, please
refer to the Statement of Additional Information.
PORTFOLIO Before investing in the Portfolio, you should review its
TURNOVER 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 rate for the Portfolio is presented in
"Financial Highlights" in this prospectus.
LEGAL COUNSEL Sutherland Asbill & Brennan LLP, 1275 Pennsylvania
Avenue, N.W., Washington, D.C. 20004-2404 serves as
counsel to the GCG Trust.
INDEPENDENT Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116-
AUDITORS 5072 serves as independent auditors of the GCG Trust.
YEAR 2000 Based on a study of its computer software systems and
hardware, DSI, in conjunction with an affiliate, Golden
American, have determined their exposure to the year 2000
change of the century date issue. Some of these systems
support certain trust operations. The Adviser believes
its and Golden American's systems are or will be
substantially compliant by year 2000 and has engaged
external consultants to validate this assumption. The
Adviser is in contact with the GCG Trust's third party
vendors to ensure that their systems will be
substantially compliant by year 2000. To the extent
these third parties would be unable to transact business
in the year 2000 and thereafter, the GCG Trust's
operations could be adversely affected.
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TO OBTAIN
MORE
INFORMATION
Two documents are available that offer further
information on the Portfolio:
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS. The
annual report of the Trust include a discussion of
the market conditions and investment strategies
that significantly affected the Portfolio's
performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION. The
Statement of Additional Information contains
additional information about the Portfolio. A
current Statement of Additional Information has
been filed with the Securities and Exchange
Commission, and is made a part of this prospectus
by reference.
To obtain a free copy of these documents or to
make inquiries about the Portfolio, 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 WILMINGTON, DELAWARE
G_______/99 811-5629
<PAGE>
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SAI #1
THE GCG TRUST
<PAGE>
<PAGE>
THE GCG TRUST
1001 Jefferson Street
Wilmington, DE 19801
(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.
MANAGER:
DIRECTED SERVICES, INC.
(800) 447-3644
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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.................................................... 4
Mortgage-Backed Securities........................................ 5
GNMA Certificates.............................................. 5
FNMA and FHLMC Mortgage-Backed Obligations..................... 5
Collateralized Mortgage Obligations (CMOs)..................... 6
Other Mortgage-Backed Securities............................... 6
Other Asset-Backed Securities..................................... 7
Variable and Floating Rate Securities............................. 8
Banking Industry and Savings Industry Obligations................. 8
Commercial Paper.................................................. 9
Repurchase Agreements............................................. 10
Reverse Repurchase Agreements..................................... 11
Lending Portfolio Securities...................................... 11
Other Investment Companies........................................ 11
Short Sales....................................................... 12
Short Sales Against the Box....................................... 12
Futures Contracts and Options on Futures Contracts................ 12
General Description of Futures Contracts....................... 12
Interest Rate Futures Contracts................................ 12
Options on Futures Contracts................................... 13
Stock Index Futures Contracts.................................. 13
Investment in Gold and Other Precious Metals................... 14
Gold Futures Contracts......................................... 14
Limitations.................................................... 15
Options on Securities and Securities Indexes...................... 16
Purchasing Options on Securities............................... 16
Risks of Options Transactions.................................. 16
Writing Covered Call and Secured Put Options................... 17
Options on Securities Indexes.................................. 17
Over-the-Counter Options....................................... 18
General........................................................ 18
Risks Associated with Futures and Futures Options................. 18
When-Issued or Delayed Delivery Securities........................ 20
Foreign Securities................................................ 20
Foreign Currency Transactions..................................... 22
Options on Foreign Currencies..................................... 23
Common Stock and Other Equity Securities ......................... 23
Convertible Securities............................................ 23
Currency Management............................................... 24
Hybrid Investments................................................ 24
Dollar Roll Transactions.......................................... 25
Equity and Debt Securities Issued or Guaranteed by
Supranational Organizations..................................... 26
Exchange Rate Related Securities.................................. 26
Geographical and Industry Concentration........................... 27
Illiquid Securities............................................... 27
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Restricted Securities............................................. 27
Lease Obligation Bonds............................................ 27
Borrowing......................................................... 28
Hard Asset Securities............................................. 28
Real Estate Securities............................................ 28
Swaps............................................................. 29
Zero-Coupon Bonds................................................. 29
Small Companies................................................... 29
Strategic Transactions............................................ 30
Lending of Portfolio Securities................................... 31
Special Situations................................................ 31
Warrants.......................................................... 31
ADDITIONAL INVESTMENT STRATEGIES AND ASSOCIATED RISKS............... 32
Equity Income Portfolio........................................... 32
Fully Managed Portfolio............................................ 32
Limited Maturity Bond Portfolio................................... 33
Hard Assets Portfolio............................................. 34
Real Estate Portfolio............................................. 36
All-Growth Portfolio.............................................. 37
Rising Dividend Portfolio......................................... 37
Emerging Market Portfolio......................................... 38
Value Equity Portfolio............................................ 39
Strategic Equity Portfolio........................................ 40
Capital Appreciation Portfolio.................................... 40
Small Cap Portfolio............................................... 41
Managed Global Portfolio.......................................... 42
Growth Opportunities Portfolio.................................... 43
Developing World Portfolio........................................ 43
Mid-Cap Growth Portfolio.......................................... 44
Research Portfolio................................................ 45
Total Return Portfolio............................................ 45
Growth & Income Portfolio......................................... 46
Growth Portfolio.................................................. 47
Global Fixed Income Portfolio..................................... 48
Liquid Asset Portfolio............................................ 49
INVESTMENT RESTRICTIONS............................................. 49
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....... 49
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.............................. 54
For the Growth Opportunities and Developing World Portfolio.... 54
Non-Fundamental Investment Restrictions........................... 56
For the Rising Dividends Portfolio, Emerging Markets Portfolio,
Value Equity Portfolio, Strategic Equity Portfolio, Small Cap
Portfolio, Managed Global Portfolio and Market Manager
Portfolio..................................................... 56
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For the Managed Global Portfolio............................... 56
For the Total Return Portfolio, Research Portfolio, Mid-Cap
Growth Portfolio and Global Fixed Income Portfolio............ 56
For the Growth Portfolio....................................... 56
For the Growth & Income Portfolio.............................. 57
For the Growth Opportunities and Developing World Portfolio.... 58
MANAGEMENT OF THE TRUST............................................. 58
The Management Agreement.......................................... 62
Portfolio Managers................................................ 64
Distribution of Trust Shares...................................... 65
Purchases and Redemptions......................................... 65
PORTFOLIO TRANSACTIONS AND BROKERAGE................................ 65
Investment Decisions.............................................. 65
Brokerage and Research Services................................... 66
NET ASSET VALUE..................................................... 68
PERFORMANCE INFORMATION............................................. 69
TAXES............................................................... 71
OTHER INFORMATION................................................... 73
Capitalization.................................................... 73
Voting Rights..................................................... 73
Custodian and Other Service Providers............................. 74
Independent Auditors.............................................. 74
Counsel........................................................... 74
Registration Statement............................................ 74
Financial Statements.............................................. 74
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 solely 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 Portfolio's 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 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
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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 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 they also typically entail
greater price volatility and principal and income risk.
Investment in high yield bonds involves special risks in addition to
the risks associated with investments in higher rated debt securities.
High yield bonds are regarded as predominately speculative with respect
to the issuer's continuing ability to meet principal and interest
payments. 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
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changes, and therefore
tend to be more volatile than securities which pay interest periodically
and in cash.
The secondary market on which high yield bonds are traded may be less
liquid than the market for higher grade bonds. Less liquidity in the
secondary trading market could adversely affect the price at which the
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.
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
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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 any of its political subdivisions,
authorities, agencies, or instrumentalities, or by supranational
entities, which, at the time of investment, are rated A or better by
Standard & Poor's or Moody's or, if not rated by Standard & Poor's or
Moody's, determined by the Portfolio Manager to be of equivalent quality.
Certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. The issuer or governmental
authority that controls the repayment of sovereign debt may not be
willing or able to repay the principal and/or pay interest when due in
accordance with the terms of such obligations. A governmental entity's
willingness or ability to repay principal and pay interest due in a
timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
government's dependence on expected disbursements from third parties, the
government's policy toward the International Monetary Fund and the
political constraints to which a government may be subject. Governmental
entities may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements may be
conditioned on a debtor's implementation of economic reforms or economic
performance and the timely service of such debtor's obligations. Failure
to implement such reforms, achieve such levels of economic performance or
repay principal or interest when due may result in the cancellation of
such third parties' commitments to lend funds to the government debtor,
which may further impair such debtor's ability or willingness to timely
service its debts. Holders of sovereign debt may be requested to
participate in the rescheduling of such debt and to extend further loans
to governmental entities. In addition, no assurance can be given that
the holders of commercial bank debt will not contest payments to the
holders of other foreign government debt obligations in the event of
default under their commercial bank loan agreements. The issuers of the
government debt securities in which the 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 the 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.
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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.
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.
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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) 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 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' investment quality
standards.
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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.
OTHER ASSET-BACKED SECURITIES
Asset-backed securities (unrelated to mortgage loans) are securities
such as "CARSSM" ("Certificates for Automobile ReceivablesSM") 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 CARSSM 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 CARSSM 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 specified events which signal a potential deterioration in
the quality of the assets backing the security, such as the imposition of
a cap on interest rates. The ability of the issuer to extend the life of
an issue of Credit Card Receivable Securities thus depends upon the
continued generation of additional principal amounts in the underlying
Accounts during the initial period and the non-occurrence of specified
events. The Tax Reform Act of 1986, pursuant to which a taxpayer's
ability to deduct consumer interest in his or her federal income tax
calculation was completely phased out for taxable years beginning in
1991, as well as competitive and general economic factors, could
adversely affect the rate at which new receivables are created in an
Account and conveyed to an issuer, shortening the expected weighted
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average life of the related Credit Card Receivable Security, and reducing
its yield. An acceleration in cardholders' payment rates or any other
event which shortens the period during which additional credit card
charges on an Account may be transferred to the pool of assets supporting
the related Credit Card Receivable Security could have a similar effect
on the weighted average life and yield.
Credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holder
the right to set off certain amounts against balances owed on the credit
card, thereby reducing amounts paid on Accounts. In addition, unlike
most other asset-backed securities, Accounts are unsecured obligations of
the cardholder.
VARIABLE AND FLOATING RATE SECURITIES
Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually,
etc.). Floating rate securities provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes. The
interest rate on variable or floating rate securities is ordinarily
determined by reference to or is a percentage of a bank's prime rate, the
90-day U.S. Treasury bill rate, the rate of return on commercial paper or
bank certificates of deposit, an index of short-term interest rates, or
some other objective measure.
Variable or floating rate securities frequently include a demand
feature entitling the holder to sell the securities to the issuer at par
value. In many cases, the demand feature can be exercised at any time on
7 days' notice; in other cases, the demand feature is exercisable at any
time on 30 days' notice or on similar notice at intervals of not more
than one year. Some securities which do not have variable or floating
interest rates may be accompanied by puts producing similar results and
price characteristics.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
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 may also
invest in obligations of foreign branches of commercial banks and foreign
banks if the securities are not U.S. dollar-denominated. See "Foreign
Securities" discussion in 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 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
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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), denominated in U.S. dollars, issued
by U.S. corporations or foreign 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
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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 its 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 transaction if (1) the loan is
fully collateralized at all times with U.S. Government securities, cash,
or cash equivalents (cash, U.S. Government securities, negotiable
certificates of deposit, bankers' acceptances, or letters of credit)
maintained on a daily marked-to-market basis, in an amount at least equal
to the value of the securities loaned; (2) it may at any time call the
loan and obtain the return of the securities loaned within five business
days; (3) it will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will
not at any time exceed 30% of the total assets of the 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.
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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 the broker, consisting of cash or securities acceptable to the
broker. In addition, with respect to any short sale, other than short
sales against the box, the 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.
The Portfolio may purchase and sell interest rate futures as a hedge
against adverse changes in debt instruments and other interest rate
sensitive securities held by the Portfolio. As a hedging strategy a
Portfolio might employ, 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
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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 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
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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 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 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
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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.
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"
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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.
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
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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 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 also may be for the same purposes
as the purchase or sale of options on securities. Options on securities
indexes are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the
actual purchase or sale of securities. In addition, securities index
options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price
fluctuations in a single security. When such options are written, the
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.
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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 Portfolio 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.
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
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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 Portfolio 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
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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.
"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.
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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 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
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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 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
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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. Each Portfolio's
Adviser or 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 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 Fund 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 Fund 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
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Fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the Hybrid.
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 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 Fund. Accordingly, the Fund will limit its investments
in Hybrid Instruments to 10% of total assets. However, because of their
volatility, it is possible that the Fund'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
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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
1940 Act. "Covered rolls" are not subject to these segregation
requirements. Dollar Roll Transactions may be considered borrowings and
are, therefore, subject to the borrowing limitations applicable to the
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 which are indexed
to certain specific foreign currency exchange rates. The terms of such
security would provide that the principal amount or interest payments are
adjusted upwards or downwards (but not below zero) at payment to reflect
fluctuations in the exchange rate between two currencies while the
obligation is outstanding, depending on the terms of the specific
security. A 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 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
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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 above, except those Portfolio 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 the 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
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special tax treatment under
Subchapter M of the Internal Revenue Code of 1986 and to maintain an
exemption under the Investment Company Act of 1940. Finally, certain
REITs may be self-liquidating in that a specific term of existence is
provided for in the trust document and such REITs run the risk of
liquidating at an economically inopportune time.
SWAPS
Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than
one year. In a standard swap transaction, two parties agree to exchange
the returns (or differential in rates of return) earned or realized on
particular predetermined investments or instruments, which may be
adjusted for an interest factor. The gross returns to be exchanged or
"swapped" between the parties are generally calculated with respect to a
"notional amount," i.e., the return on or increase in value of a
particular dollar amount invested at a particular interest rate, or in a
"basket" of securities representing a particular index.
The use of swaps is a highly specialized activity which involved
investment techniques and risks different from those associated with
ordinary portfolio transactions. Whether the 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.
Zero-coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue
and compound over the period until maturity or the first interest payment
date at a rate of interest reflecting the market rate of the security at
the time of issuance. While zero-coupon bonds do not require the periodic
payment of interest, deferred interest bonds provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the
form of additional debt obligations. Such investments benefit the issuer
by mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations
which make regular payments of interest. The 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
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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 Adviser or a
Portfolio Manager would other wise have sold the security. It is possible
that the Adviser or a Sub-Adviser or its affiliates or clients may hold
securities issued by the same issuers, and may in some cases have
acquired the securities at different times, on more favorable terms, or
at more favorable prices, than a Portfolio which it manages.
Certain small- and mid-cap companies may present greater opportunities
for investment return, but may also involve greater risks. They may have
limited product lines, markets, or financial resources, or may depend on
a limited management group. Their securities may trade less frequently
and in limited volume. As a result, the prices of these securities may
fluctuate more than prices of securities of larger, widely traded
companies.
The Portfolios are subject to investment restrictions that are
described in this Statement of Additional Information. Those investment
restrictions so designated and the investment objective of each Portfolio
are "fundamental policies" of the Portfolio, which means that they may
not be changed without a majority vote of the shareholders of the
affected Portfolio. Except for those restrictions specifically identified
as fundamental and each Portfolio's investment objective, all other
investment policies and practices described in this Statement of
Additional Information are not fundamental, meaning that the Board of
Trustees may change them without shareholder approval. The vote of a
majority of the outstanding voting securities of a Portfolio means the
vote, at an annual or special meeting, of (a) 67% or more of the voting
securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities of such Portfolio are present or
represented by proxy; or (b) more than 50% of the outstanding voting
securities of such Portfolio, whichever is less.
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of the
Portfolios as stated elsewhere in this Statement of Additional
Information of the Trust, 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
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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 Fund's investment program.
While the securities are being lent, the Fund 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 Fund 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 AIM, the
consideration to be earned from such loans would justify the risk.
SPECIAL SITUATIONS
A special situation arises when, in the opinion of the Fund's
management, 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. Although large and will-known companies.
Investments in unseasoned companies and special situations often involve
much greater risk than in inherent in ordinary investment securities.
