<PAGE>
As filed with the Securities and Exchange Commission on July 14, 2000
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. 43 [X]
and/or
Registration Statement under the Investment Company Act of 1940 [X]
Amendment No. 44
(Check appropriate box or boxes)
THE GCG TRUST
(Exact Name of Registrant as Specified in Charter)
1475 Dunwoody Drive
West Chester, PA 19380
(Address of Principal Executive Offices)
610-425-3400
(Registrant's Telephone Number, including Area Code)
Marilyn Talman, Esq.
Golden American Life Insurance Company
1475 Dunwoody Drive
West Chester, PA 19380
(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)
[ ] on __________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on __________ pursuant to paragraph (a)(1)
[X] 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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PART A
EXPLANATORY NOTE
This filing is only applicable to the Asset Allocation Growth, Diversified
Mid-Cap, Special Situations and Growth and Income Portfolios, each of which
is a new series of the GCG Trust. The other prospectuses and Statements
of Additional Information for the GCG Trust describing the 25 other
portfolios were last updated by Amendment no. 42 to the Trust's Registration
Statement filed on February 29, 2000.
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PROSPECTUS #1
THE GCG TRUST
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PROSPECTUS
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INCLUDED IN THIS DOCUMENT:
THE GCG TRUST
October 1, 2000
ASSET ALLOCATION GROWTH SERIES
DIVERSIFIED MID-CAP SERIES
GROWTH AND INCOME SERIES
SPECIAL SITUATIONS SERIES
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THE GCG TRUST
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PROSPECTUS
October 1, 2000
-------------------------------
BALANCED FUNDS
-------------------------------
Asset Allocation Growth Series
-------------------------------
STOCK FUNDS
-------------------------------
DOMESTIC
Diversified Mid-Cap Series
Growth and Income Series
Special Situations Series
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
FOR THE SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ
CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
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IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION,
WE REFER TO THE GCG TRUST AS "THE GCG TRUST," AND TO A SERIES OF
THE GCG TRUST INDIVIDUALLY AS A "PORTFOLIO" AND COLLECTIVELY AS THE
"PORTFOLIOS."
<TABLE>
<S> <C>
PAGE
INTRODUCTION
Investing through your Variable
Contract.......................
Why Reading this Prospectus is
Important......................
Types of Funds...................
General Risk Factors.............
PORTFOLIOS AT A GLANCE
Asset Allocation Growth Series...
Diversified Mid-Cap Series.......
Growth and Income Series.........
Special Situations Series........
MORE INFORMATION
A Word about Portfolio Diversity.
Additional Information about the
Portfolios.....................
Non-Principal Investments and
Strategies.....................
Temporary Defensive Positions....
Portfolio Turnover...............
Legal Counsel....................
Independent Auditors.............
DESCRIPTION OF THE PORTFOLIOS
Asset Allocation Growth Series...
Diversified Mid-Cap Series.......
Growth and Income Series.........
Special Situations Series........
OVERALL MANAGEMENT OF THE TRUST
The Adviser......................
Advisory Fee.....................
SHARE PRICE........................
TAXES AND DISTRIBUTIONS............
TO OBTAIN MORE INFORMATION.........Back
THE GCG TRUST TRUSTEES.............Back
</TABLE>
AN INVESTMENT IN ANY PORTFOLIO OF THE GCG TRUST IS NOT A BANK DEPOSIT
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY.
1
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INTRODUCTION
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INVESTING THROUGH YOUR VARIABLE MONEY MARKET FUNDS. Money market
CONTRACT instruments (also known as cash
Shares of the portfolios of the investments) are debt securities
GCG Trust currently are sold to issued by governments,
segregated asset accounts corporations, banks, or other
("Separate Accounts") of insurance financial institutions.
companies as funding choices for
variable annuity contracts and BOND FUNDS. Bonds are debt
variable life insurance policies securities representing loans
("Variable Contracts"). There are from investors. A bond fund's
additional portfolios of the GCG share price - and therefore the
Trust described in other value of your investment - can
prospectuses. Assets in the rise or fall in value because
Separate Account are invested of changing interest rates or
in shares of the portfolios based other factors.
on your allocation instructions.
Not all portfolios described in BALANCED FUNDS. A balanced fund
this prospectus may be available holds a mix of stocks, bonds,
under your Variable Contract. You and sometimes, cash
do not deal directly with the investments. A balanced fund
portfolios to purchase or redeem offers the convenience of
shares. The accompanying Separate investing in both stocks and
Account prospectus describes your bonds through a single fund.
rights as a Variable Contract
owner. We may sell shares of the STOCK FUNDS. Stocks - which
portfolios to qualified pension represent shares of ownership
and retirement plans outside of in a company - generally offer
the separate account context. the greatest potential for long
term growth of principal. Many
WHY READING THIS PROSPECTUS IS stocks also provide regular
IMPORTANT dividends, which are generated
This prospectus explains the by corporate profits. While
investment objective, risks and stocks have historically
strategy of four portfolios provided the highest long-term
of the GCG Trust. The investment returns, they have also
objectives, risks and strategies of exhibited the greatest short-
the other portfolios of the GCG term price fluctuations - so a
Trust are described in another stock fund has a higher risk of
prospectus. Reading the losing value over the short
prospectus will help you to decide term.
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.
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 |
|----------------------------------------------------------|
2
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INTRODUCTION (CONTINUED)
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GENERAL RISK FACTORS for shorter-
Investing in the portfolios, as term bonds, moderate for
with an investment in any security, intermediate-term bonds, and
involves risk factors and special high for longer-term bonds. A
considerations. A portfolio's bond's duration measures its
risk is defined primarily by sensitivity to changes in
its principal investments interest rates. The longer
and investment strategies. An the duration, the greater the
investment in a portfolio is not bond's price movement will be
insured against loss of principal. as interest rates change.
As with any mutual fund, there can
be no assurance that a portfolio o CREDIT RISK. A bond issuer
will achieve its investment (debtor) may fail to repay
objective. Investing in shares of interest and principal in a
a portfolio should not be timely manner. The price of a
considered a complete investment security a portfolio holds may
program. The share value of each fall due to changing economic,
portfolio will rise and fall. political or market conditions
or disappointing earnings
It is important to keep in mind results.
one of the main axioms of
investing: The higher the risk of o CALL RISK. During periods of
losing money, the higher the falling interest rates, a bond
potential reward. The lower the issuer may "call," or repay,
risk, the lower the potential its high yielding bond before
reward. As you consider an the bond's maturity date.
investment in a portfolio, you Forced to invest the
should take into account your unanticipated proceeds at
personal tolerance for investment lower interest rates, a
risk. portfolio would experience a
decline in income.
OVERALL RISK:
o MANAGER RISK. A portfolio o MATURITY RISK. Interest rate
manager of a portfolio may do risk will affect the price of
a mediocre or poor job in a fixed income security more
selecting securities. if the security has a longer
maturity because changes in
RISK RELATED TO STOCK INVESTING: interest rates are
o MARKET AND COMPANY RISK. The increasingly difficult to
price of a security held by a predict over longer periods of
portfolio may fall due to time. Fixed income securities
changing economic, political with longer maturities will
or market conditions or therefore be more volatile
disappointing earnings than other fixed income
results. Stock prices in securities with shorter
general may decline over short maturities. Conversely, fixed
or even extended periods. The income securities with shorter
stock market tends to be maturities will be less
cyclical, with periods when volatile but generally provide
stock prices generally rise lower returns than fixed
and periods when stock prices income securities with longer
generally decline. Further, maturities. The average
even though the stock market maturity of a portfolio's
is cyclical in nature, returns fixed income investments will
from a particular stock market affect the volatility of the
segment in which a portfolio portfolio's share price.
invests may still trail
returns from the overall stock Because of these and other risks
market. that may be particular to a
portfolio, your investment could
RISKS RELATED TO BOND INVESTING: lose or not make any money.
o INCOME RISK. A portfolio's
income may fall due to falling
interest rates. Income risk
is generally the greatest for
short-term bonds, and the
least for long-term bonds.
Changes in interest rates will
affect bond prices as well as
bond income.
o INTEREST RATE RISK. This is the
risk that bond prices overall
will decline over short or
even extended periods due to
rising interest rates.
Interest rate risk is
generally modest
3
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PORTFOLIOS AT A GLANCE (CONTINUED)
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ASSET ALLOCATION GROWTH PORTFOLIO
INVESTMENT
OBJECTIVE Maximize total return over the long term by allocating
assets among stocks, bonds, short-term instruments and
other investments.
PRINCIPAL The Portfolio Manager allocates the Portfolio's assets
INVESTMENT among stocks, bonds, and short-term and money market
STRATEGY investments.
The Portfolio Manager determines the allocation of the
Portfolio's assets within the different classes. The
Portfolio Manager will maintain a neutral mix over time
of 70% of assets in stocks, 25% of assets in bonds, and
5% of assets in short-term and money market instruments.
The Portfolio Manager may invest the Portfolio's assets
in securities of foreign issuers in addition to securities
of domestic issuers.
In buying and selling securities for the Portfolio, the
Portfolio Manager generally analyzes the issuer of a
security using fundamental factors (e.g., growth potential,
earnings estimates, and management) and/or quantitative
factors (e.g., historical earnings, dividend yield, and
earnings per share) and evaluates each security's current
price relative to its estimated long-term value.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
ASSET GROWTH
ALLOCATION AND
GROWTH DIVERSIFIED INCOME SPECIAL
A MID-CAP G SITUATIONS
A D A S
G M I S
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
4
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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 CREDIT RISK
o MARKET AND COMPANY RISK o CALL RISK
o INCOME RISK o MATURITY RISK
o INTEREST RATE RISK
An investment in the Portfolio is subject to the following
additional principal risks described under "Description of
the Portfolios - Asset Allocation Growth Portfolio":
o Foreign Investment Risk
o Derivative Risk
PERFORMANCE The value of your shares in the Portfolio will fluctuate
depending on the Portfolio's investment performance.
Performance information is only shown for portfolios that
have had a full calendar year of operations. Since the
Asset Allocation Growth Portfolio commenced operations on
or about October 1, 2000, performance for previous calendar
years is not available.
5
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PORTFOLIOS AT A GLANCE
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DIVERSIFIED MID-CAP PORTFOLIO
INVESTMENT
OBJECTIVE Long-term growth of capital.
PRINCIPAL The Portfolio normally invests at least 65% of its total
INVESTMENT assets in common stocks of companies with medium market
STRATEGY capitalizations.
The Portfolio Manager defines mid-cap companies as
companies with market capitalizations equaling or exceeding
$250 million and similar to the top range of the Russell
MidCap Index at the time of the Portfolio's investment
(currently $90.1 billion). The Portfolio may also invest
in companies with smaller or larger market capitalizations.
The Portfolio Manager may invest the Portfolio's assets in
securities of foreign issuers in addition to securities of
domestic issuers.
The Portfolio Manager is not constrained by any particular
investment style. The Portfolio may invest in either
"growth" stocks or "value" stocks or a combination of both
types.
The Portfolio Manager relies on fundamental analysis of each
issuer and its potential for success in light of its current
financial condition, its industry position, and economic and
market factors. Factors considered include growth potential,
earnings estimates and management. These securities are then
analyzed using statistical models to further evaluate growth
potential, valuation, liquidity and investment risk.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
ASSET GROWTH
ALLOCATION AND
GROWTH DIVERSIFIED INCOME SPECIAL
A MID-CAP G SITUATIONS
A D A S
G M I S
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
6
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PORTFOLIOS AT A GLANCE (CONTINUED)
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PRINCIPAL Any investment involves the possibility that you will lose
RISKS money or not make money.
An investment in the Portfolio is subject to the following
principal risks described under "Introduction - General Risk
Factors":
o Manager Risk o Market and Company Risk
An investment in the Portfolio is subject to the following
additional principal risks described under "Description of
the Portfolios - Diversified Mid-Cap Portfolio":
o Growth Investing Risk
o Small Company Risk
o Foreign Investment Risk
PERFORMANCE The value of your shares in the Portfolio will fluctuate
depending on the Portfolio's investment performance.
Performance information is only shown for portfolios that
have had a full calendar year of operations. Since the
Diversified Mid-Cap Portfolio commenced operations on or
about October 1, 2000, performance for previous calendar
years is not available.
7
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PORTFOLIOS AT A GLANCE (CONTINUED)
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GROWTH AND INCOME PORTFOLIO
INVESTMENT
OBJECTIVE Long-term capital growth and current income.
PRINCIPAL The Portfolio normally emphasizes investments in common stocks.
INVESTMENT It will normally invest up to 75% of its assets in equity
STRATEGY securities selected primarily for their growth potential, and
at least 25% of its assets in securities the Portfolio Manager
believes have income potential. Equity securities may make up
part of this income component if they currently pay dividends
or the Portfolio Manager believes they have potential for
increasing or commencing dividend payments.
The Portfolio Manager applies a "bottom up" approach in choosing
investments. In other words, the Portfolio Manager looks for
companies with earnings growth potential one at a time. The
Portfolio Manager looks mostly for equity and income-producing
securities that meet its investment criteria. If the Portfolio
Manager is unable to find such investments, a significant
portion of the Portfolio's assets may be in cash or similar
investments.
The Portfolio may invest without limit in foreign equity and
debt securities and up to 35% of its net assets in high-
yield/high-risk bonds.
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 MARKET AND COMPANY RISK o CREDIT RISK
o INCOME RISK o MATURITY RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
ASSET GROWTH
ALLOCATION AND
GROWTH DIVERSIFIED INCOME SPECIAL
A MID-CAP G SITUATIONS
A D A S
G M I S
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
8
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PORTFOLIOS AT A GLANCE (CONTINUED)
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An investment in the Portfolio is subject to the following
additional principal risks described under "Description of
the Portfolios - Growth and Income Portfolio":
o GROWTH INVESTING RISK o DERIVATIVE RISK
o SMALL COMPANY RISK o CONCENTRATION RISK
o FOREIGN INVESTMENT RISK o SPECIAL SITUATIONS RISK
o HIGH-YIELD/HIGH-RISK
BOND 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.
PERFORMANCE The value of your shares in the Portfolio will fluctuate
depending on the Portfolio's investment performance.
Performance information is only shown for funds that have
had a full calendar year of operations. Since the Growth
and Income Portfolio commenced operations on or about
October 1, 2000, there is no performance information
included in this prospectus.
9
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PORTFOLIOS AT A GLANCE (CONTINUED)
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SPECIAL SITUATIONS PORTFOLIO
INVESTMENT
OBJECTIVE Capital appreciation.
PRINCIPAL The Portfolio invests primarily in common stocks selected
INVESTMENT for their capital appreciation potential. The Portfolio
STRATEGY emphasizes stocks of "special situation" companies that
the Portfolio Manager believes have been overlooked or
undervalued by other investors. A "special situation"
arises when, in the Portfolio Manager's opinion, securities
of a particular company will appreciate in value due
to a specific development. The Portfolio Manager pays
particular attention to companies thought to have
high free cash flows.
The Portfolio Manager applies a "bottom up" approach in
choosing investments. In other words, the Portfolio
Manager looks for companies with earnings growth potential
one at a time.
The Portfolio may invest without limit in foreign equity
and debt securities and up to 35% of its net assets
in high-yield/high-risk bonds.
PRINCIPAL
RISKS Any investment involves the possibility that you will lose
money or not make money. An investment in the Portfolio
is subject to the following principal risks described
under "Introduction - General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to the following
additional principal risks described under "Description of
the Portfolios - Special Situations Portfolio":
o SMALL COMPANY RISK o CONCENTRATION RISK
o FOREIGN INVESTMENT RISK o SPECIAL SITUATIONS RISK
o HIGH-YIELD/HIGH-RISK o DIVERSIFICATION RISK
BOND RISK
o DERIVATIVE RISK
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
ASSET GROWTH
ALLOCATION AND
GROWTH DIVERSIFIED INCOME SPECIAL
A MID-CAP G SITUATIONS
A D A S
G M I S
<<<------------------------------------------------------------------------>>>
<< xXx >>>
<<<------------------------------------------------------------------------>>>
<<LOWER RISK HIGHER RISK>>
10
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PORTFOLIOS AT A GLANCE (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.
PERFORMANCE The value of your shares in the Portfolio will fluctuate
depending on the Portfolio's investment performance.
Performance information is only shown for portfolios that
have had a full calendar year of operations. Since the
Special Situations Portfolio commenced operations on or
about October 1, 2000, there is no performance information
included in this prospectus.
11
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MORE INFORMATION
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A WORD The Diversified Mid-Cap, Asset Allocation Growth and Growth
ABOUT and Income Portfolios are diversified, as defined in the
PORTFOLIO Investment Company Act of 1940. A diversified portfolio may
DIVERSITY 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 Special
Situations Portfolio is not diversified and, as a result,
may be more volatile because it may invest in a smaller
number of issuers.
ADDITIONAL The investment objective and certain of the investment
INFORMATION restrictions of each portfolio in this prospectus are
ABOUT THE fundamental. This means they may not be modified or
PORTFOLIOS changed without a vote of the shareholders. A Statement
of Additional Information is made a part of this prospectus.
It identifies and discusses non-principal investment
strategies and associated risks of each portfolio, as well
as investment restrictions, secondary or temporary
investments and associated risks, a description of how the
bond rating system works and other information that may be
helpful to you in your decision to invest. You may obtain
a copy without charge by calling our Customer Service Center
at 1-800-344-6864, or by downloading it from the Securities
and Exchange Commission's website (http://www.sec.gov).
NON-PRINCIPAL This prospectus does not describe all of the various types
INVESTMENTS of securities, strategies and practices that are available
AND to, but are not the principal focus of, a particular
STRATEGIES portfolio. Such non-principal investments and strategies
are discussed in the Statement of Additional Information.
TEMPORARY This prospectus does not describe temporary defensive
DEFENSIVE positions. A portfolio may depart from its principal
POSOTIONS investment strategies by temporarily investing for
defensive purposes when adverse market, economic or
political conditions exist. While a portfolio invests
defensively, it may not be able to pursue its investment
objective. A portfolio's defensive investment position
may not be effective in protecting its value. The types
of defensive positions in which a portfolio may engage
are identified and discussed, together with their risks,
in the Statement of Additional Information.
PORTFOLIO Before investing in a portfolio, you should 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
selling by the portfolio, the greater the impact that
and 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.
LEGAL Sutherland Asbill & Brennan LLP, located at 1275
COUNSEL Pennsylvania Avenue, N.W., Washington, D.C. 20004.
INDEPENDENT Ernst & Young LLP, located at Two Commerce Square,
AUDITORS Suite 4000, 2001 Market Street, Philadelphia,
Pennsylvania 19103.
12
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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ASSET ALLOCATION GROWTH PORTFOLIO
PORTFOLIO
MANAGER Fidelity Research & Management Company
INVESTMENT Maximize total return over the long term by allocating
OBJECTIVE its assets among stocks, bonds, short-term instruments
and other investments.
PRINCIPAL The Portfolio Manager allocates the Portfolio's assets
INVESTMENT among the following classes, or types, of investments.
STRATEGY The stock class includes equity securities of all types.
The bond class includes all varieties of fixed-income
securities, including lower-quality debt securities,
maturing in more than one year. The short-term/money
market class includes all types of short-term and money
market instruments.
The Portfolio Manager uses its judgment to place a security
in the most appropriate class based on its investment
characteristics. Fixed-income securities may be classified
in the bond or short-term/money market class according to
interest rate sensitivity as well as maturity.
The Portfolio Manager may invest the Portfolio's assets in
these classes by investing in other funds. The Portfolio
Manager may also invest the Portfolio's assets in other
instruments that do not fall within these classes.
The Portfolio Manager has the ability to allocate the
Portfolio's assets within the different asset classes.
The Portfolio's neutral mix represents the benchmark for
its combination of investments in each asset class over
time. The Portfolio Manager may change the neutral mix
from time to time. The approximate neutral mix is 70%
of assets in stocks, 25% of assets in bonds, and 5% of
assets in short-term and money market instruments.
The Portfolio Manager does not try to pinpoint the precise
moment when a major reallocation should be made. Instead,
the Portfolio Manager regularly reviews the Portfolio's
allocation and makes changes gradually to favor investments
that it believes will provide the most favorable outlook
for achieving the Portfolio's objective.
The Portfolio Manager will invest the Portfolio's assets in
securities of foreign issuers in addition to securities of
domestic issuers.
In buying and selling securities for the Portfolio, the
Portfolio Manager generally analyzes the issuer of a security
using fundamental factors (e.g., growth potential, earnings
estimates, and management) and/or quantitative factors (e.g.,
historical earnings, dividend yield, and earnings per share)
and evaluates each security's current price relative to its
estimated long-term value.
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 Manager may use various techniques, such as
buying and selling futures contracts, to increase or
decrease the Portfolio's exposure to changing security prices,
interest rates, or other factors that affect security values.
If the Portfolio Manager's strategies do not work as intended,
the Portfolio may not achieve its objective.
13
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
DESCRIPTION OF PRINCIPAL SECURITY TYPES:
Equity securities represent an ownership interest, or the
right to acquire an ownership interest, in an issuer.
Different types of equity securities provide different
voting and dividend rights and priority in the event of
the bankruptcy of the issuer. Equity securities include
common stocks, preferred stocks, convertible securities,
and warrants.
Debt securities are used by issuers to borrow money. The
issuer usually pays a fixed, variable, or floating rate of
interest, and must repay the amount borrowed at the maturity
of the security. Some debt securities, such as zero coupon
bonds, do not pay current interest but are sold at a discount
from their face values. Debt securities include corporate
bonds, government securities, and mortgage- and other asset-
backed securities.
Money market securities are high-quality, short-term securities
that pay a fixed, variable, or floating interest rate.
Securities are often specifically structured so that they are
eligible investments for a money market fund. For example,
in order to satisfy the maturity restrictions for a money market
fund, some money market securities have demand or put features,
which shorten the security's effective maturity. Money
market securities include bank certificates of deposit,
bank acceptances, bank time deposits, notes, commercial
paper, and U.S. government securities.
PORTFOLIO TURNOVER. The Portfolio generally intends to
purchase securities for long-term investment, although, to
a limited extent, the Portfolio may purchase securities in
anticipation of relatively short-term price gains. Short-term
transactions may also result from liquidity needs, securities
having reached a price or yield objective, changes in interest
rates or the credit standing of an issuer, or by reason of
economic or other developments not foreseen at the time of the
investment decision. The Portfolio may also sell one security
and simultaneously purchase the same or a comparable security
to take advantage of short-term differentials in bond yields
or securities prices. Portfolio turnover rates are generally
not a factor in making buy and sell decisions.
PRINCIPAL Any investment in the Portfolio involves the possibility that
RISKS you will lose money or not make money. An investment in the
Portfolio is subject to the following principal risks described
under "Introduction - General Risk Factors":
o MANAGER RISK o CREDIT RISK
o MARKET AND COMPANY RISK o CALL RISK
o INCOME RISK o MATURITY RISK
o INTEREST RATE RISK
An investment in the Portfolio is subject to the following
additional principal risks:
o FOREIGN INVESTMENT RISK. Foreign investments may be
riskier than U.S. investments for many reasons,
including changes in currency exchange rates, unstable
political and economic conditions, possible security
illiquidity, a lack of adequate company information,
differences in the way securities markets operate,
less secure foreign banks or securities depositories
than those in the United States, and foreign controls
on investments. In addition, the costs of buying,
selling and holding foreign securities, including
brokerage, tax and custody costs, may be higher than
those involved in domestic transactions.
14
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<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
To the extent that the portfolio invests more than 25%
of its total assets in one geographic region or country,
the portfolio may be more sensitive to economic and other
factors in that geographic region or country than a more
diversified fund.
o DERIVATIVE RISK. The Portfolio may use futures, options,
swaps and other derivative instruments to hedge or protect
the Portfolio from adverse movements in securities prices
and interest rates. The Portfolio may also use a variety
of currency hedging techniques, including foreign currency
contracts, to manage exchange rate risk. The use of these
instruments may benefit the Portfolio. However, the
Portfolio's performance could be worse than if the Portfolio
had not used such instruments if the portfolio manager's
judgment proves incorrect.
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 Fidelity Research & Management Company (FMR) has managed
ON THE the Portfolio since its inception. As of June 30, 2000,
PORTFOLIO FMR had approximately $995 billion in discretionary
MANAGER assets under management. The address of FMR is 82
Devonshire Street, Boston, MA 02109. Fidelity Investments
Money Management, Inc. (FIMM) in Merrimack, New Hampshire,
serves as sub-adviser for the Portfolio. FIMM is responsible
for choosing certain types of fixed income securities for
the Portfolio. FIMM is an affiliate of FMR. As of June 30,
2000, FIMM had approximately $274 billion in discretionary
assets under management.
The following person at FMR is primarily responsible for the
day-to-day investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Ren Y. Cheng Senior Vice President of FMR and Portfolio
Manager.
Mr. Cheng has been employed as a portfolio
manager by FMR since 1994.
FMR also manages the Diversified Mid-Cap Portfolio.
PRIOR PERFORMANCE OF SIMILAR ACCOUNTS MANAGED BY FMR
The table below shows the past performance of FMR in managing
accounts with investment objectives, policies, styles and
techniques substantially similar though not identical to
those of the Asset Allocation Growth Portfolio. The table
shows the total returns for a composite of the actual
performance of similar accounts managed by FMR for various
periods ended June 30, 2000, as adjusted for the projected
annual expenses for the Asset Allocation Growth Portfolio
during its initial fiscal period. The amounts shown reflect
the reinvestment of all dividends and other distributions.
Information presented is based on performance data provided
by FMR. The past performance does not represent the Asset
Allocation Growth Portfolio, as it is newly organized and
has no performance record of its own. Included for comparison
purposes are performance figures of the Russell MidCap Index,
the Lehman Brothers Aggregate Bond Index and the Wilshire 5000
Index, all of which are unmanaged market indices. The
performance shown is calculated in accordance with established
Securities and Exchange Commission rules and guidelines.
15
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
-------------------------------------------------------------------------
The composite is made up of unregistered accounts that are not
subject to diversification and other requirements that apply
to mutual funds under applicable securities, tax and other
laws that, if applicable, may have adversely affected
performance. As a result, portfolio management strategies
used on the composite and those used on the Asset Allocation
Growth Portfolio may vary in some respects. The information
should not be considered a prediction of the future performance
of the Asset Allocation Growth Portfolio. The actual performance
may be higher or lower than that shown.