WARRANTS
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.
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The Funds 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 Fund's intent to
continue to qualify as such. The result of a hedging program cannot be
foreseen and may cause a Fund to suffer losses which it would not
otherwise sustain.
ADDITIONAL INVESTMENT STRATEGIES AND ASSOCIATED RISKS
EQUITY INCOME PORTFOLIO
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 generally invests 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 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
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 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
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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 holds a certain portion of its assets in money market
reserves. The Portfolio's reserve position can consist of shares of the
Reserve Investment Fund, and internally managed money market fund of T.
Rowe Price, as well as short-term, high-quality U.S. and foreign dollar-
denominated money market securities, including repurchase agreements.
The reserve position provides for flexibility in meeting redemptions and
paying expenses. 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
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.
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 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 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 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
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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 of the Portfolio will
not exceed five years, and, in periods of rapidly rising interest rates,
may be shortened to one year or less. For these purposes, (i) the
maturity of mortgage-backed securities is determined on an "expected
life" basis, (ii) variable or floating rate securities are deemed to
mature at the next interest rate adjustment date, and (iii) debt
securities with put features are deemed to mature at the next put
exercise date. Positions in interest rate futures contracts (long or
short) will be reflected in average portfolio maturity on the basis of
the maturities of the securities underlying the futures contracts. The
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 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."
HARD ASSETS PORTFOLIO
One premise underlying the Hard Asset Portfolio's investment
strategies is that during periods of accelerated inflation the prices of
natural resources will rise faster than the rate of inflation. The
Portfolio Manager expects that inflation and the price of certain natural
resources will continue on a long-term upward trend since the market
action of shares of companies engaged in certain natural resources
activities may move against, or independently of, the market trend of
industrial shares, the addition of such shares to an overall portfolio
may increase the return and reduce the fluctuations of such portfolio.
There can be no assurance that an increased rate of return or reduced
fluctuation of a portfolio will be achieved. Thus, an investment in the
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 will 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,
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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: (a) common stock of
companies not engaged in natural resources activities, (b) corporate debt
securities, (c) obligations issued or guaranteed by U.S. or foreign
governments, (d) money market instruments, and (e) repurchase agreements.
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. 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
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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."
REAL ESTATE PORTFOLIO
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
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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."
There are risks inherent in the Portfolio's investment policies. These
risks are discussed in "Description of Securities and Investment
Techniques."
ALL-GROWTH PORTFOLIO
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. 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
In seeking its objectives, the Portfolio normally invests at least 80%
of 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 25-30 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
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criteria. A security will generally be sold when it
reaches its target price, when negative changes occur in either the
company or its industry, or when any one or more of the four criteria are
no longer satisfied. There may from time to time be other equity
securities in the Portfolio which meet most, but not all, of the
criteria, but which the Portfolio Manager deems a suitable investment.
Equity securities are deemed to include common stocks, securities
convertible into common stocks, or rights or warrants to subscribe for or
purchase common stocks.
The Portfolio Manager may enter into forward currency contracts and
currency exchange transactions for hedging purposes. During those times
when equity securities that meet the Portfolio Manager's investment
criteria cannot be found, for temporary defensive purposes or pending
longer-term investment, the Portfolio may invest any amount of its assets
in short-term fixed income securities or in cash or cash equivalents.
The Portfolio may invest in mortgage- and asset-backed securities, enter
into repurchase agreements, invest in foreign equity securities,
including Depositary Receipts, make short sales "against the box," and
may borrow up to 10% of its net assets, and for temporary purposes may
borrow up to 25% of its assets for such items as large redemptions. As a
temporary defensive position, the Portfolio may invest in short-term
fixed income securities or cash equivalents.
EMERGING MARKET PORTFOLIO
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.
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.
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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 indexes, 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
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.
It is the policy of the Portfolio that no equity security will be
acquired, if, 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."
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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
Each Portfolio may invest, for temporary defensive purposes, all or
substantially all of its asset in investment grade (high quality)
corporate bonds, commercial paper, or U.S. Government obligation. 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 condition, 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 their 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
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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. The Portfolios 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
could invest in foreign securities.
Each Portfolio will not invest more than 15% of its assets in illiquid
securities, including repurchase agreements with maturities in excess of
seven days. 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
The investment objective of the Portfolio is 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. 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.
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MANAGED GLOBAL PORTFOLIO
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
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
The Portfolio 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
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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 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
The investment objective of the Mid-Cap Growth Portfolio is to obtain
long-term growth of capital. The Series 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 which
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" and this Statement of Additional Information for a
discussion of the risks involved in investing in lower-rated securities.
When the Portfolio Manager believes that investing for temporary
defensive 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.
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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%, 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
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
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-
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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 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" and the
Statement of Additional Information 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. (See the Statement of Additional
Information for information relating to these transactions including
related risks.)
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
The Portfolio may at times invest a substantial portion of its assets
in securities traded in the over-the-counter markets in such countries
and not on any exchange, which may affect the liquidity of the investment
and expose the 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.
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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 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's
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's Portfolio Manager believes to be
consistent with the Portfolio's best interests.
GROWTH PORTFOLIO
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 Funds 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 a Fund's net assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into.
When a Fund's 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 Fund's
investments may be hedged to a greater degree and/or its cash or similar
investments may increase. In other words, the Funds do 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. Partly because the portfolio managers act independently
of each other, the cash positions of the Funds may vary significantly.
Larger hedged positions and/or larger cash positions may serve as a means
of preserving capital in unfavorable market conditions.
Securities that the Funds 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
Funds may also invest in money market funds (including funds managed by
Janus Capital). When a Fund 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 Fund
was not hedged or remained more fully invested in stocks or bonds.
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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 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
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. The Portfolio Manager for
the Portfolio is Baring International Investment Limited.
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.
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LIQUID ASSET PORTFOLIO
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 mature within five business days), shall promptly
reassess whether such security presents minimal credit risk and determine
whether to retain the instrument.
From time to time, in the ordinary course of business, the Portfolio
may purchase securities on a when-issued or delayed delivery basis. The
Portfolio shall engage only in short sales "against the box." The
Portfolio may also enter into repurchase agreements; the Portfolio may
purchase mortgage-backed securities, invest up to 10% in illiquid
securities and may borrow up to 10% of its net assets to purchase
securities and up to 25% of its net assets for temporary purposes. In
connection with permissible borrowings the Portfolio may transfer as
collateral securities owned by the Portfolio. See "Description of
Securities and Investment Techniques" for descriptions of these
techniques.
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.
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
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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;
(7) Issue senior securities, except insofar as a Portfolio may be
deemed to have issued a senior security by reason of borrowing
money in according 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
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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, more than 15% of the total
assets 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.
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FOR THE TOTAL RETURN PORTFOLIO, RESEARCH PORTFOLIO, MID-CAP GROWTH
PORTFOLIO AND GLOBAL FIXED INCOME PORTFOLIO:
A Portfolio may not:
(1) With respect to 75% of its total assets, purchase the
securities of any issuer if such purchase would cause more than 5%
of the value of a 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.
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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;
(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;
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(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);
(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
54
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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 (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.
55
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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 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.
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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;
(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
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(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 WITH BUSINESS AFFILIATIONS,
THE TRUST PRINCIPAL OCCUPATIONS
AND AGES
R. Brock Armstrong Trustee, Senior Vice President,
Golden American Life President and Individual Insurance, The
Insurance Company; Chairman for Prudential Insurance Company
1001 Jefferson Street the of America, April 1997 -
Wilmington, DE 19801 GCG Trust 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; 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, Golden American
Golden American Life Vice Life Insurance Company;
Insurance Company; President President, Directed Services,
1001 Jefferson Inc.; Executive Vice
Street Wilmington, President,First Golden
DE 19801 American Life Insurance
Company of New York;
formerly, Senior Vice
President and Chief
Financial Officer,
Reliance Insurance Company,
August 1977 to July 1993.
Age 49.
J. Michael Earley Trustee President, and Chief Executive
665 Locust Street Officer,Executive Officer,
Bankers Bankers Trust Company, Des
Des Moines, IA 50309 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. Barabara Gitenstein Trustee President, The College of New
Office of the President Jersey since January 1999;
The College of New Jersey Trustee Provost, Drake University
200 Pennington Road from July 1992 to Decembeer 1998;
Ewing, NJ Assistant Provost, State University
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.
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Robert A. Grayson Trustee Co-founder, Grayson Associates,
Grayson Associates Inc.; Adjunct Professor of
108 Loma Media Road Marketing, New York University
Santa Barbara, CA School of Business Administration;
93103 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 Company Golden American Life
1001 Jefferson Street Insurance Company; Director,
Wilmington, DE Executive Vice President,
19801 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,
Untied Pacific Life Insurance
Company (1086-1993). Age 56.
Stanley B. Seidler Trustee President, Iowa Periodicals,
P.O. Box. 1297 Inc. since 1990 and President,
3301 McKinley Avenue Excell Marketing L.C. since 1994.
Des Moines, IA 50321 Age 70.
Mary Bea Wilkinson Treasurer Senior Vice President &
Golden American Treasurer, First Golden
Insurance Company American Life Insurance
1001 Jefferson Company of New York; Senior
Street. Wilmington, Vice President and Treasurer,
DE 19801 Golden 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.
Elizabeth J. Newell Trustee President and Chief
KRAGIE/NEWELL, Inc. Executive Officer of
2633 Fleur Drive KRAGIE/NEWELL, Inc.
Des Moines, IA 50321 Age 52.
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As of December 31, 1998, none of the Trustees directly owns shares of
the Portfolio. In addition, as of December 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 $___________. The following table shows 1998
compensation by Trustee. An asterisk indicates that the person is an
interested trustee, pursuant to the 1940 Act.
<TABLE>
COMPENSATION TABLE
<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, $_____ N/A N/A $24,000
Trustee
R. Barbara Gitenstein, $_____ N/A N/A $24,750
Trustee
Robert A. Grayson $_____ N/A N/A $24,000
Trustee
Stanley B. Seidler, $_____ N/A N/A $24,750
Trustee
Elizabeth J. Newell $_____ N/A N/A $24,000
Trustee
Roger B. Vincent $_____ N/A N/A $24,000
Trustee
M. Norvell Young $_____ N/A N/A $ 6,000
Trustee
</TABLE>
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 DECEMBER 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 Opportunity 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 ("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
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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 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 _____________________. 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--$____________ ; Strategic
Equity Portfolio (commencement of operation October 2, 1995)--$
____________ ; Fully Managed Portfolio--$____________; Limited Maturity
Bond Portfolio--$____________; Hard Assets Portfolio--$____________ ;
Real Estate Portfolio--$____________; All-Growth Portfolio--
$____________; Capital Appreciation Portfolio--$____________; Rising
Dividends Portfolio--$____________; Emerging Markets Portfolio--
$____________ ; Liquid Asset Portfolio--$____________; and Value Equity
Portfolio--$____________ and the Market Manager 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
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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 through 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 $293,930, respectively.
PORTFOLIO MANAGERS
The Trust, DSI, and each Portfolio Manager entered into Portfolio
Management Agreements dated and effective as of October 24, 1997. The
Portfolio Management Agreements were approved by the Trustees of the
Trust at a meeting held on _________________ and were approved by
shareholders of each Portfolio of the Trust at a meeting held on
_________________.
Pursuant to the separate Portfolio Management Agreements, the Manager
(and not the Trust) pays each Portfolio Manager for its services a
monthly fee at annual rates which are expressed as percentages of the
average daily net assets of each Portfolio. For the fiscal year ended
December 31, 1998, the Manager (and not the Trust) paid the Portfolio
Managers the following amounts: Zweig Advisors Inc.--$ _________ for
the Equity Income Portfolio and $______ for the Strategic Equity Portfolio
(operation commencement from October 2, 1995); T. Rowe Price Associates,
Inc.--$_________ for the Fully Managed Portfolio; Bankers Trust Company--
$_________ for the Limited Maturity Bond Portfolio, $_________ for the
Emerging Markets Portfolio, $________ for the Liquid Asset Portfolio and
$_________ for the Market Manager Portfolio; Van Eck Associates Corp.--
$_________ for the Hard Assets Portfolio; Chancellor LGT Asset Management,
Inc.--$_________ for the Capital Appreciation Portfolio; Kayne, Anderson
Investment Management, L.P.--$_________ for the Rising Dividends Portfolio;
EII Realty Securities, Inc.--$__________ for the Real Estate Portfolio;
Eagle Asset Management, Inc.--$________ for the Value Equity Portfolio; and
Warburg, Pincus Counsellors, Inc.--$________ for the All-Growth 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,
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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 January 1, 1996 to August 31,
1996, Warburg, Pincus Counsellors, Inc. received $317,424 from the
predecessor and 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.
PURCHASES AND REDEMPTIONS
For information on purchase and redemption of shares, see "Purchase of
Shares" and "Redemption of Shares" in the Prospectuses. The Trust may
suspend the right of redemption of shares of any Portfolio and may
postpone payment beyond seven days for any period: (i) during which the
New York Stock Exchange is closed other than customary weekend and
holiday closing or during which trading on the New York Stock Exchange is
restricted; (ii) when the Securities and Exchange Commission determines
that a state of emergency exists which may make payment or transfer not
reasonably practicable; (iii) as the Securities and Exchange Commission
may by order permit for the protection of the security holders of the
Trust; or (iv) at any other time when the Trust may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
If the Board of Trustees should determine that it would be detrimental to
the best interests of the remaining shareholders of a Portfolio to make
payment wholly or partly in cash, the Portfolio may pay the redemption
price in whole or in 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 Securities and Exchange Commission. If shares
are redeemed in kind, the redeeming shareholder might incur brokerage
costs in converting the assets into cash.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each 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
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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 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.
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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. Watermark Securities, Inc., Zweig Securities
Corp., KA Associates, Inc., Raymond James & Associates, Inc., and Fred
Alger & Company, Incorporated are registered broker-dealers, and each is
an affiliate of a Portfolio Manager. Certain affiliates of Robert
Fleming Holdings Limited and Jardine Fleming Group Limited are broker-
dealers affiliated with T. Rowe Price Associates, Inc. Any of the above
firms may retain compensation on transactions effected for a 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 and All-Growth Portfolio paid brokerage
commissions of $___________________________________________________,
respectively. The Equity Income Portfolio paid brokerage commissions of
$______ ( ____% of its total brokerage commissions) to Watermark
Securities, Inc. The Market Manager Portfolio paid brokerage commissions
of $_____ ( ____% of its total brokerage commissions) to BT Brokerage
Corporation. The Value Equity Portfolio paid brokerage commissions of
$___ ( ____% of its total brokerage commissions) to Raymond James &
Associates, Inc.
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
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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 Fleming and Robert
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.
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
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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.
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.
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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:
_____________%, and _____% for the Equity Income Portfolio; _____%,
_____%, and _____% for the Fully Managed Portfolio; _____%, _____%, and
_____% for the Limited Maturity Bond Portfolio; _____%, _____%, and
_____% for the All-Growth Portfolio; _____%, _____%, and _____% for the
Real Estate Portfolio; _____%, _____%, and _____% for the Hard Assets
Portfolio; and _____%, _____%, and _____% 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 _____%, _____%, and _____%. For the period of
October 1, 1993 (inception of the Rising Dividends and Emerging Markets
Portfolio) to December 31, 1998 and for the one-year period ended
December 31, 1998, the average total return for the Rising Dividends
Portfolio was _____% and _____% and the average annual total return for
the Emerging Markets Portfolio was _____% and _____%. 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 _____% and _____%. 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 _____% and
_____%. 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 _____% and _____%. 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 _____% and _____%.
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 _____%, _____% and _____%, respectively.
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
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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.
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
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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.
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
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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.
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 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.
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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.
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.
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.
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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.
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PROSPECTUS #3
THE FUND FOR LIFE
<PAGE>
<PAGE>
THE GCG TRUST
PROSPECTUS
___________ ____, 1999
THE FUND FOR LIFE 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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PAGE
INTRODUCTION ..........................................
Investing Through Your Variable Contract .............
Why Reading This Prospectus is Important .............
Non-Principal Investments and Strategies .............
Temporary Defensive Positions ........................
Additional Information about the Portfolio ...........
Performance Information ..............................
The Year 2000 ........................................
THE PORTFOLIO AT A GLANCE .............................
FINANCIAL HIGHLIGHTS ..................................
DESCRIPTION OF THE PORTFOLIO ..........................
MANAGEMENT OF THE TRUST ...............................
The Adviser ..........................................
Portfolio Manager ....................................
Distributor ..........................................
Expenses .............................................
Portfolio Transactions ...............................
SHARE PRICE ...........................................
TAXES AND DISTRIBUTION ................................
MORE INFORMATION ......................................
Additional Investment Strategies .....................
Portfolio Turnover ...................................
Legal Counsel ........................................
Independent Auditors .................................
Year 2000 ............................................
AN INVESTMENT IN THE FUND FOR LIFE 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.
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INTRODUCTION
- -------------------------------------------------------------------------
[Section is in two-column format.]
INVESTING THROUGH YOUR VARIABLE CONTRACT
Shares of the Fund For Life Portfolio of the GCG Trust currently are
sold to segregated asset accounts ("Separate Accounts") of insurance
companies as funding choices for variable annuity contracts ("Variable
Contracts"). Assets in the Separate Account are invested in shares of
the Portfolio based on your allocation instructions. You do not deal
directly with the Portfolio to purchase or redeem shares. The
accompanying Separate Account prospectus describes your rights as a
Variable Contract owner.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, risks and strategy
of the Portfolio. Reading the prospectus will help you to decide
whether the Portfolio is the right investment for you. We suggest
that you keep this prospectus and the prospectus for the Separate
Account for future reference.
NON-PRINCIPAL INVESTMENTS AND STRATEGIES
This prospectus does not describe non-principal investments and
strategies which are available to, but are not the principal focus of,
the Portfolio. The types of investments and strategies are identified
and discussed, together with their limitations and risks, in the
Statement of Additional Information.
TEMPORARY DEFENSIVE POSITIONS
This prospectus does not describe temporary defensive positions. The
Portfolio may depart from its principal investment strategies by
temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While the Portfolio invests
defensively, it may not be able to pursue its investment objective.
The types of defensive positions in which the Portfolio may engage are
identified and discussed, together with their risks, in the Statement
of Additional Information.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
The Statement of Additional Information (dated ________ __, 1999)
about the Portfolio is made a part of this prospectus. It contains
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 (www.sec.gov).
PERFORMANCE INFORMATION
The performance information presented for the Portfolio 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.
THE YEAR 2000
The Trust could be adversely affected if the computer systems used by
the Trust's investment adviser and the Trust's other service providers
do not properly process and calculate date-related information from
and after January 1, 2000.
The Trust's investment adviser and independent technology consultants
are working to avoid year 2000-related problems in its systems and to
obtain assurances from other service providers that they are taking
similar steps. In addition, issuers of securities in which the Trust
invests may be adversely affected by year 2000-related problems. This
could have an impact on the value of the Trust's investments and its
share.
AN INVESTMENT IN THE FUND FOR LIFE 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.
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PORTFOLIO AT A GLANCE
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THE FUND FOR LIFE PORTFOLIO
INVESTMENT High total investment return (capital appreciation and
OBJECTIVE current income) consistent with prudent investment risk
and a balanced investment approach.
PRINCIPAL The Portfolio invests primarily in shares of other
INVESTMENT mutual funds. Under the Portfolio's allocation
STRATEGY strategy, investments are allocated between two asset
classes of mutual funds:
o 70% of the Portfolio's assets in mutual funds
investing primarily in equity securities
(including 10% in equity securities of foreign
issuers)
o 30% of the Portfolio's assets in mutual funds
investing primarily in debt securities rated at
least investment grade.
The Portfolio Manager believes that such asset
allocation strategy provides the majority of investment
return that would otherwise be obtained by investing
exclusively in common stocks, yet with significantly
lower volatility.
PRINCIPAL Like all funds, an investment in the Portfolio involves
RISKS risk. Investment in the Portfolio is not insured against
loss of principal. We cannot assure that the Portfolio
will achieve its investment objective. Investing in
shares of the Portfolio should not be considered a complete
investment program. The share value of the Portfolio
will rise and fall.
An investment in the Portfolio is subject to the
following principal risks described under "Description
of the Portfolio":
o MANAGER RISK
o LIQUIDITY RISK
o DIVERSITY RISK
Because the Portfolio invests in underlying mutual
funds, the Portfolio is subject to the risks associated
with the investment activities of the underlying mutual
funds. The following principal risks are described
under "Description of the Portfolio":
Principal risk associated with equity securities:
o MARKET AND COMPANY RISK
Principal risk associated with international
investments:
o FOREIGN INVESTMENT RISK
Principal risk associated with debt securities:
o INCOME RISK o INTEREST RATE RISK
o CREDIT RISK o CALL RISK
Because of these risks, your investment could lose or
not make any money.
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PORTFOLIO AT A GLANCE (CONTINUED)
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PERFORMANCE The value of your share in the Portfolio will fluctuate
depending on the investment performance of the
Portfolio. The following chart shows the variability
of the Portfolio's returns for the indicated time
periods, and the accompanying table shows the average
annual total return for the indicated time periods as
compared to the applicable market indices. The average
annual total returns below include reinvestment of
dividends and distributions. Of course, past
performance does not necessarily indicate future
results.
[[Performance Bar Chart Follows:]
FUND FOR LIFE -- ANNUAL TOTAL RETURN
Year 1993 1994 1995 1996 1997 1998
8.42% -2.15% 18.79% 10.57% 14.58% [ ]
|-------------------------------------------------| |--------------------|
| AVERAGE ANNUAL TOTAL RETURN AS COMPARED TO | | BEST QUARTER |
| MARKET INDEX | |--------------------|
|-------------------------------------------------| | ________ XX, 19XX |
| 1 YEAR 5 YEAR 3/1/93 | | ___ % |
| (INCEPTION)| | |
| Portfolio's Average | | |
| Annual Total Return | |--------------------|
| Standard & Poor's | | WORST QUARTER |
| 500 Index | |--------------------|
| Standard & Poor's | | |
| Midcap 400 Index | | ________ XX, 19XX |
| Russell Midcap | | ___ % |
| | | |
|-------------------------------------------------| |--------------------|
The Portfolio commenced operations in March, 1993. The
average annual return for year 1993 as shown is not
annualized.
Directed Services, Inc. manages the Portfolio.
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FINANCIAL HIGHLIGHTS
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The following financial highlights tables are intended to help you
understand the Portfolio's financial performance for the past 5 years.
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 the
Portfolio's financial statements, are included in the annual report,
which is available upon request.
<TABLE>
<CAPTION>
FUND FOR LIFE PORTFOLIO *
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YEAR ENDED
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12/31/98 12/31/97# 12/31/96 12/31/95 12/31/94
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<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $ 7.61 $10.95 $ 9.23 $10.51
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income(Loss) 0.03 0.01 (0.24) 0.44
Net Realized and Unrealized
Gain(Loss) on Investments 1.09 0.88 1.98 (0.67)
------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.12 0.89 1.74 (0.23)
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income 0.13 0.00 0.02 0.44
Distributions from Capital Gains 1.35 4.23 0.00 0.61
------------------------------------------------
TOTAL DISTRIBUTIONS 1.48 4.23 0.02 1.05
- ---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $7.25 $ 7.61 $10.95 $ 9.23
=======================================================================================
TOTAL RETURN 14.58% 10.57% 18.79% (2.15)%
=======================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000's) $ $ 202 $ 201 $ 333 $1,346
Ratio of Operating Expenses to
Average Net Assets 2.50% 2.56% 4.25% 1.84%
Decrease Reflected in Above
Expense Ratio Due to
Expense Limitations 12.06% 9.45% 0.68% --
Ratio of Net Investment Income
to Average Net Assets 0.40% 0.10% (2.32%) 2.23%
Portfolio Turnover Rate 8.94% 6.87% 5.68% 13.06%
- ---------------------------------------------------------------------------------------
</TABLE>
* The Fund For Life Portfolio commenced operations on March 1, 1993.
** Not annualized
# Per share data numbers have been calculated using the average
share method.
4
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIO
- -------------------------------------------------------------------------
THE FUND FOR LIFE PORTFOLIO
PORTFOLIO
MANAGER Directed Services, Inc.
INVESTMENT High total investment return (capital appreciation and
OBJECTIVE current income) consistent with prudent investment risk
and a balanced investment approach.
PRINCIPAL The Portfolio invests primarily in other mutual funds.
INVESTMENT The Portfolio uses an allocation strategy that emphasizes
STRATEGY mutual funds that invest primarily in domestic equity
securities, while also allocating a portion of the
Portfolio's assets to mutual funds that invest in
international equity securities and a portion of the
Portfolio's assets to mutual funds that invest primarily
in debt securities rated at least investment grade. The
Portfolio invests only in mutual funds that are not
affiliated with the Portfolio or the Portfolio Manager.
Toward this end, the Portfolio allocates its assets among
the following three general classifications:
o EQUITY FUNDS. Approximately 60% of the Portfolio's
assets will be invested in mutual funds that seek
growth, growth and income, capital appreciation, or a
similar objective or objectives, primarily through
investment in domestic equity securities under normal
circumstances.
o INTERNATIONAL EQUITY FUNDS. Approximately 10% of
the Portfolio's assets will be invested in mutual
funds that seek growth, growth and income, capital
appreciation, or a similar objective or objectives,
primarily through investment in equity securities
that may be from issuers domiciled or traded in
countries outside of the United States.
o INCOME FUNDS. Approximately 30% of the Portfolio's
assets will be invested in mutual funds that seek as
their objective income, growth, or total return
primarily through investment in debt securities that
are rated investment grade or better.
The Portfolio normally maintains the allocation of its
assets among the three classifications indicated above,
but may vary the percentages to respond to market
conditions.
The Portfolio Manager believes that the allocation
strategy provides the majority of investment return that
would otherwise be obtained by investing exclusively in
common stocks, yet with significantly lower volatility.
The Portfolio Manager also believes that with the
increasing globalization of securities markets, investors
should have some exposure to foreign stock markets. The
Portfolio Manager selects mutual funds that have had the
best performance within their classification, as measured
over time periods deemed appropriate by the Portfolio
Manager. The Portfolio normally invests in 10-15 mutual
funds. The Portfolio generally may not purchase or
invest in securities of any investment company if, as a
result, the Portfolio and all of its affiliates, would
own more than 3% of the total outstanding stock of that
company.
5
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<PAGE>
The Portfolio may invest in underlying mutual funds that
are both diversified and non-diversified. A non-
diversified mutual fund may invest more than 5% and up to
25% of its assets in the securities of one issuer. The
Portfolio itself is classified as diversified under the
Investment Company Act of 1940.
PRINCIPAL Like all funds, an investment in the Portfolio involves
RISKS risk. Investment in the Portfolio is not insured against
loss of principal. We cannot assure that the Portfolio
will achieve its investment objective. Investing in
shares of the Portfolio should not be considered a
complete investment program. The share value of the
Portfolio will rise and fall.
An investment in the Portfolio is subject to the
following principal risks:
o MANAGER RISK. The Portfolio Manager and the
investment advisers of the underlying mutual funds
may do a mediocre or poor job in selecting
securities.
o LIQUIDITY RISK. The 1940 Act provides than an
underlying mutual fund whose shares are purchased by
the Portfolio will be obligated to redeem shares held
by the Portfolio only in an amount up to 1% of the
mutual fund's outstanding securities during any
period of less than 30 days. Shares held by the
Portfolio in excess of 1% of a mutual fund's
outstanding securities therefore will be considered
not readily marketable, and these securities together
with other illiquid securities may not, exceed 15% of
the Portfolio's assets.
o DIVERSITY RISK. The Portfolio may invest in shares
of mutual funds that are both diversified and non-
diversified. Non-diversified funds are permitted to
invest a greater proportion of their assets in the
securities of a smaller number of issuers, and may be
more susceptible to any single economic, political or
regulatory occurrence.
Because the Portfolio invests in underlying mutual
funds, the Portfolio is subject to the following
principal risks associated with the investment activities
of the underlying mutual funds:
o PRINCIPAL RISK ASSOCIATED WITH EQUITY SECURITIES:
o MARKET AND COMPANY RISK. The price of a
security held by an underlying mutual fund may
fall due to changing economic, political or
market conditions or disappointing earnings
results. Stock prices in general will decline
over short or even extended periods. The stock
market tends to be cyclical, with periods when
stock prices generally rise and periods when
stock prices generally decline. Further, even
though the stock market is cyclical, returns from
a particular stock market segment in which the
mutual fund may invest may still trail returns
from the overall stock market.
o PRINCIPAL RISK ASSOCIATED WITH INTERNATIONAL
INVESTMENTS:
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 underlying mutual fund 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.
6
<PAGE>
<PAGE>
dollar-denominated securities
of foreign issuers, including depositary
receipts, also are subject to currency risk based
on their related investments.
o PRINCIPAL RISK ASSOCIATED WITH DEBT SECURITIES:
o INCOME RISK. The underlying mutual fund'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
for shorter-term bonds, moderate for intermediate-
term bonds, and high for longer-term bonds. A
bond's duration measures its sensitivity to
changes in interest rates. The longer the
duration, the greater the bond's price movement
will be as interest rates change.
o CREDIT RISK. A bond issuer (debtor) may fail
to repay interest and principal in a timely
manner. The price of a security held by a
portfolio may fall due to changing economic,
political or market conditions or disappointing
earnings results.
o CALL RISK. During periods of falling interest
rates, a bond issuer may "call," or repay, its
high yielding bond before the bond's maturity
date. Forced to invest the unanticipated
proceeds at lower interest rates, a portfolio
would experience a decline in income.
Because of these risks, your investment could lose or not
make any money.
MORE ON THE The Trust has retained Directed Services, Inc. ("DSI") as
PORTFOLIO Portfolio Manager to manage the assets of the Portfolio
MANAGER and to act as administrator to the Portfolio. DSI is a
subsidiary of ING Groep N.V. The address of DSI is 1475
Dunwoody Drive, West Chester, Pennsylvania 19380.
The following person at DSI is primarily responsible for
the day-to-day investment decisions of the Portfolio:
Name Name and Recent Business Experience
---- ------------------------------------
Christopher W. Smythe Vice President
Mr. Smythe has been employed as Vice
President at DSI for the past 2 years.
Prior to date, he was employed as
Assistant Vice President at PNC Bank.
DSI also serves as manager and administrator to the GCG
Trust and is the principal underwriter and distributor of
the Variable Contracts issued by Golden American Life
Insurance Company. For more information, please refer to
"Management of the Trust."
7
<PAGE>
<PAGE>
- -------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
- -------------------------------------------------------------------------
THE ADVISER Directed Services, Inc. ("DSI") is the overall adviser to
the GCG Trust. The Trust is an open-end management
investment company organized as a Massachusetts business
trust. DSI is a New York corporation and is a wholly
owned subsidiary of ING Groep N.V. ("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 ("Golden American")
issues. Golden American is a stock life insurance
company organized under the laws of the State of Delaware
and a subsidiary of ING.
DSI performs the activities described above in this
Prospectus and below under the caption "Distributor."
The Trust pays DSI, as portfolio manager, for management
services a monthly fee at an annual rate of 0.10% of the
average daily net assets of the Portfolio. DSI is
currently waiving the management fee.
DSI also provides administrative services necessary for
the Trust's operation and furnishes or procures on behalf
of the Trust and the Portfolio the services and
information necessary to the proper conduct of the
Portfolio's business. As administrator, DSI also
liaisons among the various service providers to the
Portfolio. DSI is also responsible for ensuring that the
Portfolio is operated in compliance with applicable legal
requirements. The Trust pays DSI, as administrator, for
administrative services a monthly fee at an annual rate
of 0.20% of the average daily net assets of the
Portfolio. DSI is currently providing (non-advisory)
management and administrative services to the other
operational portfolios of the Trust.
DISTRIBUTOR DSI acts as distributor of shares of the Portfolio, in
addition to serving as manager and administrator. As
distributor, DSI is a registered broker-dealer and a
member of the National Association of Securities Dealers,
Inc., and acts as distributor without remuneration from
the Trust.