--------------------------------------------------------------
| ANNUALIZED RATES OF RETURN FOR PERIODS |
| ENDING JUNE 30, 2000 |
|------------------------------------------------------------|
| ASSET LEHMAN |
| ALLOCATION RUSSELL BROTHERS |
| GROWTH MIDCAP AGGREGATE WILSHIRE |
| COMPOSITE INDEX BOND INDEX 5000 INDEX |
| 1 YEAR |
| 3 YEARS |
| 5 YEARS |
| 10 YEARS |
--------------------------------------------------------------
16
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<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
-------------------------------------------------------------------------
DIVERSIFIED MID-CAP PORTFOLIO
PORTFOLIO
MANAGER Fidelity Research & Management Company
INVESTMENT
OBJECTIVE Long-term growth of capital.
PRINCIPAL The Portfolio Manager normally invests at least 65%
INVESTMENT of the Portfolio's total assets in common stocks of
STRATEGY companies with medium market capitalizations. The
Portfolio Manager defines mid-cap companies as
companies with market capitalizations equaling or
exceeding $250 million and similar to the top range
of the Russell Midcap Index at the time of the
Portfolio's investment. Companies whose capitalization
no longer meets this definition after purchase continue
to be considered to have a medium market capitalization
for purposes of the 65% policy. As of June 30, 2000,
the Russell MidCap Index included companies with
capitalizations between approximately $132 million and
$66.5 billion. The size of the companies in the Russell
MidCap Index changes with market conditions and the
composition of the index. The Portfolio Manager may also
invest the Portfolio's assets in companies with smaller
or larger market capitalizations.
The Portfolio Manager may invest the Portfolio's assets
in securities of foreign issuers in addition to securities
of domestic issuers.
The Portfolio Manager is not constrained by any particular
investment style. At any given time, the Portfolio
Manager may buy "growth" stocks or "value" stocks, or a
combination of both types. The Portfolio Manager relies
on fundamental analysis of each issuer and its potential
for success in light of its current financial condition,
its industry position, and economic and market factors.
Factors considered include growth potential, earnings
estimates and management. These securities are then
analyzed using statistical models to further evaluate
growth potential, valuation, liquidity and investment risk.
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 Manager may use various techniques, such as
buying and selling futures contracts, to increase or decrease
the Portfolio's exposure to changing security prices or other
factors that affect security values. If the Portfolio
Manager's strategies do not work as intended, the Portfolio
may not achieve its objective.
17
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
-------------------------------------------------------------------------
PRINCIPAL Any investment in the Portfolio involves the possibility
RISKS that you will lose money or not make money. An investment
in the Portfolio is subject to the following principal
risks described under "Introduction - General Risk Factors":
o MANAGER RISK
o MARKET AND COMPANY RISK
An investment in the Portfolio is subject to the following
additional principal risks:
o GROWTH INVESTING RISK. Growth stocks may be more
volatile than other stocks because they are more
sensitive to investor perceptions of the issuing
company's growth potential. Growth-oriented funds
will typically underperform when value investing is
in favor.
o SMALL COMPANY RISK. Investing in securities of small
companies may involve greater risks than investing in
larger, more established issuers. Smaller companies
may have limited product lines, markets or financial
resources. Their securities may trade less frequently
and in more limited volume than the securities of
larger, more established companies. In addition,
smaller companies are typically subject to greater
changes in earning 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 RISK. Foreign investments may
be riskier than U.S. investments for many reasons,
including changes in currency exchange rates,
unstable political and economic conditions, possible
security illiquidity, a lack of adequate company
information, differences in the way securities markets
operate, less secure foreign banks or securities
depositories than those in the United States, and
foreign controls on investments. In addition, the
costs of buying, selling and holding foreign
securities, including brokerage, tax and custody
costs, may be higher than those involved in domestic
transactions.
To the extent that the Portfolio invests more than 25%
of its total assets in one geographic region or country,
the Portfolio may be more sensitive to economic and other
factors in that geographic region or country than 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 Fidelity Research & Management Company (FMR) has managed
ON THE the Portfolio since its inception. As of June 30, 2000,
PORTFOLIO FMR had approximately $995 billion in discretionary
MANAGER assets under management. The address of FMR is 82 Devonshire
Street, Boston, MA 02109.
The following person at FMR is primarily responsible for
the day-to-day investment decisions of the Portfolio:
Name Position and Recent Business Experience
------------------- ---------------------------------------
Robert L. MacDonald Senior Vice President of FMR and
Portfolio Manager.
Mr. MacDonald has been employed by FMR
since 1985 and has been a portfolio
manager since 1987.
18
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
FMR also manages the Asset Allocation Growth Portfolio.
PRIOR PERFORMANCE OF SIMILAR ACCOUNTS MANAGED BY FMR
The table below shows the past performance of FMR in managing
accounts with investment objectives, policies, styles and
techniques substantially similar though not identical to those
of the Diversified MidCap Portfolio. The table shows the total
returns for a composite of the actual performance of similar
accounts managed by FMR for various periods ended June 30,
2000, as adjusted for the projected annual expenses for the
Diversified MidCap Portfolio during its initial fiscal period.
The amounts shown reflect the reinvestment of all dividends
and other distributions. Information presented is based on
performance data provided by FMR. The past performance does
not represent the Diversified MidCap Portfolio, as it is
newly organized and has no performance record of its own.
Included for comparison purposes are performance figures
of the Russell MidCap Index, an unmanaged market index.
The performance shown is calculated in accordance with
established Securities and Exchange Commission rules and
guidelines.
The composite is made up of unregistered accounts that
are not subject to diversification and other requirements
that apply to mutual funds under applicable securities,
tax and other laws that, if applicable, may have adversely
affected performance. As a result, portfolio management
strategies used on the composite and those used on the
Diversified MidCap Portfolio may vary in some respects.
The information should not be considered a prediction of
the future performance of the Diversified MidCap Portfolio.
The actual performance may be higher or lower than that shown.
--------------------------------------------------------------
| ANNUALIZED RATES OF RETURN FOR PERIODS |
| ENDING JUNE 30, 2000 |
|------------------------------------------------------------|
| DIVERSIFIED RUSSELL |
| MIDCAP MIDCAP |
| COMPOSITE INDEX |
| 1 YEAR |
| 3 YEARS |
| 5 YEARS |
| 10 YEARS |
--------------------------------------------------------------
19
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
PORTFOLIO
MANAGER Janus Capital Corporation
INVESTMENT
OBJECTIVE Long-term capital growth and current income.
PRINCIPAL The Portfolio normally emphasizes investments in common
INVESTMENT stocks. It will normally invest up to 75% of its assets in
STRATEGY equity securities selected primarily for their growth potential,
and at least 25% of its assets in securities the Portfolio
Manager believes have income potential. Because of this
investment strategy, the Portfolio is not designed for
investors who need consistent income.
The Portfolio Manager applies a "bottom up" approach in
choosing investments. In other words, the Portfolio Manager
seeks to identify individual companies with earnings growth
potential that may not be recognized by the market at large.
The Portfolio Manager 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. The Portfolio Manager emphasizes
aggressive growth stocks and may derive a significant portion
of its income from dividend-paying common stocks. Because of
these factors, the Portfolio's net asset value may fluctuate
more than other equity funds.
The Portfolio Manager shifts assets between the growth and
income components of the Portfolio based on the Portfolio
Manager's analysis of relevant market, financial and economic
conditions. If the Portfolio Manager believes that growth
securities will provide better returns than the yields available
or expected on income-producing securities, the Portfolio will
place a greater emphasis on the growth component.
The growth component of the Portfolio is expected to consist
primarily of common stocks, but may also include warrants,
preferred stocks or convertible securities selected primarily
for their growth potential.
The income component of the Portfolio will consist of securities
that the Portfolio Manager believes have income potential. Such
securities may include equity securities, convertible securities
and all types of debt securities. Equity securities may be
included in the income component of the Portfolio if they
currently pay dividends or the Portfolio Manager believes they
have the potential for either increasing their dividends or
commencing dividends, if none are currently paid.
The Portfolio may also invest in:
o debt securities
o foreign equity and debt securities (either indirectly
through depositary receipts or directly in foreign
markets) (without limit)
o high-yield/high-risk bonds (up to 35%)
o index/structured securities
o options, futures, forwards, swaps and other types of
derivatives for hedging purposes or for non-hedging
purposes such as seeking to enhance return
o securities purchased on a when-issued, delayed delivery
or forward commitment basis
o illiquid investments (up to 15%)
20
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS. When the Portfolio Manager
believes that market conditions are unfavorable for profitable
investing or when he is otherwise unable to locate attractive
investment opportunities for the Portfolio, the Portfolio's
cash or similar investments may increase. The Portfolio
Manager may also temporarily increase the Portfolio's cash
position to protect its assets or maintain liquidity. When
the Portfolio's investments in cash or similar investments
increase, it may not participate in market advances or
declines to the same extent that it would if the Portfolio
remained more fully invested in stocks or bonds.
PORTFOLIO TURNOVER. The Portfolio generally intends to
purchase securities for long-term investment, although,
to a limited extent, the Portfolio may purchase securities
in anticipation of relatively short-term price gains.
Short-term transactions may also result from liquidity needs,
securities having reached a price or yield objective, changes
in interest rates or the credit standing of an issuer, or by
reason of economic or other developments not foreseen at the
time of the investment decision. The Portfolio may also sell
one security and simultaneously purchase the same or a
comparable security to take advantage of short-term
differentials in bond yields or securities prices. Portfolio
turnover rates are generally not a factor in making buy and
sell decisions.
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 CREDIT RISK
o MARKET AND COMPANY RISK o CALL RISK
o INCOME RISK o MATURITY RISK
o INTEREST RATE RISK
An investment in the Portfolio is subject to the following
additional principal risks:
o GROWTH INVESTING RISK. Growth stocks may be more volatile
than other stocks because they are more sensitive to
investor perceptions of the issuing company's growth
potential. Growth-oriented funds will typically
underperform when value investing is in favor.
o SMALL COMPANY RISK. Investing in securities of small
companies may involve greater risks than investing in
larger, more established issuers. Smaller companies may
have limited product lines, markets or financial resources.
Their securities may trade less frequently and in more
limited volume than the securities of larger, more
established companies. In addition, smaller companies
are typically subject to greater changes in earning 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 RISK. Foreign investments may be
riskier than U.S. investments for many reasons, including
changes in currency exchange rates, unstable political and
economic conditions, possible security illiquidity, a lack
21
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
of adequate company information, differences in the way
securities markets operate, less secure foreign banks or
securities depositories than those in the United States,
and foreign controls on investments. In addition, the
costs of buying, selling and holding foreign securities,
including brokerage, tax and custody costs, may be higher
than those involved in domestic transactions.
To the extent that the Portfolio invests more than 25% of
its total assets in one geographic region or country, the
Portfolio may be more sensitive to economic and other
factors in that geographic region or country that a more
diversified fund.
o HIGH-YIELD/HIGH-RISK BOND RISK. High yield bonds (commonly
referred to as "junk bonds") generally provide greater
income and increased opportunity for capital appreciation
than investments in higher quality debt securities, but
they also typically have greater potential price
volatility and principal and income risk. High yield
bonds are not considered investment grade.
o DERIVATIVE RISK. The Portfolio may use futures, options,
swaps and other derivative instruments to hedge or
protect the Portfolio from adverse movements in securities
prices and interest rates. The Portfolio may also use a
variety of currency hedging techniques, including foreign
currency contracts, to manage exchange rate risk. The use
of these instruments may benefit the Portfolio. However,
the Portfolio's performance could be worse than if the
Portfolio had not used such instruments if the portfolio
manager's judgment proves incorrect.
o CONCENTRATION RISK. The Portfolio may, at times, invest
more than 25% of its assets in securities of issuers in
one or more market sectors, such as technology. To the
extent the Portfolio's assets are concentrated in a single
market sector, volatility in that sector will have a
greater impact on the Portfolio than it would on a fund
that has not concentrated its investments.
o SPECIAL SITUATIONS RISK. Investments in special situations
companies may not appreciate if an anticipated development
does not occur or does not attract the anticipated
attention.
This prospectus does not describe all of the risks of every
technique, strategy or temporary defensive position that the
Portfolio may use. For such information, please refer to the
Statement of Additional Information.
MORE Janus Capital Corporation has managed the Portfolio since its
ON THE inception. Janus Capital has been an investment adviser since
PORTFOLIO 1970, and provides advisory services to managed accounts and
MANAGER investment companies. As of June 30, 2000, Janus Capital
managed approximately $304 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
------------------- ---------------------------------------
David J. Corkins Executive Vice President and Portfolio
Manager of the Portfolio since its
inception.
22
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
Mr. Corkins joined Janus Capital in
1995 as a research analyst specializing
in domestic financial services
companies and a variety of foreign
industries. Prior to joining Janus
Capital, he was the Chief Financial
Officer of Chase U.S. Consumer
Services, Inc., a Chase Manhattan
mortgage business.
Janus Capital also manages the Special Situations Portfolio.
PRIOR PERFORMANCE OF A COMPARABLE FUND MANAGED BY JANUS
The table below shows the past performance of Janus in managing
the Janus Growth and Income Fund, a series of the Janus Equity
Funds. The Janus Growth and Income Fund is a mutual fund managed
by the same Janus personnel with the same investment objective
and substantially similar policies and strategies though not
identical to those of the Growth and Income Portfolio. The
table shows the total returns for Janus Growth and Income Fund
for various periods ended June 30, 2000, as adjusted for the
projected annual expenses for the Growth and Income Portfolio
during its initial fiscal period. The amounts shown reflect
the reinvestment of all dividends and other distributions.