EXPENSES Investors in the Portfolio bear not only a proportionate
share of the expenses of the Portfolio (including
operating costs and management fees) but also indirectly
similar expenses of the underlying mutual funds.
Shareholders also bear their proportionate share of any
sales charges incurred by the Portfolio related to the
purchase of shares of the mutual funds. In addition,
shareholders of the Portfolio may indirectly bear
expenses paid by a mutual fund related to the
distribution of its shares. For the fiscal year ended
December 31, 1998, total expenses paid by the Portfolio
were ____% of average net assets.
OTHER The Trust bears all costs of its operations other than
EXPENSES expenses specifically borne by DSI. See "Management of
the Trust" in the Statement of Additional Information.
Trust expenses directly attributable to the Portfolio
are charged to the Portfolio; other expenses are
allocated among all the portfolios of the Trust. The
Trust reimburses DSI for the Portfolio's organizational
expenses that DSI advanced.
PORTFOLIO DSI, as portfolio manager, places orders for the purchase
TRANSACTIONS and sale of no-load mutual funds for the Portfolio's
account directly with the mutual fund. Purchase and sale
orders of load mutual funds may be placed with DSI, as the
distributor, although other brokers or dealers may be
selected at the discretion of DSI. Purchase order for
certain money market instruments may be placed directly
with the issuer.
7
<PAGE>
<PAGE>
DSI, as distributor, may also assist in the execution of
the Portfolio's transactions to purchase underlying fund
shares for which it may receive distribution payments
from the mutual funds or their distributors in
accordance with the distribution plans of those funds.
The Portfolio has no restrictions on portfolio turnover,
although its annual turnover rate is not expected to
exceed 100%. A 100% annual portfolio turnover rate would
occur if each security in the Portfolio (other than
securities with less than one year remaining to maturity)
was replaced once during the year. If the Portfolio
purchases shares of load funds, a higher turnover rate
would result in correspondingly higher sales loads paid
by the Portfolio. There is no limit on the portfolio
turnover rates of the mutual funds in which the Portfolio
may invest.
- -------------------------------------------------------------------------
SHARE PRICE
- -------------------------------------------------------------------------
NET ASSET
VALUE The net asset value per share of the Portfolio is
calculated at or about 4:00 p.m. (New York City time),
Monday through Friday, on each day that the New York
Stock Exchange is open for trading, exclusive of federal
holidays. Net asset value per share is calculated by
dividing the aggregate value of the Fund's assets less
all liabilities by the number of the Portfolio's
outstanding shares.
The assets of the Portfolio consist primarily of the
mutual funds, which are valued at their respective net
asset values under the 1940 Act. Each mutual fund is
required to value securities in its portfolio for which
market quotations are readily available at their current
market value (generally the last reported sale price) and
all other securities and assets at fair value pursuant to
methods established in good faith by the board of
directors of the underlying fund. Money market funds
with portfolio securities that mature in one year or less
may use the amortized cost or penny-rounding methods to
value their securities. Securities having 60 days or
less remaining to maturity generally are valued at their
amortized cost, which approximates market value.
Other assets of the Portfolio are valued at their current
market value if market quotations are readily available
and, if market quotations are not available, they are
valued at fair value pursuant to methods established in
good faith by the Board of Trustees. Securities having
60 days or less remaining to maturity are valued at their
amortized cost.
- -------------------------------------------------------------------------
TAXES AND DISTRIBUTION
- -------------------------------------------------------------------------
The GCG Trust pays net investment income, if any, on your
shares of each Portfolio annually. Any net realized long-
term capital gains for the 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 the
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 the Portfolio will reduce the per share
net asset value by the per share amount paid.
The Portfolio 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
9
<PAGE>
<PAGE>
("Code"). As a qualified regulated investment
company, the Portfolio is 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 the
Portfolio's intention to distribute all such income and
gains.
Shares of the 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 the
Portfolio and you. Please refer to the Statement of
Additional Information for more information about the tax
status of the Portfolio. You are urged to consult with
your tax advisor for more detailed information regarding
taxes applicable to the Contracts and the holders
thereof.
- -------------------------------------------------------------------------
MORE INFORMATION
- -------------------------------------------------------------------------
ADDITIONAL The description of the Portfolio in this prospectus does
INVESTMENT not describe all of the non-principal investments,
STRATEGIES techniques and strategies the Portfolio may use to achieve
its investment objective. The Portfolio is not obligated
to use any of these techniques or strategies at any given
time or under any particular economic condition. For
further information on these investments, techniques and
strategies, please refer to the Statement of Additional
Information.
The Portfolio may take temporary defensive positions
inconsistent with their respective investment policies to
adjust their investment exposure during uncertain
periods, such as periods when the portfolio manager
determines that adverse market, economic, political or
other conditions exist. These positions generally
involve investing in a manner different than that in
which the portfolio invests under normal market
conditions. To the extent the Portfolio assumes a
temporary investment position, it may not achieve its
investment objective. For more detailed information on
the Portfolio's temporary defensive positions, please
refer to the Statement of Additional Information.
PORTFOLIO Before investing in the Portfolio, you should review its
TURNOVER 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 rate for the Portfolio is presented in
"Financial Highlights" in this prospectus.
LEGAL COUNSEL Sutherland Asbill & Brennan LLP, 1275 Pennsylvania
Avenue, N.W., Washington, D.C. 20004-2404 serves as
counsel to the GCG Trust.
10
<PAGE>
<PAGE>
INDEPENDENT Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116-
AUDITORS 5072 serves as independent auditors of the GCG Trust.
YEAR 2000 Based on a study of its computer software systems and
hardware, DSI, in conjunction with an affiliate, Golden
American, have determined their exposure to the year 2000
change of the century date issue. Some of these systems
support certain trust operations. The Adviser believes
its and Golden American's systems are or will be
substantially compliant by year 2000 and has engaged
external consultants to validate this assumption. The
Adviser is in contact with the GCG Trust's third party
vendors to ensure that their systems will be
substantially compliant by year 2000. To the extent
these third parties would be unable to transact business
in the year 2000 and thereafter, the GCG Trust's
operations could be adversely affected.
11
<PAGE>
<PAGE>
TO OBTAIN
MORE
INFORMATION
Two documents are available that offer further
information on the Portfolio:
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS. The
annual report of the Portfolio include a
discussion of the market conditions and investment
strategies that significantly affected the
Portfolio's performance during the last fiscal
year.
STATEMENT OF ADDITIONAL INFORMATION. The
Statement of Additional Information contains
additional information about the Portfolio. A
current Statement of Additional Information has
been filed with the Securities and Exchange
Commission, and is made a part of this prospectus
by reference.
To obtain a free copy of these documents or to
make inquiries about the Portfolio, 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 WILMINGTON, DELAWARE
G_______/99 811-5629
<PAGE>
<PAGE>
SAI #2
THE FUND FOR LIFE
<PAGE>
<PAGE>
THE FUND FOR LIFE
1475 DUNWOODY DRIVE
WEST CHESTER, PA 19380
(800) 366-0066
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information describes The Fund
For Life (the "Fund"), one of the Series of The GCG Trust (the
"Trust"). The Trust is an open-end management investment company
organized as a Massachusetts business trust. The Fund's Manager
is Directed Services, Inc. ("DSI" or the "Manager").
The Fund's investment objective is high total investment
return (capital appreciation and current income) consistent with
prudent investment risk and a balanced investment approach. The
Fund seeks to achieve its investment objective by investing in
shares of other open-end investment companies--commonly called
mutual funds.
As of the date of this Statement of Additional Information,
shares of the Fund are sold only to separate accounts of
insurance companies to serve as the investment medium for
variable annuity contracts issued by the insurance companies.
This Statement of Additional Information is intended to
supplement the information provided to investors in the
Prospectus dated May 1, 1999, of The Fund For Life and has 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
Fund's Prospectus and retained for future reference. The
contents of this Statement of Additional Information are
incorporated by reference in the Prospectus in their entirety. A
copy of the Prospectus may be obtained free of charge from the
Trust at the address and telephone number listed above.
Manager:
Directed Services, Inc.
(800) 447-3644
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION 1
INVESTMENT POLICIES 1
U.S. Government Securities 2
Banking Industry Obligations 2
Commercial Paper 4
Corporate Debt Securities 4
Repurchase Agreements 5
Illiquid and Restricted Securities 5
Foreign Securities 6
Foreign Currency Transactions 6
Industry Concentration 7
Loans of Portfolio Securities 7
Short Sales 7
Options 7
Futures Contracts and Options
on Futures Contracts 8
Leverage through Borrowing 9
Warrants 9
INVESTMENT RESTRICTIONS 10
MANAGEMENT OF THE TRUST 12
The Management Agreement 16
The Administrative Services Agreement 17
Distribution of Trust Shares 18
Purchases and Redemptions 19
PORTFOLIO TRANSACTIONS 19
NET ASSET VALUE 21
ADVERTISING 21
TAXATION 22
Distributions 25
Other Taxes 25
OTHER INFORMATION 25
Capitalization 25
Voting Rights 26
Custodian 26
Independent Auditors 27
Counsel 27
Registration Statement 27
FINANCIAL STATEMENTS 27
Appendix A: Description of Bond Ratings A-1
Appendix B: Securities and Investment Techniques
of Underlying Mutual Funds B-1
<PAGE>
<PAGE>
INTRODUCTION
This Statement of Additional Information is designed to
elaborate upon the discussion of certain securities and
investment techniques which are described in the Prospectus. The
more detailed information contained herein is intended solely for
investors who have read the Prospectus and are interested in a
more detailed explanation of certain aspects of some of the
Fund's securities and some investment techniques. Some of the
Fund's investment techniques are described only in the Prospectus
and are not repeated herein. Captions and defined terms in this
Statement of Additional Information generally correspond to like
captions and terms in the Prospectus.
INVESTMENT POLICIES
FUND INVESTMENTS. The Fund intends to maintain its assets
invested in mutual funds in accordance with the investment program
described above. At times, for temporary purposes pending full
investment of its assets or to meet anticipated redemptions, the Fund
may invest in money market mutual funds or invest directly in (or
enter into repurchase agreements with respect to) short-term debt
securities, including U.S. Treasury bills and other short-term U.S.
Government securities, commercial paper, certificates of deposit,
time deposits, and bankers' acceptances. The Fund may not purchase
shares of any investment company that is not registered with the
Securities and Exchange Commission.
The Fund will not employ a defensive strategy in response to
market or financial conditions, but will attempt to remain as fully
invested as practicable in the shares of mutual funds allocated as
described above. However, the mutual funds themselves may adopt
defensive strategies consistent with their own investment policies.
This may result, for example, in the Fund holding underlying funds
that, in turn, have committed significant assets to defensive
investments so they are not primarily invested in equity or
longer-term debt securities in which they would normally be invested.
The Fund's investments other than mutual funds are more fully
described as follows:
1
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U.S. GOVERNMENT SECURITIES. U.S. Government agency and instrumentality
obligations are debt securities issued by U.S. Government-sponsored
enterprises and Federal agencies. Some obligations of agencies are
supported by the full faith and credit of the United States
or U.S. Treasury guarantees; others, by the right of the issuer to
borrow from the U.S. Treasury; others, by discretionary authority
of the U.S. Government to purchase certain obligations of the
agency or instrumentality; and others, only by the credit of the
agency or instrumentality issuing the obligation. In the case of
obligations not backed by the full faith and credit of the United
States, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment.
Agencies and instrumentalities which issue or guarantee debt securities and
which have been established or sponsored by the U.S. Government
include the Bank for Cooperatives, the Export-Import Bank, the
Federal Farm Credit System, the Federal Home Loan Banks, the
Federal Home Loan Mortgage Corporation, the Federal Intermediate
Credit Banks, the Federal Land Banks, the Federal National
Mortgage Association and the Student Loan Marketing Association.
U.S. Treasury bills, which have a maturity of up to one year,
are direct obligations of the United States and are
the most frequently issued marketable U.S. Government security. The
U.S. Treasury also issues securities with longer maturities in the
form of notes and bonds.
BANK OBLIGATIONS. These obligations include negotiable
certificates of deposit, bankers' acceptances, and fixed time
deposits. The Fund limits its investments in United States bank
obligations to obligations of United States banks which have more
than $1 billion in total assets at the time of investment and are
members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the
Federal Deposit Insurance Corporation.
Certificates of Deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, which are
normally drawn by an importer or exporter to pay for specific
merchandise, and which are "accepted" by a bank, meaning, in
effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed-time deposits are
bank obligations payable at a stated maturity date and bearing
interest at a fixed rate. Fixed-time deposits may be withdrawn
on demand by the investor, but may be subject to early withdrawal
2
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<PAGE>
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. The Fund will not invest in fixed-time
deposits (i) which are not subject to prepayment; (ii) which
mature in more than seven days that are subject to withdrawal
penalties upon prepayment; or (iii) which mature from two
business days through seven calendar days that provide for
withdrawal penalties upon prepayment (other than overnight
deposits), if, in the aggregate, more than 15% 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.
The Fund may not invest in fixed time deposits maturing in more
than seven calendar days that are subject to withdrawal penalties.
Investments in fixed time deposits maturing from two business days
through seven calendar days that are subject to withdrawal penalties
may not, along with other illiquid securities, exceed 15% of the
value of the total assets of the Fund.
3
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COMMERCIAL PAPER. Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes, and variable rate
master demand notes issued by domestic and foreign bank holding
companies, corporations, and financial institutions, as well as
similar taxable instruments issued by government agencies and
instrumentalities. All commercial paper purchased by the Fund must
be, at the time of investment, (i) rated "P-1" by Moody's or "A-1" by
S&P, (ii) issued or guaranteed as to principal and interest by
issuers having an existing debt security rating of "Aa" or better by
Moody's or "AA" or better by S&P or (iii) securities which, if not
rated, are in the opinion of the Manager of an investment quality
comparable to rated commercial paper in which the Fund may invest.
Variable amount master demand notes are obligations that permit
the investment of fluctuating amounts at varying rates of interest
pursuant to direct arrangements between the Fund, as lender, and
the borrower. These notes permit daily changes in the amountsborrowed.
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 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 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 S&P; the Fund may invest in
them only if the Manager believes that at the time of investment
the notes are of comparable quality to the other commercial paper
in which the Fund may invest. Master demand notes are considered
by the Fund to have a maturity of one day, unless the Manager has
reason to believe that the borrower could not make immediate
repayment upon demand. See Appendix A for a description of
Moody's and S&P ratings applicable to commercial paper. See more
on "Master Demand Notes" under the same title in Appendix B.
CORPORATE DEBT SECURITIES. Fund investments in these securities
are limited to non-convertible corporate debt securities (corporate
bonds, debentures, notes and other similar corporate debt
instruments) which have one year or less remaining to maturity and
which are rated "AA" or better by S&P or "Aa" or better by Moody's.
4
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<PAGE>
The rating "P-1" is the highest commercial paper rating
assigned by Moody's and the ratings "A-1" and "A-1+" are the
highest commercial paper ratings assigned by S&P. Debt
obligations rated "Aa" or better by Moody's or "AA" or better by
S&P are generally regarded as high-grade obligations and such
ratings indicate that the ability to pay principal and interest
is very strong.
After purchase by the Fund, a security may cease to be rated
or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require a sale of such
security by the Fund. However, the Manager will consider such
event in its determination of whether the Fund should continue to
hold the security. To the extent the ratings given by Moody's or
S&P may change as a result of changes in such organizations or
their rating systems, the Fund will attempt to use comparable
ratings as standards for investments in accordance with the
investment policies contained in the Prospectus and in this
Statement of Additional Information.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase
agreements. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to
repurchase that security from the buyer at a mutually agreed-upon
time and price. These agreements may be considered to be loans by
the purchaser collateralized by the underlying securities. The Fund
may not enter into a repurchase agreement of greater than seven days
maturity if, after such investment, the amount of the Fund's total
assets in such agreements and other illiquid securities is greater
than 15%. In the event of default by the seller under the repurchase
agreement, the Fund may experience problems in exercising its rights
to the underlying securities and may experience time delays and costs
in connection with the disposition of such securities.
The Fund may engage in repurchase transactions in accordance
with guidelines approved by the Board of Trustees of the Trust,
which include monitoring the creditworthiness of the parties with
which the Fund 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.