Information presented is based on performance data provided
by Janus. The past performance does not represent the Growth
and Income Portfolio, as it is newly organized and has no
performance record of its own. Included for comparison purposes
are performance figures of the S&P 500 Index, an unmanaged
market index. The performance shown is calculated in accordance
with established Securities and Exchange Commission rules and
guidelines.
The investment results presented below reflect the reinvestment
of all dividends and other distributions. These results are not
those of the Portfolio and should not be considered a prediction
of the future performance of the Growth and Income Portfolio.
The actual performance may be higher or lower than that shown.
--------------------------------------------------------------
| ANNUALIZED RATES OF RETURN FOR PERIODS |
| ENDING JUNE 30, 2000 |
|------------------------------------------------------------|
| JANUS GROWTH AND INCOME FUND, |
| ADJUSTED FOR PROJECTED ANNUAL |
| EXPENSES OF THE GROWTH AND S&P 500 |
| INCOME PORTFOLIO INDEX |
| 1 YEAR |
| 3 YEARS |
| 5 YEARS |
| 10 YEARS |
--------------------------------------------------------------
23
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
SPECIAL SITUATIONS PORTFOLIO
PORTFOLIO
MANAGER Janus Capital Corporation
INVESTMENT
OBJECTIVE Capital appreciation.
PRINCIPAL The Portfolio invests primarily in common stocks selected
INVESTMENT for their capital appreciation potential. The Portfolio
STRATEGY emphasizes stocks of "special situation" companies that the
Portfolio Manager believes have been overlooked or undervalued
by other investors. A "special situation" arises when, in the
Portfolio Manager's opinion, securities of a particular company
will appreciate in value due to a specific development with
respect to that issuer. Special situations may include
significant changes in a company's allocation of its existing
capital, a restructuring of assets, or a redirection of free
cash flows. For example, issuers undergoing significant
capital changes may include companies involved in spin-offs,
sales of divisions, mergers or acquisitions, companies
emerging from bankruptcy, or companies initiating large changes
in their debt to equity ratio. Companies that are redirecting
cash flows may be reducing debt, repurchasing shares or paying
dividends. Special situations may also result from
(1) significant changes in industry structure through regulatory
developments or shifts in competition; (2) a new or improved
product, service, operation or technological advance;
(3) changes in senior management; or (4) significant
changes in cost structure. The Portfolio Manager pays
particular attention to companies that it thinks have high
free cash flows.
The Portfolio Manager applies a "bottom up" approach in
choosing investments. In other words, the Portfolio Manager
seeks to identify individual companies with earnings growth
potential that may not be recognized by the market at large.
The Portfolio Manager 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. Realization of income is not a
significant consideration when the Portfolio Manager chooses
investments for the Portfolio. Income realized on the Portfolio's
investments may be incidental to its objective.
The Portfolio may also invest in:
o debt securities
o foreign equity and debt securities (either indirectly
through depositary receipts or directly in foreign
markets)
o high-yield/high-risk bonds (up to 35%)
o index/structured securities
o options, futures, forwards, swaps and other types
of derivatives for hedging purposes or for non-hedging
purposes such as seeking to enhance return
o securities purchased on a when-issued, delayed
delivery or forward commitment basis
o illiquid investments (up to 15%)
24
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS. When the Portfolio Manager believes
that market conditions are unfavorable for profitable investing
or when it is otherwise unable to locate attractive investment
opportunities for the Portfolio, the Portfolio's cash or
similar investments may increase. The Portfolio Manager may
also temporarily increase the Portfolio's cash position to
protect its assets or maintain liquidity. When the Portfolio's
investments in cash or similar investments increase, it may not
participate in market advances or declines to the same extent
that it would if the Portfolio remained more fully invested in
stocks or bonds.
PORTFOLIO TURNOVER. The Portfolio generally intends to
purchase securities for long-term investment, although, to
a limited extent, the Portfolio may purchase securities in
anticipation of relatively short-term price gains. Short-term
transactions may also result from liquidity needs, securities
having reached a price or yield objective, changes in interest
rates or the credit standing of an issuer, or by reason of
economic or other developments not foreseen at the time of the
investment decision. The Portfolio may also sell one security
and simultaneously purchase the same or a comparable security
to take advantage of short-term differentials in bond yields
or securities prices. Portfolio turnover rates are generally
not a factor in making buy and sell decisions.
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 MARKET AND COMPANY RISK
An investment in the Portfolio is subject to the following
additional principal risks:
o SMALL COMPANY RISK. Investing in securities of
small companies may involve greater risks than
investing in larger, more established issuers.
Smaller companies may have limited product lines,
markets or financial resources. Their securities
may trade less frequently and in more limited volume
than the securities of larger, more established
companies. In addition, smaller companies are
typically subject to greater changes in earning
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 RISK. Foreign investments may be
riskier than U.S. investments for many reasons,
including changes in currency exchange rates, unstable
political and economic conditions, possible security
illiquidity, a lack of adequate company information,
differences in the way securities markets operate,
less secure foreign banks or securities depositories
than those in the United States, and foreign controls
on investments. In addition, the costs of buying,
selling and holding foreign securities, including
brokerage, tax and custody costs, may be higher than
those involved in domestic transactions.
To the extent that the Portfolio invests more than 25%
of its total assets in one geographic region or country,
the portfolio may be more sensitive to economic and other
factors in that geographic region or country than a more
diversified fund.
25
<PAGE>
<PAGE>
-------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
o HIGH-YIELD/HIGH-RISK BOND RISK. High yield bonds
(commonly referred to as "junk bonds") generally provide
greater income and increased opportunity for capital
appreciation than investments in higher quality debt
securities, but they also typically have greater
potential price volatility and principal and income
risk. High yield bonds are not considered investment
grade.
o DERIVATIVE RISK. The Portfolio may use futures,
options, swaps and other derivative instruments to
hedge or protect the Portfolio from adverse movements
in securities prices and interest rates. The Portfolio
may also use a variety of currency hedging techniques,
including foreign currency contracts, to manage
exchange rate risk. The use of these instruments
may benefit the Portfolio. However, the Portfolio's
performance could be worse than if the Portfolio had
not used such instruments if the Portfolio Manager's
judgment proves incorrect.
o CONCENTRATION RISK. The Portfolio may, at times, invest
more than 25% of its assets in securities of issuers
in one or more market sectors, such as technology.
To the extent the Portfolio's assets are concentrated
in a single market sector, volatility in that sector
will have a greater impact on the Portfolio than it
would on a fund that has not concentrated its
investments.
o SPECIAL SITUATIONS RISK. Investments in special
situations companies may not appreciate if an
anticipated development does not occur or does not
attract the anticipated attention.
o DIVERSIFICATION RISK. A non-diversified fund will be
more volatile than a diversified fund because it may
invest its assets in a smaller number of issuers. The
gains or losses on a single security or issuer will,
therefore, have a greater impact on the non-diversified
fund's net asset value.
This prospectus does not describe all of the risks of every
technique, strategy or temporary defensive position that the
Portfolio may use. For such information, please refer to the
Statement of Additional Information.
MORE Janus Capital Corporation has managed the Portfolio since its
ON THE inception. Janus Capital has been an investment adviser
PORTFOLIO since 1970, and provides advisory services to managed accounts
MANAGER and investment companies. As of June 30, 2000, Janus
Capital managed approximately $304 billion in assets.
The address of Janus Capital is 100 Fillmore Street,
Denver, Colorado 80206.
The following person at Janus Capital is primarily respponsible
for the day-to-day investment decisions of the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
David C. Decker Executive Vice President and Portfolio
Manager of the Portfolio since its inception.
Mr. Decker joined Janus Capital in 1992 and
has managed various other mutual funds and
private accounts since that time.
Janus Capital also manages the Growth and Income Portfolio.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------
PRIOR PERFORMANCE OF A COMPARABLE FUND MANAGED BY JANUS
The table below shows the past performance of Janus in managing
the Janus Special Situations Fund, a series of the Janus Equity
Funds. The Janus Special Situations Fund is a mutual fund
managed by the same Janus personnel with the same investment
objective and substantially similar policies and strategies
though not identical to those of the Special Situations Portfolio.
The table shows the total returns for Janus Special Situations
Fund for various periods ended June 30, 2000, as adjusted for
the projected annual expenses for the Special Situations
Portfolio during its initial fiscal period. The amounts shown
reflect the reinvestment of all dividends and other distributions.
Information presented is based on performance data provided by
Janus. The past performance does not represent the Special
Situations Portfolio, as it is newly organized and has no
performance record of its own. Included for comparison purposes
are performance figures of the S&P 500 Index, an unmanaged
market index. The performance shown is calculated in accordance
with established Securities and Exchange Commission rules and
guidelines.
The investment results presented below reflect the reinvestment
of all dividends and other distributions. These results are
not those of the Portfolio and should not be considered a
prediction of the future performance of the Special Situations
Portfolio. The actual performance may be higher or lower than
that shown.
--------------------------------------------------------------
| ANNUALIZED RATES OF RETURN FOR PERIODS |
| ENDING JUNE 30, 2000 |
|------------------------------------------------------------|
| JANUS SPECIAL SITUATIONS FUND, |
| ADJUSTED FOR PROJECTED ANNUAL |
| EXPENSES OF THE SPECIAL S&P 500 |
| SITUATIONS PORTFOLIO INDEX |
| 1 YEAR |
| 3 YEARS |
| 5 YEARS |
| 10 YEARS |
--------------------------------------------------------------
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OVERALL MANAGEMENT OF THE TRUST
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THE Directed Services, Inc. ("DSI") is the overall adviser to
ADVISER the GCG Trust. DSI is a New York corporation and a wholly
owned subsidiary of ING Groep N.V., a global financial services
holding company based in The Netherlands. DSI is registered
with the Securities and Exchange Commission as an investment
adviser and a broker-dealer. DSI is the principal underwriter
and distributor of the Variable Contracts that Golden American
Life Insurance Company issues. The address of DSI is 1475
Dunwoody Drive, West Chester, Pennsylvania 19380.
DSI has overall responsibility for hiring portfolio managers
and for periodically monitoring their performance. DSI considers
performance records in light of a portfolio's investment
objectives and policies. The GCG Trust pays DSI for its services
an advisory fee. DSI in turn pays the portfolio managers their
respective portfolio management fee.
In addition to advisory services, DSI provides administrative
and other services necessary for the ordinary operation of the
portfolios. DSI procures and pays for the services and
information necessary to the proper conduct of the portfolios'
business, including custodial, administrative, transfer agency,
portfolio accounting, dividend disbursing, auditing, and ordinary
legal services. DSI also acts as liaison among the various
service providers to the portfolios, including the custodian,
portfolio accounting agent, portfolio managers, and the
insurance company or companies to which the portfolios offer
their shares. DSI also ensures that the portfolios operate in
compliance with applicable legal requirements and monitors the
portfolio managers for compliance with requirements under
applicable law and with the investment policies and restrictions
of the portfolios. DSI does not bear the expense of brokerage
fees and other transactional expenses for securities or other
assets (which are generally considered part of the cost for the
assets), taxes (if any) paid by a portfolio, interest on
borrowing, fees and expenses of the independent trustees, and
extraordinary expenses, such as litigation or indemnification
expenses.
DSI has full investment discretion and makes all determinations
with respect to the investment of a portfolio's assets and the
purchase and sale of portfolio securities for one or more
portfolios.
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OVERALL MANAGEMENT OF THE TRUST (continued)
-------------------------------------------------------------------------
ADVISORY The GCG Trust pays DSI an advisory fee, payable monthly, based
FEE on the average daily net assets of a portfolio.
ADVISORY FEE. The Trust pays DSI an advisory fee at the
following annual rates (based on the average daily net assets
of the respective portfolios):
-------------------------------------------------------------------
| ADVISORY FEE |
| (as a percentage of |
| PORTFOLIO average net assets) |
|-----------------------------------------------------------------|
| Asset Allocation Portfolio 1.00% of first $500 million; |
| and Diversified Mid-Cap 0.95% of next $250 million; |
| Portfolio: 0.90% of next $500 million; and |
| 0.85% of the amount in excess of |
| $1.25 billion. |
| |
| Growth and Income Portfolio 1.10% of first $250 million; |
| and Special Situations 1.05% of next $400 million; |
| Portfolio: 1.00% of next $450 million; and |
| 0.95% of the amount in excess of |
| $1.1 billion. |
-------------------------------------------------------------------
DSI in turn pays, on a monthly basis, the portfolio managers
a portfolio management fee for their services.
The GCG Trust is distinct in that the portfolios' expense
structure is simpler and more predictable than that of most
mutual funds. DSI PAYS MANY OF THE ORDINARY EXPENSES FOR
EACH PORTFOLIO, INCLUDING CUSTODIAL, ADMINISTRATIVE, TRANSFER
AGENCY, PORTFOLIO ACCOUNTING, AUDITING, AND ORDINARY LEGAL
EXPENSES. MOST MUTUAL FUNDS PAY FOR THESE EXPENSES DIRECTLY
FROM THEIR OWN ASSETS. DSI ALSO SERVES AS THE OVERALL ADVISER
TO THE OTHER PORTFOLIOS OF THE TRUST.
-------------------------------------------------------------------------
SHARE PRICE
-------------------------------------------------------------------------
Purchase and redemption orders ("orders") are accepted only
on days on which the New York Stock Exchange ("NYSE") is
open for business ("a business day").