ILLIQUID AND RESTRICTED SECURITIES. An underlying fund may invest
not more than 15% of its total assets in securities for which there
is no readily available market ("illiquid securities"), which would
include securities that are illiquid because their disposition is
subject to legal restrictions (so-called "restricted securities") and
repurchase agreements having more than seven days to maturity. A
considerable period of time may elapse between an underlying fund's
decision to dispose of such securities and the time when the
underlying fund is able to dispose of them, during which time the
value of the securities (and therefore the value of the underlying
fund's shares held by the Fund) could decline.
5
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FOREIGN SECURITIES. An underlying fund may invest up to 100% of
its assets in securities of foreign issuers. There may be less
publicly available information about these issuers than is available
about companies in the U.S., and foreign auditing, accounting, and
financial reporting requirements may not be comparable to those in
the U.S. In addition, the value of the underlying fund's foreign
securities may be adversely affected by fluctuations in the exchange
rates between foreign currencies and the U.S. dollar, as well as
other political and economic developments, including the possibility
of expropriation, confiscatory or other taxation, exchange controls
or other foreign governmental restrictions. Many 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 U.S. 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. In addition, foreign securities
and dividends and interest payable on those securities may be subject
to foreign taxes, including taxes withheld from payments on those
securities.
The underlying funds will calculate generally their net asset
values and complete orders to purchase, exchange or redeem shares
only on a Monday-Friday basis (excluding holidays on which the New
York Stock Exchange is closed). Foreign securities in which the
underlying funds may invest may be listed primarily on foreign stock
exchanges which may trade on other days (such as Saturday). As a
result, the net asset value of an underlying fund's portfolio may be
significantly affected by such trading on days when the Manager does
not have access to the underlying funds and shareholders do not have
access to the Fund.
FOREIGN CURRENCY TRANSACTIONS. In connection with its portfolio
transactions in securities traded in a foreign currency, an
underlying fund may enter into forward contracts to purchase or sell
an agreed-upon amount of a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed
upon by the parties at a price set at the time of the contract.
Although such contracts tend to minimize the risk of loss due to a
decline in the value of the subject currency, they tend to limit
commensurately any potential gain which might result should the value
of such currency increase during the contract period. See more on
"Foreign Currency Transactions" under the same title in Appendix B.
6
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INDUSTRY CONCENTRATION. An underlying fund may concentrate its
investments within one industry. Because the scope of investment
alternatives within an industry is limited, the value of the shares
of such an underlying fund may be subject to greater market
fluctuation than an investment in a fund which invests in a broader
range of securities.
LOANS OF PORTFOLIO SECURITIES. An underlying fund may lend its
portfolio securities provided: (1) that the loan is secured
continuously by collateral consisting of U.S. Government securities
or cash or cash equivalents maintained on a daily marked-to-market
basis in an amount at least equal to the current market value of the
securities loaned; (2) the fund may at any time call the loan and
obtain the return of the securities loaned; (3) the fund will receive
any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of the securities loaned will not at any time
exceed one-third of the total assets of the fund. Loans of
securities involve a risk that the borrower may fail to return the
securities or may fail to provide additional collateral.
SHORT SALES. An underlying fund may sell securities short. The
underlying fund will incur a loss as a result of the short sale if
the price of the security increases between the date of the short
sale and the date on which the fund replaces the borrowed security.
The fund will realize a gain if the security declines in price
between those dates. The amount of any gain will be decreased and
the amount of any loss increased by the amount of any premium,
dividends or interest the fund may be required to pay in connection
with a short sale. See more on "Short Sales" under the same title in
Appendix B.
OPTIONS. Certain underlying mutual funds may purchase and write
call and put options on securities, securities indexes, and on
foreign currencies. 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 a mutual fund is not sold when it has
remaining value, and if the market price of the underlying security,
7
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<PAGE>
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 fund 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 mutual fund seeks to close out an option
position. Furthermore, if trading restrictions or suspensions are
imposed on the options market a fund may be unable to close out a
position. If a mutual fund cannot effect a closing transaction, it
will not be able to sell the underlying security while the previously
written option remains outstanding, even if it might otherwise be
advantageous to do so. See "Options Activities" under the same title
in Appendix B.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. An underlying
mutual fund may invest in financial futures contracts such as
interest rate futures contracts, stock index futures contracts, and
others, and may purchase and write options on such futures contracts.
Generally, transactions in futures contracts and options thereon by a
mutual fund must constitute bona fide hedging or other permissible
transactions under regulations promulgated by the Commodities Futures
Trading Commission (the "CFTC"), under which a fund engaging in such
transactions would not be a "commodity pool."
There are several risks associated with the use of futures
contracts. While a mutual fund's use of futures contracts for
hedging may protect a fund against adverse movements in the general
level of interest rates or securities prices, such transactions could
also preclude the opportunity to benefit from favorable movements in
the level of interest rates or securities prices. There can be no
guarantee that there will be a correlation between price movements in
the hedging vehicle and in the securities being hedged. An incorrect
correlation could result in a loss on both the hedged securities in a
mutual fund and the hedging vehicle so that the fund's return might
have been better had hedging not been attempted.
8
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<PAGE>
There can be no assurance that a liquid market will exist at a
time when a mutual fund seeks to close out a futures contract or
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. Lack of a liquid market for any reason may prevent the
fund from liquidating an unfavorable position and the fund would
remain obligated to meet margin requirements until the position is
closed. See "Futures Contracts" and "Options on Futures Contracts" in
Appendix B.
LEVERAGE THROUGH BORROWING. An underlying fund may borrow a
percentage of the value of its net assets on an unsecured basis from
banks to increase its holdings of portfolio securities. Under the
1940 Act, the fund is required to maintain continuous asset coverage
of 300% with respect to such borrowings and to sell (within three
days) sufficient portfolio holdings to restore such coverage if it
should decline to less than 300% due to market fluctuations or
otherwise, even if disadvantageous from an investment standpoint.
In addition, the Fund may, for temporary or emergency purposes,
such as to facilitate redemptions, borrow from a bank in an amount
not in excess of 25% of the Fund's total assets, and the Fund may
pledge a portion of its total assets to secure such borrowings.
Leveraging will exaggerate the effect of any increase or decrease in
the value of portfolio securities on the fund's net asset value, and
money borrowed will be subject to interest costs (which may include
commitment fees and/or the cost of maintaining minimum average
balances) which may or may not exceed the interest and option
premiums received from the securities purchased with borrowed funds.
WARRANTS. An underlying fund may invest in warrants, which are
options to purchase equity securities at specific prices valid for a
specific period of time. The prices do not necessarily move parallel
to the prices of the underlying securities. Warrants have no voting
rights, receive no dividends and have no rights with respect to the
assets of the issuer. If a warrant is not exercised within the
specified time period, it will become worthless and the fund will
lose the purchase price and the right to purchase the underlying
security.
9
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INVESTMENT RESTRICTIONS
The investment restrictions set forth below, together with
the Fund's investment objective and policies, are fundamental
policies of the Fund and may not be changed by the Fund without
the approval of a majority of the outstanding voting shares of
the Fund. Under these restrictions, the Fund may not:
(1) 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 or the securities of issuers that
are registered investment companies and that themselves
invest more than 25% of their total assets in one industry,
except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies
or instrumentalities (or repurchase agreements with respect
thereto) or securities or obligations issued by U.S. banks;
(2) Purchase or sell real estate, except that the Fund
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;
(3) Purchase securities on margin (except for use of
short-term credit necessary for clearance of purchases and
sales of portfolio securities), except that to the extent
the Fund engages in transactions in options, futures, and
options on futures, the Fund may make margin deposits in
connection with those transactions and except that effecting
short sales will be deemed not to constitute a margin
purchase for purposes of this restriction, and subject to
the restrictions described in the Prospectus and in the
Statement of Additional Information, purchase securities on
margin;
(4) Lend any funds or other assets, except that the
Fund 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 Board of Trustees;
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(5) Issue senior securities, except insofar as the
Fund may be deemed to have issued a senior security by
reason of borrowing money in accordance with the Fund's
borrowing policies, or in connection with any repurchase
agreement, 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;
(6) Act as an underwriter of securities of other
issuers, except when in connection with the disposition of
portfolio securities, the Fund may be deemed to be an
underwriter under the federal securities laws; and
(7) Borrow money or pledge, mortgage, or hypothecate
its assets, except that the Fund may borrow from banks but
only if immediately after each borrowing and continuing
thereafter, there is asset coverage of 300%.
The Fund is also subject to the following restrictions and
policies that are not fundamental and may, therefore, be changed
by the Board of Trustees (without shareholder approval). Unless
otherwise indicated, the Fund may not:
(1) 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
Manager are illiquid if, as a result of such investment,
more than 15% of the total assets of the Fund (taken at
market value at the time of such investment) would be
invested in such securities;
(2) Purchase or sell commodities or commodities
contracts; and
(3) 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.
11
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MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction
of the Board of Trustees according to the applicable laws of the Common-
wealth 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, Stanley B. Seidler, Elizabeth J. Newell,
and Roger B. Vincent. The Executive Officers of the Trust are Barnett
Chernow, Myles R. Tashman, and Mary Bea Wilkinson.
Trustees and Executive Officers of the Trust, their business addresses,
and principal occupations during the past five years are:
NAME AND ADDRESS POSITION BUSINESS AFFILIATIONS AND
WITH THE PRINCIPAL OCCUPATIONS
TRUST
R. Brock Armstrong Trustee, Senior Vice President, Individual
Golden American Life President and Insurance, The Prudential Insurance
Insurance Cpompany; Chairman of Company of America, April 1997 -
1475 Dunwoody Drive the GCG TRust February 16, 1999; Executive Vice
West Chester, PA 19380 President, Operation, 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 ___.
Barnett Chernow Vice Executive Vice President,
Golden American Life President Golden American Life
Insurance Co. Trustee Insurance Company; Executive
1001 Jefferson Street Vice President, Directed
Wilmington, DE 19801 Services, Inc.; Executive Vice
President, First Golden American
Life Insurance Company of New
York; formerly,Senior Vice
President and Chief
Financial Officer, Reliance
Insurance Company, August
1977 to July 1993. Age 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.
12
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<PAGE>
R. Barbara Gitenstein Trustee President, The College of New Jersey
The College of New Jersey since January, 1999; Trustee Provost,
200 Pennington Road Drake Office of the President
Ewing, NJ 08628 University from July 1992 to December
1998, Assistant Provost, State
University 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 York University School of
Business Administration;
former Director, The Golden
Financial Group, Inc.; 93103
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
1001 Jefferson Street Company; Director, Executive Vice
Wilmington, DE 19801 President, Secretary and General
Counsel, Directed Services, Inc.;
Director, Executive Vice
President, Secretary and General
Counsel, First Golden American Life
Insurance Company of New York;
formerly, Senior Vice President
and General Counsel, United Pacific
Life Insurance Company (1986-
1993). Age 55.
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.
13
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<PAGE>
Mary Bea Wilkinson Treasurer Senior Vice President & Treasurer,
Golden American Life First Golden American Life Insurance
Insurance Co. Company of New York; Senior Vice
1001 Jefferson Street President and Treasurer, Golden
Wilmington, DE 19801 American Life Insurance Co.;
and President and Treasurer,
Directed Services, Inc.
October 1993 to December
1996; Assistant Vice
President, CIGNA Insurance
Companies, August 1993 to
October 1993; various
positions with United
Pacific Life Insurance
Company, January 1987 to
July 1993, and was Vice
President and Controller
upon leaving. Age 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.
Elizabeth J. Newell Trustee President and Chief
KRAGIE/NEWELL, Inc. Executive Officer of
2633 Fleur Drive KRAGIE/NEWELL, Inc. Age 51
Des Moines, IA 50321
- -----------------------------
As of December 31, 1998, none of the Trustees directly owns shares of
the Series. In addition, as of December 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 Series in the aggregate.
Each Trustee of the Trust who is not an interested person of the Trust or
Manager or Portfolio Manager receives a fee of $6,000 for each Trustees'
meeting attended and any expenses incurred in attending such meetings or
carrying out their responsibilities as Trustees of the Trust. With respect to
the period ended December 31, 1998, the Trust paid Trustees' Fees
aggregating $______________. The following table shows 1997
compensation by Trustee.
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<PAGE>
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, $ ______ N/A N/A $ 24,000
Trustee
R. Barbara Gitenstein, $ _____ N/A N/A $ 24,750
Trustee
Robert A. Grayson $ ______ N/A N/A $ 24,000
Trustee
Stanley B. Seidler, $ _____ N/A N/A $ 24,750
Trustee
Elizabeth J. Newell $ _____ N/A N/A $ 24,000
Trustee
Roger B. Vincent $ ______ N/A N/A $ 24,000
Trustee
M. Norvell Young $ ______ N/A N/A $ 6,000
Trustee
</TABLE>
The table below lists each Variable Contract Owner who owns a Variable
Contract that entitles the owner to give voting instructions with
respect to 5% or more of the shares of the Series as of December 31, 1998.
The address for each record owner is c/o Golden American Life Insurance
Company, 1475 Dunwoody Drive, West Chester, PA 19803.
NAME SERIES PERCENTAGE
Helen B. Yungman The Fund For Life 68.92%
Jerome S. Golden The Fund For Life 8.08%
Donald C. Nonell The Fund For Life 12.09%
15
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The Management Agreement
- ------------------------
Subject to the supervision of the Trust's Board of Trustees,
the Manager will provide a continuous investment program for the
Fund's portfolio and determine the composition of the assets of
the Fund's portfolio, including determination of the purchase,
retention, or sale of the securities, cash, and other investments
contained in the portfolio. The Manager will provide investment
research and conduct a continuous program of evaluation,
investment, sales, and reinvestment of the Fund's assets by
determining the securities and other investments that shall be
purchased, entered into, sold, closed, or exchanged for the Fund,
when these transactions should be executed, and what portion of
the assets of the Fund should be held in the various securities
and other investments in which it may invest in accordance with
the Fund's investment objective or objectives, policies, and
restrictions.
Pursuant to the Management Agreement, the Manager is
authorized to exercise full investment discretion and make all
determinations with respect to the investment of the Fund's
assets and the purchase and sale of its portfolio securities.
The Management Agreement will continue in effect until
February 1996, and from year to year thereafter provided such
continuance is approved annually by (i) the holders of a majority
of the outstanding voting securities of the Fund 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 1940 Act) of any such party. The Management
Agreement was approved by the Board of Trustees, including a
majority of the Trustees who are not parties to the Management
Agreement, or interested persons of such party, at a meeting held
on September 27, 1994. The Management Agreement may be
terminated without penalty by vote of the Trustees or the
shareholders of the Fund, or by the Manager, on 60 days' written
notice by either party to the Management Agreement and will
terminate automatically if assigned.
The Trust pays the Manager a monthly fee at an annual rate
of ____% of the average daily net assets of the Fund. Gross fees
paid to the Manager for the fiscal years ended December 31, 1998, 1997
and 1996 under the Management Agreement were $_____, $258, and $830,
respectively.
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The Administrative Services Agreement
- -------------------------------------
Directed Services, Inc. ("Administrator") serves as
Administrator to the Fund pursuant to an Administrative Services
Agreement between the Administrator and the Trust. Its address
is 1475 Dunwoody Drive, West Chester, PA 19803. DSI
also serves as Manager to the Fund.
Pursuant to the Administrative Services Agreement, the
Administrator, subject to the direction of the Board of Trustees,
is responsible for providing all supervisory and management
services reasonably necessary for the operation of the Trust and
the Fund other than the services performed by the Manager. These
services shall include, but are not limited to, (i) coordinating
all matters relating to the functions of the Fund's Manager,
Custodian, Dividend Disbursing Agent, and Recordkeeping Agent
(including pricing and valuation of the Fund's portfolio),
accountants, attorneys, and other parties performing services or
operational functions for the Trust, (ii) providing the Trust and
the Fund, at the Administrator'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 as well as other
applicable laws and to provide effective supervision and
administration of the Trust; (iii) maintaining or supervising the
maintenance by the Manager or third parties approved by the Trust
of such books and records of the Trust and the Fund as may be
required by applicable federal or state law; (iv) preparing or
supervising the preparation by third parties approved by the
Trust of all federal, state, and local tax returns and reports of
the Trust required by applicable law; (v) preparing and, after
approval by the Trust, filing and arranging for the distribution
of proxy materials and periodic reports to shareholders of the
Trust as required by applicable law; (vi) preparing and, after
approval by the Trust, 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; (vii) taking
such other action with respect to the Trust, after approval by
the Trust, as may be required by applicable law, including
without limitation the rules and regulations of the Securities
and Exchange Commission and other regulatory agencies; and (viii)
providing the Trust, at the Administrator's expense, with
adequate personnel, office space, communications facilities, and
other facilities necessary for its operations as contemplated in
the Administrative Services Agreement. Other responsibilities of
the Administrator are described in the Prospectus.