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 NYSE.
Therefore, orders received by the Trust via insurance company
Separate Accounts on any business day prior to the close of
NYSE trading will receive the price calculated at the close
of trading that day. Orders received by a Separate Account
after the close of trading on a business day, but prior to
the close of business on the next business day, will receive
the price calculated at the close of trading on that next
business day.
The net asset values per share of each portfolio fluctuates
in response to changes in market conditions and other factors.
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-------------------------------------------------------------------------
OVERALL MANAGEMENT OF THE TRUST
-------------------------------------------------------------------------
The 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 of Trustees. Instruments
maturing in sixty days or less may be valued using the
amortized cost method of valuation. The amortized cost
method 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
value of a foreign security is determined in its national
currency based upon the price on the foreign exchange at
close of business. Securities traded in over-the-counter
markets outside the United States are valued at the last
available price in the over-the-counter market before the
time of valuation.
Debt securities, including those to be purchased under firm
commitment agreements (other than obligations having a
maturity sixty days or less at their date of acquisition
valued under the amortized cost method), are normally valued
on the basis of quotes obtained from brokers and dealers or
pricing services, which take into account appropriate factors
such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. Debt
obligations having a maturity of sixty days or less may be
valued at amortized cost unless the portfolio manager believes
that amortized cost does not approximate market value.
When a portfolio writes a put or call option, the amount of the
premium is included in the portfolio's assets and an equal
amount is included in its liabilities. The liability thereafter
is adjusted to the current market value of the option. The
premium a portfolio pays for an option is recorded as an asset,
and subsequently adjusted to market value. Futures and options
traded on commodities exchanges or boards of trade are valued at
their closing settlement price on such exchange or board of trade.
Foreign securities quoted in foreign currencies generally are
valued at translated foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets
in European and Pacific Basin countries is normally completed
well before 4:00 p.m. Eastern 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 are 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 is
not 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 are valued at fair market value as
determined in good faith by DSI or the portfolio manager acting
under the direction of the Board.
30
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TAXES AND DISTRIBUTIONS
-------------------------------------------------------------------------
The GCG Trust pays net investment income, if any, on your
shares of each portfolio annually. Any net realized
long-term capital gains for any portfolio will be declared
and paid at least once annually. Net realized short-term
gains may be declared and paid more frequently. We will
automatically reinvest any distributions made by any portfolio
in additional shares of that portfolio, unless the separate
account of your insurance company makes an election to receive
distributions in cash. Dividends or distributions by a
portfolio will reduce the per share net asset value by the
per share amount paid.
Each portfolio intends to qualify and expects to continue to
qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended ("Code").
As qualified regulated investment companies, the portfolios
are generally not subject to federal income tax on the part
of their investment company taxable income (including any net
capital gains) which they distribute to shareholders. It is
each portfolio's intention to distribute all such income and
gains.
Shares of each portfolio are offered to the Separate Accounts
of insurance companies. Under the Code, an insurance company
pays no tax with respect to income of a qualifying Separate
Account when the income is properly allocable to the value of
eligible variable annuity or variable life insurance contracts.
Under current tax law, your gains under your Contract are taxed
only when you take them out. Contract purchasers should review
the Contract prospectus for a discussion of the tax treatment
applicable to holders of the Contracts.
The foregoing is only a summary of some of the important federal
income tax considerations generally affecting a portfolio and
you. Please refer to the Statement of Additional Information
for more information about the tax status of the portfolios.
You should consult with your tax adviser for more detailed
information regarding taxes applicable to the Contracts.
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TO OBTAIN THE GCG TRUST
MORE INFORMATION TRUSTEES
A Statement of Additional Information, dated Barnett Chernow, Chairman
October 1, 2000, has been filed with the and Trustee
Securities and Exchange Commission ("SEC"), John R. Barmeyer, Trustee
and is made a part of this prospectus by .
reference J. Michael Earley, Trustee
Additional information about the GCG Trust's
investments is available in the GCG Trust's R. Barbara Gitenstein, Trustee
annual and semi-annual reports to shareholders.
In the annual report, you will find a discussion Robert A. Grayson, Trustee
of the market conditions and investment
strategies that significantly affected the Elizabeth J. Newell, Trustee
GCG Trust's performance during its last
fiscal year. Stanley B. Seidler, Trustee
To obtain a free copy of these documents or to Roger B. Vincent, Trustee
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.
Information about the GCG Trust can be reviewed
and copied at the SEC Public Reference Room.
Information about its operation may be obtained
by calling 1-202-942-8090. Reports and other
information about the GCG Trust are available
on the EDGAR Database on the SEC's Internet Site
at http://www.sec.gov. You may also obtain copies of
information for a duplicating fee by electronic
request at the following E-mail address:
[email protected], or by writing the SEC's Public
Reference Section, Washington, DC 20549-0102
GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company is a stock
company domiciled in Delaware.
G3059 10/00 SEC File No. 811-5629
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
THE GCG TRUST
STATEMENT OF ADDITIONAL INFORMATION
ASSET ALLOCATION GROWTH SERIES
DIVERSIFIED MID-CAP SERIES
GROWTH AND INCOME SERIES
SPECIAL SITUATIONS SERIES
OCTOBER 1, 2000
This Statement of Additional Information pertains to the Portfolios
listed above, each of which is a separate series of The GCG Trust. This
Statement of Additional Information is not a prospectus. It should be
read in conjunction with the prospectus dated October 1, 2000, which is
incorporated by reference herein. The information in this Statement of
Additional Information expands on information contained in the
prospectus. The prospectus can be obtained without charge by contacting
the Manager at the phone number or address below.
DIRECTED SERVICES, INC.
1475 Dunwoody Drive
West Chester, Pennsylvania 19380
(800) 447-3644
<PAGE>
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TABLE OF CONTENTS
Page
INTRODUCTION
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
FIXED INCOME SECURITIES
U.S. Government Securities
Debt Securities
High Yield Bonds
Brady Bonds
Banking Industry and Savings Industry Obligations
Commercial Paper
Sovereign Debt
Mortgage-Backed Securities
Collateralized Mortgage Obligations
Agency Mortgage Securities
GNMA Certificates
FNMA & FHLMC Mortgage-Backed Obligations
Privately-Issued Mortgage-Backed Securities
Asset-Backed Securities
Zero Coupon Bonds
EQUITY INVESTMENTS
Common Stock and Other Equity Securities
Preferred Stock
Convertible Securities
Warrants
DERIVATIVES
Futures Contracts and Options on Futures Contracts
General Description of Futures Contracts
Interest Rate Futures Contracts
Options on Futures Contracts
Stock Index Futures Contracts
Limitations
OPTIONS ON SECURITIES AND SECURITIES INDEXES
Purchasing Options on Securities
Risks of Options Transactions
Writing Covered Call and Secured Put Options
Options on Securities Indexes
Over-the-Counter Options
General Risks Associated with Futures and Futures Options
Swaps
Variable and Floating Rate Securities
Lease Obligation Bonds
Structured Securities
Indexed Securities
Hybrid Instruments
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Dollar Roll Transactions
When-Issued or Delayed Delivery Securities
FOREIGN INVESTMENTS
Foreign Securities
Foreign Currency Transactions
Options on Foreign Currencies
Currency Management
Equity and Debt Issued or Guaranteed
by Supranational Organizations
Exchange Rate-Related Securities
OTHER INVESTMENT PRACTICES AND RISKS
Repurchase Agreements
Reverse Repurchase Agreements
Other Investment Companies
Short Sales
Short Sales Against the Box
Illiquid Securities
Restricted Securities
Borrowing
Lending Portfolio Securities
Hard Asset Securities
Real Estate Investment Trusts
Risks Associated with the Real Estate Industry
Small Companies
Strategic Transactions
Special Situations
Temporary Defensive Investments
INVESTMENT OBJECTIVES AND ADDITIONAL
INVESTMENT STRATEGIES AND ASSOCIATED RISKS
Asset Allocation Growth Portfolio
Diversified Mid-Cap Portfolio
Growth and Income Portfolio
Special Situations Portfolio
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Non-Fundamental Investment Restrictions
MANAGEMENT OF THE TRUST
The Management Agreement
Portfolio Managers
Distribution of Trust Shares
Codes of Ethics
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment Decisions
Brokerage and Research Services
NET ASSET VALUE
PERFORMANCE INFORMATION
ii
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TAXES
OTHER INFORMATION
Capitalization
Voting Rights
Purchase of Shares
Redemption of Shares
Exchanges
Custodian and Other Service Providers
Independent Auditors
Counsel
Registration Statement
Financial Statements
APPENDIX 1: DESCRIPTION OF BOND RATINGS A-1
iii
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INTRODUCTION
This Statement of Additional Information is designed to elaborate upon
information contained in the Prospectus for the Portfolios, including the
discussion of certain securities and investment techniques. The more
detailed information contained herein is intended for investors who have
read the Prospectus and are interested in a more detailed explanation of
certain aspects of some of the Portfolio's securities and some investment
techniques. Some of the Portfolios' investment techniques are described
only in the 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 Portfolios' Prospectus. Terms not defined
herein have the meanings given them in the Prospectus.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
FIXED INCOME INVESTMENTS
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 U.S. government unconditionally guarantees the
payment of principal and interest, and thus they are of the highest
credit quality. Such direct obligations or guaranteed securities are
subject to variations in market value due to fluctuations in interest
rates, but, if held to maturity, the U.S. government is obligated to or
guarantees to pay them in full.
Securities issued by U.S. government instrumentalities and certain
federal agencies are neither direct obligations of nor guaranteed by the
Treasury. However, they involve federal sponsorship in one way or
another: some are backed by specific types of collateral; some are
supported by the issuer's right to borrow from the Treasury; some are
supported by the discretionary authority of the Treasury to purchase
certain obligations of the issuer; others are supported only by the
credit of the issuing government agency or instrumentality. These
agencies and instrumentalities include, but are not limited to, Federal
Land Banks, Farmers Home Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"),
Student Loan Mortgage Association, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, and Federal Home Loan Banks.
Certain Portfolios may also purchase obligations of the International
Bank for Reconstruction and Development, which, while technically not a
U.S. government agency or instrumentality, has the right to borrow from
the participating countries, including the United States.
DEBT SECURITIES
Certain Portfolios may invest in debt securities, as stated in the
Portfolios' investment objectives and policies in the relevant Prospectus
or in this Statement of Additional Information. Some Portfolios may
invest only in debt securities that are investment grade, i.e., rated BBB
or better by Standard & Poor's Rating Group ("Standard & Poor's") or Baa
or better by Moody's Investors Service, Inc. ("Moody's"), or, if not
rated by Standard & Poor's or Moody's, of equivalent quality as
determined by the Portfolio Manager.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market
value of corporate debt obligations may be expected to rise and fall
inversely with interest rates generally. There is also a risk that the
issuers of the securities
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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.
Moody's or Standard and Poor's do not rate many securities of foreign
issuers; therefore, the selection of such securities depends, to a large
extent, on the credit analysis performed or used by the Portfolio's
Manager.
HIGH YIELD BONDS
"High Yield Bonds" (commonly referred to as "junk bonds"), are bonds
rated lower than Baa or BBB, or, if not rated by Moody's or Standard &
Poor's, of equivalent quality. In general, high yield bonds are not
considered to be investment grade and investors should consider the risks
associated with high yield bonds before investing in the pertinent
Portfolio. Investment in such securities generally provides greater
income and increased opportunity for capital appreciation than
investments in higher quality securities, but it also typically entails
greater price volatility and principal and income risk.
Investment in high yield bonds involves special risks in addition to
the risks associated with investments in higher rated debt securities.
High yield bonds are regarded as predominately speculative with respect
to the issuer's continuing ability to meet principal and interest
payments. Many of the outstanding high yield bonds have not endured a
lengthy business recession. A long-term track record on bond default
rates, such as that for investment grade corporate bonds, does not exist
for the high yield market. Analysis of the creditworthiness of issuers
of debt securities, and the ability of a Portfolio to achieve its
investment objective may, to the extent of investment in high yield
bonds, be more dependent upon such creditworthiness analysis than would
be the case if the Portfolio were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade bonds.
The prices of high yield bonds have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive
to adverse downturns or individual corporate developments. A projection
of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield bond prices because the
advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities.
If an issuer of high yield bonds defaults, in addition to risking payment
of all or a portion of interest and principal, the Portfolio may incur
additional expenses to seek recovery. In the case of high yield bonds
structured as zero coupon or pay-in-kind securities, their market prices
are affected to a greater extent by interest rate changes, and therefore
tend to be more volatile than securities which pay interest periodically
and in cash.
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The secondary market in which high yield bonds are traded may be less
liquid than the market for higher-grade bonds. Less liquidity in
secondary trading market could adversely affect the price at which the
Portfolio could sell a high yield bond, and could adversely affect and
cause large fluctuations in the daily net asset value of the Portfolio's
shares. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of high
yield bonds, especially in a thinly traded market. When secondary
markets for high yield bonds are less liquid than the market for higher
grade bonds, it may be more difficult to value the securities because
such valuation may require more research, and elements of judgment may
play a greater role in the valuation because there is less reliable,
objective data available.
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 Bonds may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. dollar-denominated) and are
actively traded in the over-the-counter secondary market.