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The Administrator 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 Fund. The Trust pays the Administrator a
monthly fee at an annual rate of _____% of the Fund's average
daily assets. Gross fees paid the Administrator under the
Administrative Services Agreement for the fiscal years ended
December 31, 1998, 1997 and 1996 were $____, $518, and $1,660,
respectively. The 1997 fees were waived by the Administrator.
The Trust bears all of its costs of operation other than
those specifically borne by the Administrator or the Manager.
The Fund's costs include any direct charges relating to the
purchase and sale of portfolio securities, interest charges, fees
and expenses of the Trust's attorneys and auditors, taxes and
governmental fees, cost of share certificates and other expenses
of issue, sale, repurchase or redemption of shares, expenses of
registering and qualifying shares for sale, expenses of printing
and distributing reports, notices and proxy materials to
shareholders, fees and expenses of data processing, recordkeeping
and financial accounting services rendered to the Trust, expenses
of printing and filing reports and other documents with
governmental agencies, expenses of typesetting, printing and
distributing Prospectuses to the existing shareholders, expenses
of annual and special shareholders' meetings, charges of
custodians, fees and expenses of Trustees of the Trust who are
not officers or employees to the Manager or its affiliates,
membership dues in the Investment Company Institute or other
industry associations, insurance premiums and extraordinary
expenses such as litigation expense and the expense of compliance
with any governmental tax withholding requirements.
Certain of the expenses incurred by the Fund in connection
with its organization, its registration with the Securities and
Exchange Commission and any states where registered, and the
public offering of its shares were advanced on behalf of the
Trust by the Manager. These organizational expenses are deferred
and amortized by the Fund over a period not exceeding 60 months
from the date of the Fund's commencement of operations.
Distribution of Trust Shares
- ----------------------------
Directed Services, Inc. (the "Distributor") serves as the
Trust's Distributor pursuant to a Distribution Agreement with the
Trust. The Distributor is not obligated to sell a specific
amount of Trust shares. The Distributor bears all expenses of
providing services pursuant to the Distribution Agreement
including the costs of sales presentations, mailings,
advertising, and any other marketing efforts by the Distributor
in connection with the distribution or sale of the shares.
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Purchases and Redemptions
- -------------------------
For information on purchase and redemption of shares, see
"Purchase of Shares" and "Redemption of Shares" in the Fund's
Prospectus. The Trust may suspend the right of redemption of
shares of the Fund and may postpone payment beyond seven days for
any period: (i) during which the New York Stock Exchange is
closed other than customary weekend and holiday closing or during
which trading on the New York Stock Exchange is restricted; (ii)
when the Securities and Exchange Commission determines that a
state of emergency exists which may make payment or transfer not
reasonably practicable; (iii) as the Securities and Exchange
Commission may by order permit for the protection of the security
holders of the Trust; or (iv) at any other time when the Trust
may, under applicable laws and regulations, suspend payment on
the redemption of its shares. If the Board of Trustees should
determine that it would be detrimental to the best interests of
the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or
in part by a distribution in kind of securities from its
portfolio, in lieu of cash, in conformity with applicable rules
of the Securities and Exchange Commission. If shares are
redeemed in kind, the redeeming shareholder might incur brokerage
costs in converting the assets into cash.
PORTFOLIO TRANSACTIONS
As part of its obligations under the Management Agreement,
the Manager places all orders for the purchase and sale of
portfolio investments for the Fund's account with brokers or
dealers selected by it in its discretion. With respect to orders
for the purchase and sale of no-load mutual funds, the Manager
places orders directly with the mutual fund or its agent. With
respect to purchases of certain money market instruments,
purchase orders are placed directly with the issuer or its agent.
Purchases of load fund shares may be effected by the Manager
itself, which is a registered broker-dealer, although other
brokers or dealers may be selected at the discretion of the
Manager.
When appropriate, the Fund may arrange to be included within
a class of investors entitled to a reduced sales charge on load
fund shares and may purchase load fund shares under letters of
intent, rights of accumulation and cumulative purchase
privileges, which permit it to obtain reduced sales charges for
larger purchases of shares. Therefore, in a majority of cases,
the sales charges paid by the Fund on a load fund purchase do not
exceed 1% of the public offering price.
19
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Under the 1940 Act, a mutual fund must sell its shares at
the price (including sales load, if any) described in its
prospectus, and current rules under the 1940 Act do not permit
negotiations of sales charges. Therefore, the Fund currently is
not able to negotiate the level of the sales charges at which it
purchases shares of load funds, which may be as great as 8.5% of
the public offering price (or 9.29% of the net amount invested).
Nevertheless, certain factors tend to keep the Fund's portfolio
transaction costs as low as possible, including: (1) the Fund,
to the extent feasible, purchases shares of no-load funds which
can be acquired without incurring a sales charge or utilizing a
broker to effect the transaction; (2) the Fund, to the extent
feasible, takes advantage of exchange or conversion privileges
offered by many "families" of mutual funds; and (3) insofar as
the Fund invests in U.S. Government and other money market
securities, the transaction costs should be minimal.
With respect to all non-mutual fund securities, in executing
transactions, the Manager attempts to obtain the best execution
for the Fund 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 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.
The Manager may in the future provide advisory services to
clients other than the Fund. A particular security may be bought
or sold by the Manager for certain clients even though it could
have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more
clients when one or more clients are selling the security. In
some instances, one client may sell a particular security to
another client. Two or more clients of the Manager also may
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 Manager. Although there is no specified
formula for allocating such transactions, the various allocation
methods used by the Manager, and the results of such allocations,
are subject to periodic review by the Trust's 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.
20
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<PAGE>
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectus, the
Fund'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.
ADVERTISING
The Trust may, from time to time, include the total return
of the Fund in advertisements or sales literature. Performance
information for the Fund will not be advertised or included in
sales literature unless accompanied by comparable performance
information for a separate account to which the Fund offers its
shares.
Quotations of average annual total return for the Fund will
be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in the Fund over certain
periods that will include periods of one, five, and ten years
(or, if less, up to the life of the Fund), 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 Fund expenses on an annual
basis, and assume that all dividends and distributions are
reinvested when paid. For the fiscal year ended December 31,
1998 and the period from the commencement of operations of the
Fund on March 1, 1993 to December 31, 1998, the total return of
the Fund was 13.67% and _____%, respectively.
21
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<PAGE>
Performance information for the Fund may be compared, in
advertisements, sales literature, and reports to shareholders to:
(i) the Standard & Poor's 500 Stock Index, the Dow Jones
Industrial Average, 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 Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Quotations of total return for the Fund will not take into
account charges and deductions against any separate accounts to
which the Fund shares are sold or charges and deductions against
the life insurance policies or annuity contracts issued by Golden
American Life Insurance Company, although comparable performance
information for the separate account will take such charges into
account. Performance information for the Fund reflects only the
performance of a hypothetical investment in the Fund during the
particular time period on which the calculations are based.
Performance information should be considered in light of the
Fund's investment objective 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.
Advertisements may include discussion of the underlying
mutual funds held by the Fund.
22
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<PAGE>
TAXATION
The following discussion summarizes certain U.S. federal tax
considerations incident to an investment in the Fund.
The Fund intends to qualify annually and to elect to be
treated as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code").
To qualify as a regulated investment company, the Fund
generally must, among other things: (i) derive in each taxable
year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, and gains from the
sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business
of investing in such stock, securities, or currencies; (ii)diversify
its holdings so that, at the end of
each quarter of the taxable year, (a) at least 50% of the market
value of the Fund's assets is represented by cash, U.S.
Government securities, the securities of other regulated
investment companies, and other securities, with such other
securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities
of such issuer, and (b) not more than 25% of the value of its
total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other
regulated investment companies); and (iii) distribute at least 90%
of its net investment income (which includes, among other items,
dividends, interest, and net short-term capital gains in excess
of any net long-term capital losses) each taxable year.
As a regulated investment company, the Fund generally will
not be subject to U.S. federal income tax on its net investment
income and net capital gains (net long-term capital gains in
excess of the net short-term capital losses) that it distributes
to shareholders. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its net
investment income and any net capital gains.
In general, amounts not distributed by a regulated
investment company on a timely basis in accordance with a
calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To avoid the tax, a regulated
investment company must distribute during each calendar year, (i)
at least 98% of its ordinary income (not taking into account any
capital gains or losses) of the calendar year, (ii) at least 98%
of its capital gains in excess of its capital losses for the
twelve month period ending on October 31 of the calendar year
(adjusted for certain ordinary losses), and (iii) all ordinary
income and capital gains for previous years that were not
distributed during such years. The Fund will not be subject to
22
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<PAGE>
the excise tax on undistributed amounts for any calendar year if
at all times during the calendar year the shareholders of the
Fund consist only of segregated asset accounts of life insurance
companies established in connection with variable contracts, as
defined in the Code. (For this purpose, any shares of the Fund
attributable to an investment in the Fund not exceeding $250,000
made in connection with the organization of the Fund shall not be
taken into account.) In the event the Fund fails to meet this
exception, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a
calendar year if it is declared by the Fund in October, November,
or December of that year with a record date in such a month and
paid by the Fund during January of the following calendar year.
Such distributions will be taxable to shareholders (the insurance
company separate accounts) for the calendar year in which the
distributions are declared, rather than the calendar year in
which the distributions are received.
If the Fund invests in shares of an investment company
organized abroad, the Fund may be subject to U.S. federal income
tax on a portion of an "excess distribution" from, or on the gain
from the sale of part or all of the shares in, such company. In
addition, an interest charge may be imposed with respect to
deferred taxes arising from such distributions or gains.
To comply with regulations under Section 817(h) of the Code,
the Fund generally will be required to diversify its investments
following the first anniversary of the beginning of its
operations. Generally, pursuant to Section 817(h), the Fund will
be required to diversify its investments so that on the last day
of each quarter of a calendar year, no more than 55% of the value
of its assets is represented by any one investment, no more than
70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is
represented by any four investments.
In connection with the issuance of the diversification
regulations, the Treasury Department announced that it would
issue future regulations or rulings addressing the circumstances
in which a variable contract owner's control of the investments
of a separate account may cause the contract owner, rather than
the insurance company, to be treated as the owner of the assets
held by the separate account. If the variable contract owner is
considered the owner of the securities underlying the separate
23
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<PAGE>
account, income and gains produced by those securities would be
included currently in the contract owner's gross income. The
insurance company to which the Fund offers its shares (the
"Company") has advised the Trust that it believes that, for
federal income tax purposes, the Fund will be the owner of the
shares of the mutual funds and any income therefrom, and the
separate accounts of the Company will be the owners of the Shares
of the Fund and any income therefrom. Although it is not known
what standards will be incorporated in future regulations or
other pronouncements, the Treasury staff has indicated informally
that it is concerned that there may be too much contract owner
control where a mutual fund (or series) underlying a separate
account invests solely in securities issued by companies in a
specific industry. Similarly, the ability of a contract owner to
select a fund representing a specific economic risk or to direct
(without restriction) the issuer of a variable contract at any
time to invest in the Fund or other investments may also be
proscribed. The belief of the Company with respect to the
ownership by the Fund of the mutual fund shares and the income
therefrom, and by the separate accounts of the Shares of the Fund
and the income therefrom, is based upon published Internal
Revenue Service rulings and the Company's understanding of the
current Internal Revenue Service policy.
In connection with the issuance of the temporary
diversification regulations in 1986, the Treasury announced that
such regulations did not provide guidance concerning the extent
to which owners may direct their investments to particular
divisions of a separate account without being considered the
owners of the assets of the account. It is possible that
regulations or revenue rulings may be issued in this area at some
time in the future. These future rules and regulations
proscribing investment control may adversely affect the ability
of the Fund to operate as described in the Prospectus. There is,
however, no certainty as to what standards, if any, Treasury will
ultimately adopt. In the event that unfavorable rules or
regulations are adopted, there can be no assurance that the Fund
will be able to operate as currently described in the Prospectus,
or that the Fund will not have to change its investment objective
or objectives, investment policies, or investment restrictions.
While the Fund's investment objective is fundamental and may be
changed only by a vote of a majority of its outstanding shares,
the Trustees have the right to modify the investment policies of
the Fund as necessary to prevent any such prospective rules and
regulations from causing the Variable Contract owners to be
considered the owners of the assets underlying the Separate
Accounts.
24
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Distributions
- -------------
Distributions of net investment income by the Fund are
taxable to shareholders (the insurance company separate accounts)
as ordinary income. Net capital gains will be treated, to the
extent distributed and designated as capital gains dividends, as
long-term capital gains in the hands of the shareholders.
Other Taxes
- -----------
Distributions may also be subject to additional state, local
and foreign taxes, depending on each shareholder's particular
situation. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them
of an investment in the Fund.
OTHER INFORMATION
Capitalization
- --------------
The Trust is a Massachusetts business trust established
under an Agreement and Declaration of Trust dated August 3, 1988.
The capitalization of the Trust consists of an unlimited number
of shares of beneficial interest with a par value of $0.001 each.
The Trust currently consists of fourteen operational Series, one
of which is discussed in this Statement of Additional
Information. The Board of Trustees may establish additional
Series (with different investment objectives and fundamental
policies) at any time in the future. Establishment and offering
of additional Series will not alter the rights of the Trust's
shareholders, the Separate Accounts. When issued in accordance
with the terms of the Agreement and Declaration of Trust, shares
are fully paid, redeemable, freely transferable, and
non-assessable by the Trust. Shares do not have preemptive
rights or subscription rights. In liquidation of a Series of the
Trust, each shareholder is entitled to receive his or her pro
rata share of the net assets of that portfolio.
Expenses incurred by the Fund in connection with its
organization and the public offering of its shares aggregated
approximately $51,850.03. These costs have been deferred and are
being amortized over a period not exceeding five years from the
Fund's commencement of operations.
25
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<PAGE>
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, and prior to July 17, 1989, the
name of the Trust was Western Capital Specialty Managers Trust.
Voting Rights
- -------------
Shareholders of the Trust are given certain voting rights.
Each share of each Series will be given one vote, unless a
different allocation of voting rights is required under
applicable law for a mutual fund that is an investment medium for
variable insurance products.
Massachusetts business law does not require the Trust to
hold annual shareholder meetings, although special meetings may
be called for a specific Series, or for the Trust as a whole, for
purposes of electing or removing Trustees, changing fundamental
policies, or approving a contract for investment advisory
services. It is not anticipated that the Trust will hold
meetings of the shareholders of the Fund unless required by law
or the Agreement and Declaration of Trust. In this regard, the
Trust will be required to hold a meeting to elect Trustees to
fill any existing vacancies on the Board if, at any time, fewer
than a majority of the Trustees have been elected by the
shareholders of the Trust. In addition, the Agreement and
Declaration of Trust provides that the holders of not less than
two-thirds of the outstanding shares or other voting interests of
the Trust may remove a person serving as Trustee either by
declaration in writing or at a meeting called for such purpose.
The Trust's shares do not have cumulative voting rights. The
Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if
requested in writing to do so by the holders of not less than 10%
of the outstanding shares of the Trust. The Trust is required to
assist in shareholders' communications.
Custodian
- ---------
The Custodian for the Trust is Bankers Trust Company, 280
Park Avenue, New York, NY 10017. DSI provides portfolio
accounting services for the Trust pursuant to a Portfolio
Accounting Agreement.
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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 Prospectus
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 Prospectus 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 audited financial statements for the Fund dated as of
December 31, 1998, including notes thereto, are incorporated by
reference in this Statement of Additional Information from the
Fund's Annual Report dated as of December 31, 1998.
27
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APPENDIX A: 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 the 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 - predominantly 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.
A-1
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APPENDIX B: SECURITIES AND INVESTMENT TECHNIQUES
OF UNDERLYING MUTUAL FUNDS
FOREIGN CURRENCY TRANSACTIONS. An underlying fund may enter
into forward contracts in connection with its portfolio
transactions in securities traded in a foreign currency. Under
such an arrangement, concurrently with the entry into a contract
to acquire a foreign security for a specified amount of currency,
the fund would purchase with U.S. dollars the required amount of
foreign currency for delivery at the settlement date of the
purchase; the fund would enter into similar forward currency
transactions in connection with the sale of foreign securities.
The effect of such transactions would be to fix a U.S. dollar
price for the security to protect against a possible loss
resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period
between the date the security is purchased or sold and the date
on which payment is made or received, the normal range of which
is three to fourteen days. These contracts are traded in the
interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement and no commissions
are charged at any stage for trades.
Under the Internal Revenue Code (the "Code"), gains or
losses attributable to fluctuations in exchange rates which occur
between the time an underlying fund accrues interest or other
receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time it actually collects such
receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of
debt securities denominated in a foreign currency and on
disposition of certain futures contracts, forward contracts and
options, gains or losses attributable to fluctuations in the
value of foreign currency between the date of acquisition of the
security or contract and the date of disposition also are treated
as ordinary gain or loss. These gains or losses, referred to
under the Code as "section 988" gains or losses, may increase or
decrease the amount of an underlying fund's investment company
taxable income to be distributed to the Fund as ordinary income.
This, in turn, will affect the amount of investment company
taxable income of the Fund. See "Dividends, Distributions, and
Taxes" in the Fund's Prospectus.
B-1
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<PAGE>
MASTER DEMAND NOTES. Although the Fund itself will not do
so, underlying funds (particularly money market mutual funds) may
invest up to 100% of their assets in master demand notes. Master
demand notes are unsecured obligations of U.S. corporations
redeemable upon notice that permit investment by a fund of
fluctuating amounts at varying rates of interest pursuant to
direct arrangements between the fund and the issuing corporation.
Because they are direct arrangements between the fund and the
issuing corporation, there is no secondary market for the notes.
However, they are redeemable at face value, plus accrued
interest, at any time.
SHORT SALES. An underlying fund may sell securities short.
In a short sale, the fund sells stock which it does not own,
making delivery with securities "borrowed" from a broker. The
fund is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement.
This price may or may not be less than the price at which the
security was sold by the fund. Until the security is replaced,
the fund is required to pay to the lender any dividends or
interest which accrue during the period of the loan. In order to
borrow the security, the fund also may have to pay a premium
which would increase the cost of the security sold. The proceeds
of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position
is closed out.
The underlying fund also must deposit in a segregated
account an amount of cash or U.S. Government securities equal to
the difference between (a) the market value of the securities
sold short at the time they were sold short and (b) the value of
the collateral deposited with the broker in connection with the
short sale (not including the proceeds from the short sale).
While the short position is open, the fund must maintain daily
the segregated account at such a level that (1) the amount
deposited in it plus the amount deposited with the broker as
collateral equals the current market value of the securities sold
short and (2) the amount deposited in it plus the amount
deposited with the broker as collateral is not less than the
market value of the securities at the time they were sold short.
Depending upon market conditions, up to 80% of the value of a
fund's net assets may be deposited as collateral for the
obligation to replace securities borrowed to effect short sales
and allocated to a segregated account in connection with short
sales.
A short sale is "against the box" if at all times when the
short position is open the fund owns at least an equal amount of
the securities or securities convertible into, or exchangeable
without further consideration for, securities of the same issue
as the securities sold short. Such a transaction serves to defer
a gain or loss for federal income tax purposes.
B-2
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OPTIONS ACTIVITIES. An underlying fund may write (i.e.,
sell) listed call options ("calls") if the calls are "covered"
throughout the life of the option. A call is "covered" if the
fund owns the optioned securities. When a fund writes a call, it
receives a premium and gives the purchaser the right to buy the
underlying security at any time during the call period (usually
not more than nine months in the case of common stock) at a fixed
exercise price regardless of market price changes during the call
period. If the call is exercised, the fund will forgo any gain
from an increase in the market price of the underlying security
over the exercise price.
An underlying fund may purchase a call on securities only to
effect a "closing purchase transaction," which is the purchase of
a call covering the same underlying security and having the same
exercise price and expiration date as a call previously written
by the fund on which it wishes to terminate its obligation. If
the fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call
previously written by the fund expires (or until the call is
exercised and the fund delivers the underlying security).
An underlying fund also may write and purchase put options
("puts"). When a fund writes a put, it receives a premium and
gives the purchaser of the put the right to sell the underlying
security to the fund at the exercise price at any time during the
option period. When an underlying fund writes a put, it must
"cover" the put by either maintaining cash or fixed income
securities with a value equal to the exercise price in a
segregated account with its custodian or by holding a put on the
same security and in the same principal amount as the put written
when the exercise price of the put held is equal to or greater
than the exercise price of the put written. When a fund
purchases a put, it pays a premium in return for the right to
sell the underlying security at the exercise price at any time
during the option period. An underlying fund also may purchase
stock index puts, which differ from puts on individual securities
in that they are settled in cash based on the values of the
securities in the underlying index rather than by delivery of the
underlying securities. Purchase of a stock index put is designed
to protect against a decline in the value of the portfolio
generally rather than an individual security in the portfolio.
If any put is not exercised or sold, it will become worthless on
its expiration date.
An underlying fund's option positions may be closed out only
on an exchange which provides a secondary market for options of
the same series, but there can be no assurance that a liquid
secondary market will exist at a given time for any particular
option. In this regard, trading in options on certain securities
(such as U.S. Government securities) is relatively new so that it
is impossible to predict to what extent liquid markets will
develop or continue.
B-3
<PAGE>
<PAGE>
The underlying fund's custodian, or a securities depository
acting for it, generally acts as escrow agent as to the
securities on which the fund has written puts or calls, or as to
other securities acceptable for such escrow so that no margin
deposit is required of the fund. Until the underlying securities
are released from escrow, they cannot be sold by the fund.
In the event of a shortage of the underlying securities
deliverable on exercise of an option, the Options Clearing
Corporation has the authority to permit other, generally
comparable securities, to be delivered in fulfillment of option
exercise obligations. If the Options Clearing Corporation
exercises its discretionary authority to allow such other
securities to be delivered, it may also adjust the exercise
prices of the affected options by setting different prices at
which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options
Clearing Corporation may impose special exercise settlement
procedures.
FUTURES CONTRACTS. An underlying fund may enter into
futures contracts for the purchase or sale of debt securities and
stock indexes. A futures contract is an agreement between two
parties to buy and sell a security or an index for a set price on
a future date. Futures contracts are traded on designated
"contract markets" which, through their clearing corporations,
guarantee performance of the contracts.
Generally, if market interest rates increase, the value of
outstanding debt securities declines (and vice versa). Entering
into a futures contract for the sale of securities has an effect
similar to the actual sale of securities, although sale of the
futures contract might be accomplished more easily and quickly.
For example, if an underlying fund holds long-term U.S.
Government securities and it anticipates a rise in long-term
interest rates, it could, in lieu of disposing of its portfolio
securities, enter into futures contracts for the sale of similar
long-term securities. If rates increased and the value of the
fund's portfolio securities declined, the value of the fund's
futures contracts would increase, thereby protecting the fund by
preventing the net asset value from declining as much as it
otherwise would have. Similarly, entering into futures contracts
for the purchase of securities has an effect similar to the
actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying
securities. For example, if the fund expects long-term interest
rates to decline, it might enter into futures contracts for the
purchase of long-term securities so that it could gain rapid
market exposure that may offset anticipated increases in the cost
of securities it intends to purchase while continuing to hold
higher-yield short-term securities or waiting for the long-term
market to stabilize.
B-4
<PAGE>
<PAGE>
A stock index futures contract may be used to hedge an
underlying fund's portfolio with regard to market risk as
distinguished from risk relating to a specific security. A stock
index futures contract does not require the physical delivery of
securities, but merely provides for profits and losses resulting
from changes in the market value of the contract to be credited
or debited at the close of each trading day to the respective
accounts of the parties to the contract. On the contract's
expiration date, a final cash settlement occurs. Changes in the
market value of a particular stock index futures contract reflect
changes in the specified index of equity securities on which the
future is based.
There are several risks in connection with the use of
futures contracts. In the event of an imperfect correlation
between the futures contract and the portfolio position which is
intended to be protected, the desired protection may not be
obtained and the fund may be exposed to risk of loss. Further,
unanticipated changes in interest rates or stock price movements
may result in a poorer overall performance for the fund than if
it had not entered into futures contracts on debt securities or
stock indexes. Also, the successful use of futures depends upon
the underlying fund investment advisor's ability to predict
correctly movements in the direction of the market.
In addition, the market prices of futures contracts may be
affected by certain factors. First, all participants in the
futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through
offsetting transactions which could distort the normal
relationship between the securities and futures markets. Second,
from the point of view of speculators, the deposit requirements
in the futures market are less onerous than margin requirements
in the securities market. Therefore, increased participation by
speculators in the futures market also may cause temporary price
distortions, although speculators generally serve an important
function by bringing liquidity to the futures markets. When
purchasing a futures contract, a fund must deposit in a
segregated account cash or high quality debt instruments equal in
value to the current value of the underlying instruments less the
margin deposit.
Finally, positions in futures contracts may be closed out
only on an exchange or board of trade which provides a secondary
market for such futures. There is no assurance that a liquid
secondary market on an exchange or board of trade will exist for
any particular contract or at any particular time.
B-5
<PAGE>
<PAGE>
OPTIONS ON FUTURES CONTRACTS. An underlying fund also may
purchase and sell listed put and call options on futures
contracts. An option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position
in a futures contract (a long position if the option is a call
and a short position if the option is a put), at a specified
exercise price at any time during the option period. When an
option on a futures contract is exercised, delivery of the
futures position is accompanied by cash representing the
difference between the current market price of the futures
contract and the exercise price of the option. The fund may
purchase put options on futures contracts in lieu of, and for the
same purpose as, a sale of a futures contract. It also may
purchase such put options in order to hedge a long position in
the underlying futures contract in the same manner as it
purchases "protective puts" on securities.
B-6
<PAGE>
<PAGE>
****************
PART C
****************
<PAGE>
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
Exhibits
(a) (1) Amended and Restated Agreement and Declaration of
Trust (To be filed by amendment)
(2) Amendment to the Restated Agreement and Declaration of
Trust (adding the Managed Global Series) (1)
(3) Amendment to the Restated Agreement and Declaration of
Trust (adding the Mid-Cap Growth Series, Research Series,
Total Return Series, Growth & Income Series, Value + Growth
Series, Global Fixed Income Series, Growth Opportunities
Series & Developing World Series) (2)
(b) By-laws (To be filed by amendment)
(c) Instruments Defining Rights of Security Holders
(To be filed by amendment)
(d) (1) (A) Management Agreement (for all Series except The
Fund For Life)(3)
(B) Management Agreement (for The Fund For Life)
(To be filed by amendment)
(2) Portfolio Management Agreements
(A) Portfolio Management Agreement with Pilgrim
Baxter & Associates, Ltd. (4)
(B) Portfolio Management Agreement with Putnam
Investment Management, Inc. (5)
(C) Portfolio Management Agreement with T. Rowe
Price Associates, Inc. (6)
(D) Portfolio Management Agreement with Van Eck
Associates Corporation (7)
(E) Portfolio Management Agreement with ING Investment
Management LLC, formerly Equitable Investment
Services, Inc. (8)
(F) Portfolio Management Agreement with EII
Realty Securities, Inc. (9)
(G) Portfolio Management Agreement with Kayne
Anderson Investment Management, LLC. (10)
(H) Portfolio Management Agreement with Fred Alger
Management, Inc. (11)
(I) Portfolio Management Agreement with Eagle
Asset Management, Inc. (12)
(J) Portfolio Management Agreement with
Massachusetts Financial Services Company and
Montgomery Asset Management, L.P. (13)
(K) Portfolio Management Agreement with
Baring International Investment Limited
(To be filed by amendment)
(L) Portfolio Management Agreement with
A I M Capital Management, Inc.
(To be filed by amendment)
-1-
<PAGE>
<PAGE>
(M) Portfolio Management Agreement with
Janus Capital Corporation
(To be filed by amendment)
(N) Portfolio Management Agreement with
Alliance Capital Management L.P.
(To be filed by amendment)
(O) Schedule Pages for T. Rowe Price Associates, Inc.
(To be filed by amendment)
(P) Schedule Pages for EII Realty Securities, Inc.
(To be filed by amendment)
(3) Administrative Services Agreement for The Fund For Life
(To be filed by amendment)
(4) Administration and Fund Accounting Agreement among the
Trust, Directed Services, Inc., and First Data
Corporation. (To be filed by amendment)
(e) Distribution Agreement (14)
(f) Not Applicable
(g) (1) Custodian Agreement and Addenda (To be filed by amendment)
(2) Addendum to the Custodian Agreement (adding
Managed Global Series) (15)
(3) Addendum to the Custodian Agreement (adding
Mid-Cap Growth Series)(16)
(4) Addendum to the Custodian Agreement (adding
Mid-Cap Growth Series, Research Series, Total Return
Series, Growth & Income Series, Value & Growth,
Global Fixed Income Series, Growth Opportunities
Series, and Developing World Series) (17)
(h) (1) (A) Transfer Agency and Service Agreement
(To be filed by amendment)
(B) Addendum to the Transfer Agency and Service
Agreement for The Fund For Life, Zero Target 2002
Series, and Capital Appreciation Series (18)
(2) (A) Organizational Agreement for Golden American
Life Insurance Company (To be filed by amendment)
(B) Assignment Agreement for Organizational Agreement (19)
(C) Organizational Agreement for The Mutual
Benefit Life Insurance Company (20)
(D) Assignment Agreement for Organizational Agreement (21)
(E) Addendum to Organizational Agreement (adding
Market Manager Series and Value Equity Series) (22)
(F) Addendum to the Organizational Agreement (adding
the Strategic Equity Series) (To be filed by amendment)
(G) Addendum to the Organizational Agreement (adding
the Small Cap Series) (To be filed by amendment)
(H) Addendum to the Organizational Agreement (adding
Managed Global Series) (23)
(I) Addendum to the Organizational Agreement (adding
Mid-Cap Growth Series, Research Series, Total Return
Series, Growth & Income Series, Value & Growth, Global
Fixed Income Series, Growth Opportunities Series, and
Developing World Series (24)
-2-
<PAGE>
<PAGE>
(3) (A) Settlement Agreement for Golden American Life
Insurance Company (To be filed by amendment)
(B) Assignment Agreement for Settlement Agreement (25)
(C) Settlement Agreement for The Mutual Benefit Life
Insurance Company (To be filed by amendment)
(D) Assignment Agreement for Settlement
Agreement (To be filed by amendment)
(4) Indemnification Agreement (26)
(5) (A) Expense Reimbursement Agreement (27)
(B) Amendment No. 1 to the Expense Reimbursement
Agreement (To be filed by amendment)
(C) Amendment No. 2 to the Expense Reimbursement
Agreement (To be filed by amendment)
(D) Amendment No. 3 to the Expense Reimbursement
Agreement (To be filed by amendment)
(E) Amendment No. 4 to the Expense Reimbursement
Agreement (To be filed by amendment)
(i) Opinion and Consent of Sutherland, Asbill & Brennan LLP
(j) Consent of Ernst & Young LLP, independent auditors
(To be filed by amendment)
(k) Not Applicable
(l) (1) Initial Capital Agreement (To be filed by amendment)
(2) Initial Capital Agreement for The Fund For Life
(To be filed by amendment)
(m) Not Applicable
(n) Financial Data Schedule (To be filed by amendment)
(o) Not Applicable
(p) Powers of Attorney
- -------------------------
(1) Incorporated by reference to Exhibit 1(b) of Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A of
The GCG Trust as filed on June 14, 1996, File No. 33-23512.