Certain Brady bonds may be collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with a maturity equal to the
final maturity of the bonds, although the collateral is not available to
investors until the final maturity of the bonds. Collateral purchases
are financed by the International Monetary Fund, the World Bank and the
debtor nation's reserves. Although Brady bonds may be collateralized by
U.S. government securities, the U.S. government does not guarantee the
repayment of principal and interest. In light of the residual risk of
Brady bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities in
countries issuing Brady bonds, investments in Brady bonds may be viewed
as speculative. Brady bonds acquired by a Portfolio might be subject to
restructuring arrangements or to requests for new credit, which may
reduce the value of the Brady bonds held by the Portfolio.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Certain Portfolios may invest in (1) certificates of deposit, time
deposits, bankers' acceptances, and other short-term debt obligations
issued by commercial banks and in (2) certificates of deposit, time
deposits, and other short-term obligations issued by savings and loan
associations ("S&Ls"). Some Portfolios may invest in obligations of
foreign branches of commercial banks and foreign banks so long as the
securities are U.S. dollar-denominated, and some Portfolios also may
invest in obligations of foreign branches of commercial banks and foreign
banks if the securities are not U.S. dollar-denominated. See "Foreign
Securities" discussion in this Statement of Additional Information for
further information regarding risks attending investment in foreign
securities.
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts
or bills 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 (1) which are not subject to prepayment or
(2) which provide for
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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: (1)
the possibility that their liquidity could be impaired because of future
political and economic developments; (2) their obligations may be less
marketable than comparable obligations of U.S. banks; (3) a foreign
jurisdiction might impose withholding taxes on interest income payable on
those obligations; (4) foreign deposits may be seized or nationalized;
(5) foreign governmental restrictions, such as exchange controls, may be
adopted which might adversely affect the payment of principal and
interest on those obligations; and (6) 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 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
(ii)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.
COMMERCIAL PAPER
All of the Portfolios may invest in commercial paper (including
variable amount master demand notes and extendable command notes
("ECN")), denominated in U.S. dollars, issued by U.S. corporations or
foreign corporations. Unless otherwise indicated in the investment
policies for a Portfolio, it may invest in commercial paper (i) rated, at
the date of investment, Prime-1 or Prime-2 by Moody's or A-1 or A-2 by
Standard & Poor's; (ii) if not rated by either Moody's or Standard &
Poor's, issued by a corporation having an outstanding debt issue rated AA
or better by Moody's or AA or better by Standard & Poor's; or (iii) if
not rated, are determined to be of an investment quality comparable to
rated commercial paper in which a Portfolio may invest.
Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements
between a Portfolio, as lender, and the borrower. These notes permit
daily changes in the amounts borrowed. The lender has the right to
increase or to decrease the amount under the note at any time up to the
full amount provided by the note agreement; and the borrower may prepay
up to the full amount of the note without penalty. Because variable
amount master demand notes are direct lending arrangements between the
lender and borrower, and because no secondary market exists for those
notes, such instruments will probably not be traded. However, the notes
are redeemable (and thus immediately repayable by the borrower) at face
value, plus accrued interest, at any time. In connection with master
demand note arrangements, the Portfolio Manager
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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.
SOVEREIGN DEBT
Debt obligations known as "sovereign debt" are obligations of
governmental issuers in emerging market countries and industrialized
countries. Some Portfolios may invest in obligations issued or
guaranteed by a foreign government or its political subdivisions,
authorities, agencies, or instrumentalities, or by supranational
entities, which, at the time of investment, are rated A or better by
Standard & Poor's or Moody's or, if not rated by Standard & Poor's or
Moody's, determined by the Portfolio Manager to be of equivalent quality.
Certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. The issuer or governmental
authority that controls the repayment of sovereign debt may not be
willing or able to repay the principal and/or pay interest when due in
accordance with the terms of such obligations.
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 a Portfolio may invest will not be subject to similar
restructuring arrangements or to requests for new credit, which may
adversely affect the Portfolio's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly
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involved in negotiating the terms of these arrangements and may therefore
have access to information not available to other market participants.
MORTGAGE-BACKED SECURITIES.
The Portfolios may invest only in those mortgage-backed securities that
meet their credit quality and portfolio maturity requirements. Mortgage-
backed securities represent participation interests in pools of
adjustable and fixed rate mortgage loans secured by real property.
Unlike conventional debt obligations, mortgage-backed securities
provide monthly payments derived from the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on
the pooled mortgage loans. The mortgage loans underlying mortgage-backed
securities are generally subject to a greater rate of principal
prepayments in a declining interest rate environment and to a lesser rate
of principal prepayments in an increasing interest rate environment.
Under certain interest rate and prepayment scenarios, a Portfolio may
fail to recover the full amount of its investment in mortgage-backed
securities notwithstanding any direct or indirect governmental or agency
guarantee. Since faster than expected prepayments must usually be
invested in lower yielding securities, mortgage-backed securities are
less effective than conventional bonds in "locking" in a specified
interest rate. In a rising interest rate environment, a declining
prepayment rate may extend the average life of many mortgage-backed
securities. Extending the average life of a mortgage-backed security
reduces its value and increases the risk of depreciation due to future
increases in market interest rates.
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.
AGENCY MORTGAGE SECURITIES.
The Portfolios may invest in mortgage-backed securities issued or
guaranteed by the U.S. government, foreign governments or any of their
agencies, instrumentalities or sponsored enterprises. There are several
types of agency mortgage securities currently available, including, but
not limited to, guaranteed mortgage pass-through certificates and
multiple class securities.
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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.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA conventional (i.e., not insured or
guaranteed by any government agency) purchases residential
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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.
PRIVATELY-ISSUED MORTGAGE-BACKED SECURITIES.
Mortgage-backed securities may also be issued. by trusts or other
entities formed or sponsored by private originators of, and institutional
investors in, mortgage loans and other foreign or domestic non-
governmental entities (or represent custodial arrangements administered
by such institutions). These private originators and institutions
include domestic and foreign savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. Privately-issued mortgage-
backed securities are generally backed by pools of conventional (i.e.,
non-government guaranteed or insured) mortgage loans.
These mortgage-backed securities are not guaranteed by an entity having
the credit standing of a U.S. government agency. In order to receive a
high quality rating, they normally are structured with one or more types
of "credit enhancement." These credit enhancements fall generally into
two categories: (1) liquidity protection and (2) protection against
losses resulting after default by a borrower and liquidation of the
collateral. Liquidity protection refers to the providing of cash advances
to holders of mortgage-backed securities when a borrower on an underlying
mortgage fails to make its monthly payment on time. Protection against
losses resulting after default and liquidation is designed to cover
losses resulting when, for example, the proceeds of a foreclosure sale
are insufficient to cover the outstanding amount on the mortgage. This
protection may be provided through guarantees, insurance policies or
letters of credit, through various means of structuring the transaction
or through a combination of such approaches.
ASSET-BACKED SECURITIES.
Asset-backed securities represent individual interests in pools of
consumer loans, home equity loans, trade receivables, credit card
receivables, and other debt and are similar in structure to mortgage-
backed securities. The assets are securitized either in a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-
through structure (similar to a CMO structure). Asset-backed securities
may be subject to more rapid repayment than their stated maturity date
would indicate as a result of the pass-through of prepayments of
principal on the underlying loans. During periods of declining interest
rates, prepayment of certain types of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Portfolio's
ability to maintain positions in these securities will be affected by
reductions in the principal amount of the securities resulting from
prepayments, and the Portfolio must reinvest the returned principal at
prevailing interest rates, which may be lower. Asset-backed securities
may also be subject to extension risk during periods of rising interest
rates.
Asset-backed securities entail certain risks not presented by mortgage-
backed securities. The collateral underlying asset-backed securities may
be less effective as security for payments than real estate collateral.
Debtors may have the right to set off certain amounts owed on the credit
cards or other obligations underlying the asset-backed security, or the
debt holder may not have a first (or proper) security interest in all of
the obligations backing the receivable because of the nature of the
receivable or state or federal laws protecting the debtor. Certain
collateral may be difficult to locate
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in the event of default, and
recoveries on depreciated or damaged collateral may not fully cover
payments due on these securities.
A Portfolio may invest in any type of asset-backed security if the
Portfolio Manager determines that the security is consistent with the
Portfolio's investment objective and policies. 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.
ZERO-COUPON BONDS
Zero-coupon bonds are issued at a significant discount from face value
and pay interest only at maturity rather than at intervals during the
life of the security. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or
in additional bonds. The values of zero-coupon bonds and payment-in-kind
bonds are subject to greater fluctuation in response to changes in market
interest rates than bonds which pay interest currently, and may involve
greater credit risk than such bonds.
The discount of zero-coupon and deferred interest bonds approximates
the total amount of interest the bonds will accrue and compound over the
period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of
issuance. While zero-coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide that the issuer thereof may, at
its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations
that 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.
EQUITY INVESTMENTS
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 Manager 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.
PREFERRED STOCK
Preferred stock represents an equity or ownership interest in an issuer
that pays dividends at a specified rate and that has precedence over
common stock in the payment of dividends. In the event an issuer is
liquidated or declares bankruptcy, the claims of owners of bonds take
precedence over the claims of those who own preferred and common stock.
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
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Convertible Securities, a Portfolio seeks the opportunity, through the
conversion feature, to participate in the capital appreciation of the
common stock into which the securities are convertible, while earning
a higher fixed rate of return than is available in common stocks.
WARRANTS
Certain Portfolios may, from time to time, invest in warrants. Warrants
are, in effect, longer-term call options. They give the holder the right
to purchase a given number of shares of a particular company at specified
prices within certain period of time. The purchaser of a warrant expects
that the market price of the security will exceed the purchase price of
the warrant plus the exercise price of the warrant, thus giving him a
profit. Of course, since the market price may never exceed the exercise
price before the expiration date of the warrant, the purchaser of the
warrant risks the losses of the entire purchase price of the warrant.
Warrants generally trade in the open market and may be sold rather than
exercised. Warrants are sometimes sold in unit form with other
qualification as a regulated investment company and a Portfolio's intent
to continue to qualify as such. The result of a hedging program cannot
be foreseen and may cause a Portfolio to suffer losses that it would not
otherwise sustain.
Such investments can provide a greater potential for profit or loss
than an equivalent investment in the underlying security. Prices of
warrants do not necessarily move in tandem with the prices of the
underlying securities, and are speculative investments. They pay no
dividends and confer no rights other than a purchase option. If a
warrant is not exercised by the date of its expiration, the Portfolio
will lose its entire investment in such warrant.
DERIVATIVES
Certain Portfolios may invest in derivatives, which are securities and
contracts whose value is based on performance of an underlying financial
asset, index or other investment.
The Portfolio's transactions in derivative instruments may include:
o the purchase and writing of options on securities (including index
options) and options on foreign currencies;
o the purchase and sale of futures contracts based on financial,
interest
rate and securities indices, equity securities or fixed income
securities; and
o entering into forward contracts, swaps and swap related products,
such as equity index, interest rate or currency swaps, and related
caps, collars, floors and swaptions.
The success of transactions in derivative instruments depends on the
Portfolio Manager's judgment as to their potential risks and rewards. Use
of these instruments exposes a Portfolio to additional investment risks
and transaction costs. If the Portfolio Manager incorrectly analyzes
market conditions or does not employ the appropriate strategy with these
instruments, the Portfolio's return could be lower than if derivative
instruments had not been used. Additional risks inherent in the use of
derivative instruments include: adverse movements in the prices of
securities or currencies and the possible absence of a liquid secondary
market for any particular instrument. A Portfolio could experience losses
if the prices of its derivative positions correlate poorly with those of
its other investments. The loss from investing in derivative instruments
is potentially unlimited.
Certain Portfolios may invest in derivatives for hedging purposes, to
enhance returns, as a substitute for purchasing or selling securities, to
maintain liquidity or in anticipation of changes in the composition of
its portfolio holdings. Hedging involves using a security or contract to
offset investment risk, and can reduce the risk of a position held in an
investment portfolio. If the Portfolio Manager's judgment about
fluctuations in securities prices, interest rates or currency prices
proves
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incorrect, or the strategy does not correlate well with a
Portfolio's investments, the use of derivatives could result in a loss to
the Portfolio and may, in turn, increase the Portfolio's volatility. In
addition, in the event that non-exchange traded derivatives are used,
they could result in a loss if the counterparty to the transaction does
not perform as promised.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL DESCRIPTION OF FUTURES CONTRACTS. A futures contract provides
for the future sale by one party and purchase by another party of a
specified amount of a particular financial instrument (debt security) or
commodity for a specified price at a designated date, time, and place.
Although futures contracts by their terms require actual future delivery
of and payment for financial instruments, commodities futures contracts
are usually closed out before the delivery date. Closing out an open
futures contract position is effected by entering into an offsetting sale
or purchase, respectively, for the same aggregate amount of the same
financial instrument or commodities and the same delivery date. Where a
Portfolio has sold a futures contract, if the offsetting purchase price
is less than the original futures contract sale price, the Portfolio
realizes a gain; if it is more, the Portfolio realizes a loss. Where a
Portfolio has purchased a futures contract, if the offsetting price is
more than the original futures contract purchase price, the Portfolio
realizes a gain; if it is less, the Portfolio realizes a loss.
INTEREST RATE FUTURES CONTRACTS. An interest rate futures contract is
an obligation traded on an exchange or board of trade that requires the
purchaser to accept delivery, and the seller to make delivery, of a
specified quantity of the underlying financial instrument, such as U.S.
Treasury bills and bonds, in a stated delivery month, at a price fixed in
the contract.