(2) Incorporated by reference to Exhibit 1(c) of Post-Effective
Amendment No. 33 to the Registration Statement on Form N-1A of
The GCG Trust as filed on September 2, 1997, File No. 33-23512.
(3) Incorporated by reference to Exhibit 5(a)(i) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(4) Incorporated by reference to Exhibit 5(b)(i) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
-3-
<PAGE>
<PAGE>
(5) Incorporated by reference to Exhibit 5(b)(iii) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(6) Incorporated by reference to Exhibit 5(b)(iv) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(7) Incorporated by reference to Exhibit 5(b)(v) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(8) Incorporated by reference to Exhibit 5(b)(vi) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(9) Incorporated by reference to Exhibit 5(b)(viii) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(10) Incorporated by reference to Exhibit 5(b)(ix) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(11) Incorporated by reference to Exhibit 5(b)(x) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(12) Incorporated by reference to Exhibit 5(b)(xi) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(13) Incorporated by reference to Exhibit 5(b)(xii) of Post-Effective
Amendment No. 33 to the Registration Statement on Form N-1A of
The GCG Trust as filed on September 2, 1997, File No. 33-23512.
(14) Incorporated by reference to Exhibit 6 of Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A of
The GCG Trust as filed on June 14, 1996, File No. 33-23512.
(15) Incorporated by reference to Exhibit 8(a)(vi) of Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A of
The GCG Trust as filed on June 14, 1996, File No. 33-23512.
(16) Incorporated by reference to Exhibit 8(a)(vii) of Post-Effective
Amendment No. 32 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 1, 1997, File No. 33-23512.
(17) Incorporated by reference to Exhibit 8(a)(viii) of Post-Effective
Amendment No. 33 to the Registration Statement on Form N-1A of
The GCG Trust as filed on September 2, 1997, File No. 33-23512.
(18) Incorporated by reference to Exhibit 9(a)(ii) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(19) Incorporated by reference to Exhibit 9(b)(ii) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
-4-
<PAGE>
<PAGE>
(20) Incorporated by reference to Exhibit 9(b)(iii) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(21) Incorporated by reference to Exhibit 9(b)(iv) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(22) Incorporated by reference to Exhibit 9(b)(v) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(23) Incorporated by reference to Exhibit 9(b)(viii) of Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A of
The GCG Trust as filed on June 14, 1996, File No. 33-23512.
(24) Incorporated by reference to Exhibit 9(b)(IX) of Post-Effective
Amendment No. 33 to the Registration Statement on Form N-1A of
The GCG Trust as filed on September 2, 1997, File No. 33-23512.
(25) Incorporated by reference to Exhibit 9(c)(i) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(26) Incorporated by reference to Exhibit 9(d) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
(27) Incorporated by reference to Exhibit 9(e)(i) of Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A of
The GCG Trust as filed on November 26, 1997, File No. 33-23512.
Item 24. Persons Controlled by or Under Control with Registrant.
As of the date of this Post-Effective Amendment, a separate account
of The Mutual Benefit Life Insurance Company ("MBL"), separate
accounts of Security Equity Life Insurance Company, a separate
account of Equitable Life Insurance Company of Iowa, Golden
American Life Insurance Company and First Golden American Life
Insurance Company of New York and its separate accounts own all
of the outstanding shares of Registrant.
MBL, Security Equity Life Insurance Company, a separate account of
Equitable Life Insurance Company of Iowa, Golden American Life
Insurance Company and First Golden American Life Insurance Company
of New York are required to vote fund shares in accordance with
instructions received from owners of variable life insurance
and annuity contracts funded by separate accounts of that company.
ING Insurance International B.V. (The Netherlands)
ING America Insurance Holdings, Inc. (Delaware)
Equitable of Iowa Companies, Inc. (Delaware)
(Equitable of Iowa Companies, Inc. is owned 50% by ING
American Insurance Holdings, Inc. and 50% by ING
Insurance International B.V.
Golden American Life Insurance Company (Delaware)
First Golden American Life Insurance Company of
New York (New York) (Golden American Life Insurance
Company, Inc. and First Golden American Life
Insurance Company of New York file consolidated
financial statements each with the other)
The GCG Trust (Massachusetts)
-5-
<PAGE>
<PAGE>
Item 25. Indemnification.
Reference is made to Article V, Section 5.4 of the Registrant's
Agreement and Declaration of Trust, which is incorporated by
reference herein.
Pursuant to Indemnification Agreements between the Trust and each
Independent Trustee, the Trust indemnifies each Independent Trustee
against any liabilities resulting from the Independent Trustee's
serving in such capacity, provided that the Trustee has not
engaged in certain disabling conduct.
The Trust has a management agreement with Directed Services Inc.
("DSI"), and The Trust and DSI have various portfolio management
agreements with the portfolio managers (the "Agreements").
Generally, the Trust will indemnify DSI and the portfolio managers
under the Agreements for acts and omissions by DSI and/or the
portfolio managers. Also, DSI will indemnify the portfolio managers
under the Agreements for acts and omissions by the portfolio
managers. Neither DSI nor the portfolio managers are indemnified
for acts or omissions where DSI and/or the portfolio managers commit
willful misfeasance, bad faith, gross negligence and/or by reason
of reckless disregard.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant by the Registrant
pursuant to the Trust's Agreement and Declaration of Trust, its
By-laws or otherwise, the Registrant is aware that in the opinion of
the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of
expenses incurred or paid by directors, officers or controlling
persons or the Registrant in connection with the successful defense
of any act, suit or proceeding) is asserted by such directors,
officers or controlling persons in connection with the shares
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issues.
-6-
<PAGE>
<PAGE>
Item 26. Business and Other Connections of Investment Adviser.
Directed Services, Inc.
The Manager of all Series of the Trust is DSI. The directors
and officers of the Manager have, during the past year, had substantial
affiliations with Golden American Life Insurance Company ("Golden American")
and Equitable of Iowa Companies ("EIC") and its affiliates. Unless
otherwise stated all officers of DSI have a principal business address of
1001 Jefferson Street, Suite 400, Wilmington, Delaware, 19801, and after
March 19, 1999, DSI's new address is 1475 Dunwoody Drive, West Chester,
Pennsylvania 19380. Most directors of DSI are employees of either EIC
or one of its affiliates or each serves as directors of some or all of
EIC's subsidiaries. In addition to DSI and Golden American, EIC's
subsidiaries are Equitable Life Insurance Company of Iowa ("Equitable Life"),
Equitable American Insurance Company ("Equitable American") USG Annuity &
Life Company ("USG") and Locust Street Securities. EIC's principal business
address 909 Locust Street, Des Moines, Iowa 50306.
<TABLE>
<S> <C> <C>
Name Position With Adviser Other Affiliations
Myles R. Tashman Director, Executive Vice Director, Executive Vice President, General
President, Secretary and Counsel, and Secretary of Golden American
General Counsel Life Insurance Company, Inc., and First
Golden American Insurance Company of New
York.
R. Lawrence Roth Director President of VESTAX Capital Corporation
VESTAX Capital Corporation
1931 Georgetown Road
Hudson, OH 44236
James R. McInnis President Executive Vice President of Golden
American Life Insurance Company and
First Golden American Life Insurance
Company of New York.
Barnett Chernow Director and President of Golden American
Executive Vice President Life Insurance Company and First Golden
American Life Insurance Company of New
York; Vice President of Equitable Life
Insurance Company of Iowa and USG
Annuity & Life Company.
Stephen J. Preston Senior Vice President Executive Vice President and Chief Actuary
Golden American Life Insurance Company,
Inc. and First Golden American Life
Insurance Company of New York
Jodie Schult Treasurer Treasurer of Locust Street Securities, Inc.
Equitable of Iowa Companies
909 Locust Street
Des Moines, IA 50309
-7-
<PAGE>
<PAGE>
David L. Jacobson Senior Vice President Senior Vice President and Assistant
Secretary of Golden American Life Insurance
Company, Inc. and First Golden American
Life Insurance Company of New York
</TABLE>
T. Rowe Price Associates, Inc.
For information regarding T. Rowe Price Associates, Inc., reference is
made to Form ADV of T. Rowe Price Associates, Inc., SEC File No. 801-00856,
which is incorporated by reference.
Van Eck Associates Corporation
For information regarding Van Eck Associates Corporation, reference is made
to Item 28 on Form N-1A for Van Eck Funds, Registration No. 2-97596, which is
incorporated by reference.
Kayne Anderson Investment Management, LLC
For information regarding Kayne Anderson Investment Management, LLC,
reference is made to Form ADV of Kayne Anderson Investment Management,
LLC, SEC File No. 801-24241, which is incorporated by reference.
Eagle Asset Management, Inc.
For information regarding Eagle Asset Management, Inc., reference is made to
Form ADV of Eagle Asset Management, Inc., SEC File No. 801-21343, which is
incorporated by reference.
EII Realty Securities, Inc.
For information regarding EII Realty Securities, Inc., reference is made to
Form ADV of EII Realty Securities, Inc., SEC File No. 801-44099, which is
incorporated herein by reference.
Fred Alger Management, Inc.
For information regarding Fred Alger Management, Inc., reference is made
to Form ADV of Fred Alger Management, Inc., SEC File No. 801-6709, which is
incorporated by reference.
A I M Capital Management, Inc.
For information regarding A I M Capital Management, Inc., reference is made
to Form ADV of A I M Capital Management, Inc., SEC File No. 801-15211, which
is incorporated by refereence.
Putnam Investment Management, Inc.
For information regarding Putnam Investment Management, Inc., reference is
made to Form ADV of Putnam Investment Management, Inc., SEC File No.
801-7974, which is incorporated by reference.
-8-
<PAGE>
<PAGE>
ING Investment Management, LLC
For information regarding ING Investment Management, LLC, reference is made
to Form ADV of ING Investment Management, LLC, SEC File No. 801-15160, which
is incorporated by reference.
Baring International Investment Limited
For information regarding Baring International Investment Limited, reference
is made to Form ADV of Baring International Investment Limited, SEC File No.
801-15160, which is incorporated by reference.
Massachusetts Financial Services Company
For information regarding Massachusetts Financial Services Company,
reference is made to Form ADV of Massachusetts Financial Services Company,
SEC File No. 801-15160, which is incorporated by reference.
Janus Capital Corporation
For information regarding Janus Capital Corporation reference is made to
Form ADV of Janus Capital Corporation, SEC File No. 801-13991, which is
incorporated by reference.
Alliance Capital Management L.P.
For information regarding Alliance Capital Management L.P. reference is
made to Form ADV of Alliance Capital Management L.P., SEC File No. 801-32361,
which is incorporated by reference.
Montgomery Asset Management, LLC
For information regarding Montgomery Asset Management, LLC, reference is made
to Form ADV of Montgomery Asset Management, LLC, SEC File No. 801-54803,
which is incorporated by reference.
Item 27. Principal Underwriters.
(a) Directed Services, Inc. serves as Distributor of Shares of The GCG
Trust.
(b) The following officers of Directed Services, Inc. hold positions
with the registrant: Barnett Chernow, Vice President, and Myles
R. Tashman, Secretary.
-9-
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
NAME and PRINCIPAL POSITIONS and OFFICES POSITIONS and OFFICES
BUSINESS ADDRESS with UNDERWRITER with FUND
Barnett Chernow Director and Executive Vice President
Golden American Life Vice President
Insurance Co.
1001 Jefferson Street
Wilmington, DE 19801
Myles R. Tashman Director, Executive Vice Secretary
Golden American Life President, Secretary and
Insurance Co. General Counsel
1001 Jefferson Street
Wilmington, DE 19801
</TABLE>
(c) Not Applicable (Underwriter Receives No Compensation)
Item 28. Location of Accounts and Records.
The Trust maintains its books of account for each Series as required
by Section 31(a) of the 1940 Act and rules thereunder at its
principal office at 1001 Jefferson Street, Suite 400, Wilmington,
Delaware 19801. After March 19, 1999 the new address is 1475
Dunwoody Drive, West Chester, Pennsylvania 19380. The Trust's books
of account are also kept at the offices of First Data Corp. 3200
Horizon Drive, P. O. Box 61503, King of Prussia, Pennsylvania
19406-0903.
Item 29. Management Services.
There are no management-related service contracts not discussed
in Part A or Part B.
Item 30. Undertakings.
Registrant undertakes to furnish to each person to whom a
prospectus for The GCG Trust or The Fund For Life is provided
a copy of the Trust's or The Fund For Life's latest Annual
Report upon request and without charge.
-10-
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 39 to the Registration Statement
on Form N-1A (File No. 33-23512) to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wilmington, and
the State of Delaware, on March 1, 1999.
THE GCG TRUST
(Registrant)
/s/ Myles R. Tashman
--------------------------
Myles R. Tashman*
Secretary
*By: /s/Marilyn Talman
---------------------
Marilyn Talman
as Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 39 to the Registration Statement on Form N-1A
(File No. 33-23512) has been duly signed below by the following persons on
behalf of The GCG Trust in the capacity indicated on March 1, 1999.
Signature Title
Chairman, President and
Trustee
- ----------------------
R. Brock Armstrong
Vice-President and
Trustee
- ----------------------
Barnett Chernow*
Trustee
- ----------------------
J. Michael Earley*
Trustee
- ----------------------
R. Barbara Gitenstein*
Trustee
- ----------------------
Robert A. Grayson*
Trustee
- ----------------------
Elizabeth J. Newell*
Trustee
- ----------------------
Stanley B. Seidler*
Trustee
- ----------------------
Roger B. Vincent*
*By: /s/ Marilyn Talman
-----------------------
Marilyn Talman
as Attorney-in-Fact
<PAGE>
<PAGE>
EXHIBIT INDEX
Number Exhibit Name Exhibit
(i) Consent of Sutherland, Asbill & Brennan LLP EX99.i
(p) Powers of Attorney EX99.p
<PAGE>
<PAGE>
<PAGE>
<PAGE>
[Sutherland, Asbill & Brennan LLP Letterhead]
CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
We consent to the reference to our firm under the heading
"Legal Counsel" in the prospectuses and under "Counsel" in the statement
of additional information included in Post-Effective Amendment No. 39
to the Registration Statement on Form N-1A for The GCG Trust (File Nos.
33-23512, 811-5629). In giving this consent, we do not admit that we
are in the category of persons whose consent is required under Section 7
of the Securities Act of 1933.
SUTHERLAND, ASBILL & BRENNAN LLP
By:/s/ Stephen E. Roth
Stephen E. Roth
Washington, D.C.
February 26, 1999
<PAGE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the each of the undersigned,
being a duly elected Trustee and/or Officer of The GCG Trust (the "Trust"),
individually constitutes and appoints Myles R. Tashman, and Marilyn Talman,
and each of them, his or her true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution for him or her in his
or her name, place and stead, in any and all capacities, to sign on behalf
of the Trust registration statements and applications for exemptive relief,
and any and all amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection there with, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes
as each might or could do in person, hereby ratifying and affirming all
that said attorneys-in-fact and agents, or any of them, or his or her
substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Trustees:
J. Michael Earley /s/J. Michael Earley August 25, 1997
------------------------
R. Barbara Gitenstein /s/R. Barbara Gitenstein August 25, 1997
------------------------
Robert A. Grayson /s/Robert A. Grayson August 26, 1997
------------------------
Stanley B. Seidler /s/Stanley B. Seidler August 26, 1997
------------------------
Roger B. Vincent /s/Roger B. Vincent August 19, 1997
------------------------
<PAGE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned,
being a duly elected Trustee and/or Officer of The GCG Trust (the "Trust"),
constitute and appoint Myles R. Tashman, and Marilyn Talman,
and each of them, his or her true and lawful attorneys-in-fact and agents
with full power of substitution and resubstitution for him or her in his or
her name, place and stead, in any and all capacities, to sign
the Trust's registration statements and applications for exemptive relief,
and any and all amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes
as each might or could do in person, hereby ratifying and affirming all
that said attorneys-in-fact and agents, or any of them, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
SIGNATURE TITLE DATE
/s/ Barnett Chernow Vice-President February 24, 1999
- ---------------------- Trustee
Barnett Chernow
/s/ Myles R. Tashman Secretary February 24, 1999
- ----------------------
Myles R. Tashman
/s/ Elizabeth J. Newell Trustee February 24, 1999
- ---------------------
Elizabeth J. Newell