A Portfolio may purchase and sell interest rate futures as a hedge
against adverse changes in debt instruments and other interest rate
sensitive securities. As a hedging strategy a Portfolio might employ, a
Portfolio would purchase an interest rate futures contract when it is not
fully invested in long-term debt securities but wishes to defer their
purchase for some time until it can orderly invest in such securities or
because short-term yields are higher than long-term yields. Such a
purchase would enable the Portfolio to earn the income on a short-term
security while at the same time minimizing the effect of all or part of
an increase in the market price of the long-term debt security, which the
Portfolio intends to purchase in the future. A rise in the price of the
long-term debt security prior to its purchase either would be offset by
an increase in the value of the futures contract purchased by the
Portfolio or avoided by taking delivery of the debt securities under the
futures contract.
A Portfolio would sell an interest rate futures contract in order to
continue to receive the income from a long-term debt security, while
endeavoring to avoid part or all of the decline in market value of that
security which would accompany an increase in interest rates. If interest
rates did rise, a decline in the value of the debt security held by the
Portfolio would be substantially offset by the ability of the Portfolio
to repurchase at a lower price the interest rate futures contract
previously sold. While the Portfolio could sell the long-term debt
security and invest in a short-term security, ordinarily the Portfolio
would give up income on its investment, since long-term rates normally
exceed short-term rates.
OPTIONS ON FUTURES CONTRACTS. A futures option gives the Portfolio the
right, in return for the premium paid, to assume a long position (in the
case of a call) or short position (in the case of a put) in a futures
contract at a specified exercise price prior to the expiration of the
option. Upon exercise of a call option, the purchaser acquires a long
position in the futures contract and the writer of the option is assigned
the opposite short position. In the 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
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would use put and call options on debt securities, as described
hereafter in "Options on Securities and Securities Indexes."
STOCK INDEX FUTURES CONTRACTS. A "stock index" assigns relative values
to the common stock included in an index (for example, the Standard &
Poor's 500 Index of Composite Stocks or the New York Stock Exchange
Composite Index), and the index fluctuates with changes in the market
values of such stocks. A stock index futures contract is a bilateral
agreement to accept or make payment, depending on whether a contract is
purchased or sold, of an amount of cash equal to a specified dollar
amount multiplied by the difference between the stock index value at the
close of the last trading day of the contract and the price at which the
futures contract is originally purchased or sold.
To the extent that changes in the value of a Portfolio corresponds to
changes in a given stock index, the sale of futures contracts on that
index ("short hedge") would substantially reduce the risk to the
Portfolio of a market decline and, by so doing, provide an alternative to
a liquidation of securities position, which may be difficult to
accomplish in a rapid and orderly fashion. Stock index futures contracts
might also be sold:
(1) when a sale of portfolio securities at that time would appear
to be disadvantageous in the long-term because such liquidation
would:
(a) forego possible price appreciation,
(b) create a situation in which the securities would be
difficult to repurchase, or
(c) create substantial brokerage commissions;
(2) when a liquidation of the portfolio has commenced or is
contemplated, but there is, in the Portfolio Manager's
determination, a substantial risk of a major price decline
before liquidation can be completed; or
(3) to close out stock index futures purchase transactions.
Where a Portfolio anticipates a significant market or market sector
advance, the purchase of a stock index futures contract ("long hedge")
affords a hedge against not participating in such advance at a time when
the Portfolio is not fully invested. Such purchases would serve as a
temporary substitute for the purchase of individual stocks, which may
then be purchased in an orderly fashion. As purchases of stock are made,
an amount of index futures contracts which is comparable to the amount of
stock purchased would be terminated by offsetting closing sales
transactions. Stock index futures might also be purchased:
(1) if the Portfolio is attempting to purchase equity positions
in issues which it had or was having difficulty purchasing at
prices considered by the Portfolio Manager to be fair value based
upon the price of the stock at the time it qualified for inclusion
in the portfolio, or
(2) to close out stock index futures sales transactions.
As long as required by regulatory authorities, each investing Portfolio
will limit its use of futures contracts and futures options to hedging
transactions and other strategies as described under the heading
"Limitations" in this section, in order to avoid being deemed a commodity
pool. For example, a Portfolio might use futures contracts to hedge
against anticipated changes in interest rates that might adversely affect
either the value of the Portfolio's securities or the price of the
securities which the Portfolio intends to purchase. The Portfolio's
hedging may include sales of futures contracts as an offset against the
effect of expected increases in interest rates and purchases of futures
contracts as an offset against the effect of expected declines in
interest rates. Although other techniques could be used to reduce that
Portfolio's exposure to interest rate fluctuations, a Portfolio may be
able to hedge its exposure more effectively and perhaps at a lower cost
by using
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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 liquid 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 liquid securities (including any margin) equal
to the amount such option is "in-the-money" until the option expires or
is closed out by the Portfolio. A call option is "in-the-money" if the
value of the futures contract that is the subject of the option exceeds
the exercise price.
A Portfolio may not maintain open short positions in futures contracts
or call options written on futures contracts if, in the aggregate, the
market value of all such open positions exceeds the current value of its
portfolio securities, plus or minus unrealized gains and losses on the
open positions, adjusted for the historical relative volatility of the
relationship between the Portfolio and the positions. For this purpose,
to the extent the Portfolio has written call options on specific
securities it owns, the value of those securities will be deducted from
the current market value of the securities portfolio.
In compliance with the requirements of the Commodity Futures Trading
Commission ("CFTC") under which an investment company may engage in
futures transactions, the Trust will comply with certain regulations of
the CFTC to qualify for an exclusion from being a "commodity pool." The
regulations require that the Trust enter into futures and options (1) for
"bona fide hedging" purposes, without regard to the percentage of assets
committed to initial margin and options premiums, or (2) for other
strategies, provided that the aggregate initial margin and premiums
required to establish such positions do not exceed 5% of the liquidation
value of a Portfolio, after taking into account unrealized profits and
unrealized gains on any such contracts entered into.
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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 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
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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 liquid 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 liquid 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 for the same purposes as it
purchase or sells of options on securities. Options on securities
indexes are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the
actual purchase or sale of securities. In addition, securities index
options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price
fluctuations in a single security. When such options are written, the
Portfolio is required to maintain a segregated account consisting of
cash, cash equivalents or high grade obligations or the Portfolio must
purchase a like option of greater value that will expire no earlier than
the option sold. Purchased options may not enable the Portfolio to hedge
effectively against stock market risk if they are not highly correlated
with the value of the Portfolio's securities. Moreover, the ability to
hedge effectively depends upon the ability to predict movements in the
stock market.
OVER-THE-COUNTER OPTIONS. Certain Portfolios may write or purchase
options in privately negotiated domestic or foreign transactions ("OTC
Options"), as well as exchange-traded or "listed" options. OTC Options
can be closed out only by agreement with the other party to the
transaction, and thus any OTC Options purchased by a Portfolio may 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").
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Except as provided below, the Portfolios intend to
write over-the-counter options only with primary U.S. government
securities dealers recognized by the Federal Reserve Bank of New York.
Also, the contracts which such Portfolios 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 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.
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There can be no assurance that a liquid market will exist at a time
when a Portfolio seeks to close out a futures contract or a futures
option position. Most futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a
single day; once the daily limit has been reached on a particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain of these instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an
active secondary market will develop or continue to exist. The daily
limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts
to substantial losses. Lack of a liquid market for any reason may prevent
the Portfolio from liquidating an unfavorable position and the Portfolio
would remain obligated to meet margin requirements and continue to incur
losses until the position is closed.
Most Portfolios will only enter into futures contracts or futures
options that 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.
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 that involves
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
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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 may be aggregated with other illiquid
positions for purposes of the limitation on illiquid investments.
The swaps market 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.
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.
LEASE OBLIGATION BONDS
Lease obligation bonds are mortgages on a facility that is secured by
the facility and are paid by a lessee over a long term. The rental stream
to service the debt as well as the mortgage are held by a collateral
trustee on behalf of the public bondholders. The primary risk of such
instrument is the risk of default. Under the lease indenture, the failure
to pay rent is an event of default. The remedy to cure default is to
rescind the lease and sell the assets. If the lease obligation is not
readily marketable or market quotations are not readily available, such
lease obligations will be subject to a Portfolio's limit on illiquid
securities.
STRUCTURED SECURITIES
Structured securities include notes, bonds or debentures that provide
for the payment of principal of, and/or interest in, amounts determined
by reference to changes in the value of specific currencies, interest
rates, commodities, indices or other financial indicators (the Reference)
or the relative change in two or more References. The interest rate or
the principal amount payable upon maturity or redemption may be increased
or decreased depending upon changes in the applicable Reference. The
terms of structured securities may provide that under certain
circumstances no principal is due at maturity and, therefore, may result
in the loss of the Portfolio's investment. Structured securities may be
positively or negatively indexed, so that appreciation of the Reference
may produce an increase or decrease in the interest rate or value of the
security at maturity. In addition, the change in interest rate or the
value of the security at maturity may be a multiple of the change in the
value of the Reference. Consequently, leveraged structured securities
entail a greater degree of market risk than other types of debt
obligations. Structured securities may also be more volatile, less liquid
and more difficult to accurately price than less complex fixed income
investments.
INDEXED SECURITIES
Indexed securities are instruments whose prices are indexed to the
prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities typically, but not
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always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or
statistic.
Currency-indexed securities typically are short-term to intermediate-
term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated
securities. Currency-indexed securities may be positively or negatively
indexed; that is, their maturity value may increase when the specified
currency value increases, resulting in a security that performs similarly
to a foreign-denominated instrument, or their maturity value may decline
when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each
other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
United States and abroad. Indexed securities are also subject to the
credit risks associated with the issuer of the security, and their values
may decline substantially if the issuer's creditworthiness deteriorates.
Recent issuers of indexed securities have included banks, corporations,
and certain U.S. government agencies.
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 depositary instrument
(hereinafter "Hybrid Instruments"). Generally, a Hybrid Instrument will
be a debt security, preferred stock, depositary 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 Portfolio may wish to take
advantage of expected declines in interest rates in several European
countries, but avoid the transaction costs associated with buying and
currency-hedging the foreign bond positions. One solution would be to
purchase a U.S. dollar-denominated Hybrid Instrument whose redemption
price is linked to the average three-year interest rate in a designated
group of countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was lower than a
specified level, and payoffs of less than par if rates were above the
specified level. Furthermore, the Portfolio could limit the downside
risk of the security by establishing a minimum redemption price so that
the principal paid at maturity could not be below a predetermined minimum
level if interest rates were to rise significantly. The purpose of this
arrangement, known as a structured security with an embedded put option,
would be to give the Portfolio the desired European bond exposure while
avoiding currency risk, limiting downside market risk, and lowering
transactions costs. Of course, there is no guarantee that the strategy
will be successful, and the Portfolio could lose money if, for example,
interest rates do not move as anticipated or credit problems develop with
the issuer of the Hybrid Instrument.
The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies.
Thus, an investment in a Hybrid Instrument may entail significant risks
that are not associated with a similar investment in a traditional debt
instrument
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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 Portfolio
would have to consider and monitor. Hybrid Instruments also may not be
subject to regulation of the Commodities Futures Trading Commission,
which generally regulates the trading of commodity futures by U.S.
persons, the SEC, which regulates the offer and sale of securities by and
to U.S. persons, or any other governmental regulatory authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset
value of the Portfolio. Accordingly, each Portfolio, except for the
Special Situations Portfolio and the Growth and Income Portfolio, will
limit its investments in Hybrid Instruments to 10% of its total assets.
However, because of their volatility, it is possible that a Portfolio's
investment in Hybrid Instruments will account for more than 10% of the
Portfolio's return (positive or negative).
DOLLAR ROLL TRANSACTIONS
Certain Portfolios seeking a high level of current income may enter
into dollar rolls or "covered rolls" in which the Portfolio sells
securities (usually Mortgage-Backed Securities) and simultaneously
contracts to purchase, typically in 30 to 60 days, substantially similar,
but not identical securities, on a specified future date. The proceeds
of the initial sale of securities in the dollar roll transactions may be
used to purchase long-term securities that 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
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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.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
Each 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 liquid 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 INVESTMENTS
FOREIGN SECURITIES
All the 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.
Each Portfolio, except the Special Situations Portfolio and the Growth
and Income Portfolio, may have no more than 25% of its total 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 more than 50% of its total
assets invested in securities of issuers located in any one of the
following countries: Australia, Canada, France, Japan, the United
Kingdom, or Germany.
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
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respect to
certain countries, there is the possibility of expropriation of assets,
confiscatory taxation, other foreign taxation, political or social
instability, or diplomatic developments that could adversely affect
investments in those countries.
There may be less publicly available information about a foreign
company than about a U.S. company and foreign companies may not be
subject to accounting, auditing, and financial reporting standards and
requirements comparable to or as uniform as those of U.S. companies.
Foreign securities markets, while growing in volume, have, for the most
part, substantially less volume than U.S. markets. Securities of many
foreign companies are less liquid and their prices more volatile than
securities of comparable U.S. companies. Transactional costs in non-U.S.
securities markets are generally higher than in U.S. securities markets.
There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the United States. A
Portfolio might have greater difficulty taking appropriate legal action
with respect to foreign investments in non-U.S. courts than with respect
to domestic issuers in U.S. courts. In addition, transactions in foreign
securities may involve greater time from the trade date until settlement
than domestic securities transactions and involve the risk of possible
losses through the holding of securities by custodians and securities
depositories in foreign countries.
As discussed above "sovereign debt" consists of debt obligations of
governmental issuers in emerging market countries and industrialized
countries. The sovereign debt issued or guaranteed by certain emerging
market governmental entities and corporate issuers in which the Portfolio
may invest potentially involves a high degree of risk and may be deemed
the equivalent in terms of quality to high risk, low rated securities
(i.e., high yield bonds) and subject to many of the same risks as such
securities. Similarly, the Portfolio may have difficulty disposing of
certain of these debt obligations because there may be a thin trading
market for such securities. In the event a governmental issuer defaults
on its obligations, the Portfolio may have limited legal recourse against
the issuer or guarantor, if any. Remedies must, in some cases, be
pursued in the courts of the defaulting party itself, and the ability of
the holder of foreign government debt securities to obtain recourse may
be subject to the political climate in the relevant country. The issuers
of the government debt securities in which the Portfolio may invest have
in the past experienced substantial difficulties in servicing their
external debt obligations, which has led to defaults on certain
obligations and the restructuring of certain indebtedness. See
"Description of Securities and Investment Techniques -- High Yield Bonds"
and "Debt Securities -- Sovereign Debt."
Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is
located and may not be recoverable by a Portfolio or its investors.
ADRs are Depositary Receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities issued by a
foreign corporation. EDRs and GDRs are typically issued by foreign banks
or trust companies, although they also may be issued by U.S. banks or
trust companies, and evidence ownership of underlying securities issued
by either a foreign or U.S. corporation. Generally, Depositary Receipts
in registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities
markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying
securities into which they may be converted. In addition, the issuers of
the securities underlying unsponsored Depositary Receipts are not
obligated to disclose material information in the United States and,
therefore, there may be less information available regarding such issuers
and there may not be a correlation between such information and the
market value of the Depositary Receipts. Depositary Receipts also
involve the risks of other investments in foreign securities.
On January 1, 1999, certain members of the European Economic and
Monetary Union ("EMU"), namely Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain
established a common European currency known as the "euro" and each
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member's local currency became a denomination of the euro. It is
anticipated that each participating country will begin to replace its
local currency with the euro beginning on July 1, 2001. 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 would, in that event, dominate its existing currency with the euro.
The anticipated replacement of existing currencies in euros could,
although unlikely, cause market disruptions before or after July 1, 2001
and could adversely affect the value of securities held by a Portfolio.
FOREIGN CURRENCY TRANSACTIONS
A forward currency contract is an obligation to purchase or sell a
currency against another currency at a future date and price as agreed
upon by the parties. A Portfolio may either accept or make delivery of
the currency at the maturity of the forward contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale
of an offsetting contract. A Portfolio will engage in forward currency
transactions in anticipation of or to protect itself against fluctuations
in currency exchange rates. A Portfolio might sell a particular currency
forward, for example, when it wants to hold bonds or bank obligations
denominated in that currency but anticipates or wishes to be protected
against a decline in the currency against the dollar. Similarly, it
might purchase a currency forward to "lock in" the dollar price of
securities denominated in or exposed to that currency which it
anticipated purchasing.
A Portfolio may enter into forward foreign currency contracts in two
circumstances. When a Portfolio enters into a contract for the purchase
or sale of a security denominated in or exposed to a foreign currency,
the Portfolio may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for a fixed amount of
dollars for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change
in 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.
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If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as
described below) to the extent that there has been movement in forward
contract prices. Should forward prices decline during the period between
the Portfolio's entering into a forward contract for the sale of a
foreign currency and the date it enters into an offsetting contract for
the purchase of the foreign currency, the Portfolio will realize a gain
to the extent that the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Portfolio will suffer a loss to the extent
that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
Forward contracts are not traded on regulated commodities exchanges.
There can be no assurance that a liquid market will exist when a
Portfolio seeks to close out a forward currency position, and in such an
event, a Portfolio might not be able to effect a closing purchase
transaction at any particular time. In addition, a Portfolio entering
into a forward foreign currency contract incurs the risk of default by
the counter party to the transaction. The CFTC has indicated that it may
in the future assert jurisdiction over certain types of forward contracts
in foreign currencies and attempt to prohibit certain entities from
engaging in such foreign currency forward transactions.
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.
CURRENCY MANAGEMENT
A Portfolio's flexibility to participate in higher yielding debt
markets outside of the United States may allow the Portfolios to achieve
higher yields than those generally obtained by domestic money market
funds and short-term bond investments. When a Portfolio invests
significantly in securities denominated in foreign currencies, however,
movements in foreign currency exchange rates versus the U.S. dollar are
likely to impact the Portfolio's share price stability relative to
domestic short-term income funds. Fluctuations in foreign currencies can
have a positive or negative impact on returns. Normally, to the extent
that the Portfolio is invested in foreign securities, a weakening in the
U.S. dollar relative to the foreign currencies underlying a Portfolio's
investments should help increase the net asset value of the Portfolio.
Conversely, a strengthening in the U.S. dollar versus the foreign
currencies in which a Portfolio's securities are denominated will
generally lower the net asset value of the Portfolio. The Manager or
relevant Portfolio Manager attempts to minimize exchange rate risk
through active Portfolio management, including hedging currency exposure
through the use of futures, options and forward currency transactions and
attempting to identify
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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.
EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY
SUPRANATIONAL ORGANIZATIONS
Portfolios authorized to invest in securities of foreign issuers may
invest assets in equity and debt securities issued or guaranteed by
Supranational Organizations, such as obligations issued or guaranteed by
the Asian Development Bank, Inter-American Development Bank,
International Bank for Reconstruction and Development (World Bank),
African Development Bank, European Coal and Steel Community, European
Economic Community, European Investment Bank and the Nordic Investment
Bank.
EXCHANGE RATE-RELATED SECURITIES
Certain of the Portfolios may invest in securities that are indexed to
certain specific foreign currency exchange rates. The terms of such
securities would provide that the principal amount or interest payments
are adjusted upwards or downwards (but not below zero) at payment to
reflect fluctuations in the exchange rate between two currencies while
the obligation is outstanding, depending on the terms of the specific
security. A Portfolio will purchase such security with the currency in
which it is denominated and will receive interest and principal payments
thereon in the currency, but the amount of principal or interest payable
by the issuer will vary in proportion to the change (if any) in the
exchange rate between the two specific currencies between the date the
instrument is issued and the date the principal or interest payment is
due. The staff of the SEC is currently considering whether a mutual
fund's purchase of this type of security would result in the issuance of
a "senior security" within the meaning of the 1940 Act. The Trust
believes that such investments do not involve the creation of such a
senior security, but nevertheless undertakes, pending the resolution of
this issue by the staff, to establish a segregated account with respect
to such investments and to maintain in such account cash not available
for investment or U.S. government securities or other liquid high quality
debt securities having a value equal to the aggregate principal amount of
outstanding securities of this type.
Investment in Exchange Rate-Related Securities entails certain risks.
There is the possibility of significant changes in rates of exchange
between the U.S. dollar and any foreign currency to which an Exchange
Rate-Related Security is linked. In addition, there is no assurance that
sufficient trading interest to create a liquid secondary market will
exist for a particular Exchange Rate-Related Security due to conditions
in the debt and foreign currency markets. Illiquidity in the forward
foreign exchange market and the high volatility of the foreign exchange
market may from time to time combine to make it difficult to sell an
Exchange Rate-Related Security prior to maturity without incurring a
significant price loss.
OTHER INVESTMENT PRACTICES AND RISKS
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
held as collateral at the time the repurchase agreement is entered into
and at all times during the term of the agreement to ensure that their
value always equals or exceeds the agreed-upon repurchase price to be
paid to the
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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 of 15% of the net assets of 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.
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 liquid securities to cover its
obligations under reverse repurchase agreements. Under the 1940 Act,
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.
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
Special Situations and Growth and Income Portfolios may invest in shares
of Janus' Money Market Funds and the Asset Allocation Growth and
Diversified Mid-Cap Portfolios may invest in shares of Fidelity Money
Market Funds pursuant to the receipt of SEC exemptive orders.
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.
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The Portfolio's obligation to replace the security borrowed in
connection with the short sale will be secured by collateral deposited
with a broker, consisting of cash or securities acceptable to the broker.
In addition, with 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 Prospectus.
ILLIQUID SECURITIES
Illiquid securities are securities that are not readily marketable,
including, where applicable: (1) repurchase agreements with maturities
greater than seven calendar days or with a demand period of more than
seven 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
Each 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, has retained sufficient oversight and is ultimately
responsible for the determinations. This investment practice could have
the effect of decreasing the level of liquidity in a 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 Portfolios 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.
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
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minimum average balances), which may or may not exceed the
income received from the securities purchased with borrowed funds. The
use of borrowing tends to result in a faster than average movement, up or
down, in the net asset value of the Portfolio's shares. A Portfolio also
may be required to maintain minimum average balances in connection with
such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing
over the stated interest rate.
Reverse repurchase agreements, short sales of securities, and short
sales of securities against the box will be included as borrowing subject
to the borrowing limitations described below, except those Portfolios
that are permitted to engage in short sales of securities with respect to
an additional 15% of the Portfolio's net assets in excess of the limits
otherwise applicable to borrowing. Securities purchased on a when-issued
or delayed delivery basis will not be subject to a Portfolio's borrowing
limitations to the extent that a Portfolio establishes and maintains
liquid assets in a segregated account with the Trust's custodian equal to
the Portfolio's obligations under the when-issued or delayed delivery
arrangement.
LENDING PORTFOLIO SECURITIES
For the purpose of realizing additional income, certain Portfolios may
make secured loans of portfolio securities. Securities loans are made to
banks, brokers and other financial institutions pursuant to agreements
requiring that the loans be continuously secured by collateral at least
equal at all times to the value of the securities lent marked to market
on a daily basis. The collateral received will consist of cash, U.S.
government securities, letters of credit or such other collateral as may
be permitted under the Portfolio's investment program. While the
securities are being lent, the Portfolio will continue to receive the
equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a
fee from the borrower. The Portfolio has a right to call each loan and
obtain the securities on five business day's notice or, in connection
with securities trading on foreign markets, within such longer period of
time which coincides with the normal settlement period for purchases and
sales of such securities in such foreign markets. The Portfolio 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 judgment of the
Portfolio Manager, the consideration to be earned from such loans would
justify the risk.
REAL ESTATE INVESTMENT TRUSTS.
REITs are pooled investment vehicles that invest primarily in income
producing real estate or real estate related loans or interests. REITs
are generally classified as equity REITs, mortgage REITs or a combination
of equity and mortgage REITs. Equity REITs invest most of their
assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs invest
most of their assets in real estate mortgages and derive income from
interest payments. Like investment companies, REITs are not taxed on
income distributed to shareholders if they comply with several
requirements of the Internal Revenue Code of 1986 (the
"Code"). A Portfolio will indirectly bear its proportionate share of any
expenses (such as operating expenses and advisory fees) paid by REITs in
which it invests in addition to the expenses paid by the Portfolio.
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RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY. Although a Portfolio
that invests in REITs does not invest directly in real estate, it does
invest primarily in real estate equity securities and may concentrate its
investments in the real estate industry, and, therefore, an investment in
the Portfolio may be subject to certain risks associated with the direct
ownership of real estate and with the real estate industry in general.
These risks include, among others:
o possible declines in the value of real estate;
o adverse general or local economic conditions;
o possible lack of availability of mortgage funds;
o overbuilding;
o extended vacancies of properties;
o increases in competition, property taxes and operating expenses;
o changes in zoning or applicable tax law;
o costs resulting from the clean-up of, and liability to third parties
for damages resulting from, environmental problems;
o casualty or condemnation losses;
o uninsured damages from floods, earthquakes or other natural
disasters;
o limitations on and variations in rents; and
o unfavorable changes in interest rates.
In addition to the risks discussed above, REITs may be affected by any
changes in the value of the underlying property owned by the trusts or by
the quality of any credit extended. REITs are dependent upon management
skill, are not diversified, and are therefore subject to the risk of
financing single or a limited number of projects. REITs are also subject
to heavy cash flow dependency, defaults by borrowers, self liquidation,
and the possibility of failing to qualify for special tax treatment under
Subchapter M of the Internal Revenue Code of 1986 and to maintain an
exemption under the 1940. Act Finally, certain REITs may be self-
liquidating in that a specific term of existence is provided for in the
trust document and such REITs run the risk of liquidating at an
economically inopportune time.
SMALL COMPANIES
Certain of the Portfolios may invest in small companies, some of which
may be unseasoned. Such companies may have limited product lines,
markets, or financial resources and may be dependent on a limited
management group. While the markets in securities of such companies have
grown rapidly in recent years, such securities may trade less frequently
and in smaller volume than more widely held securities. The values of
these securities may fluctuate more sharply than those of other
securities, and a Portfolio may experience some difficulty in
establishing or closing out positions in these securities at prevailing
market prices. There may be less publicly available information about the
issuers of these securities or less market interest in such securities
than in the case of larger companies, and it may take a longer period of
time for the prices of such securities to reflect the full value of their
issuers' underlying earnings potential or assets.
Some securities of smaller issuers may be restricted as to resale or
may otherwise be highly illiquid. The ability of a Portfolio to dispose
of such securities may be greatly limited, and a Portfolio may have to
continue to hold such securities during periods when the Manager or a
Portfolio Manager would otherwise have sold the security. It is possible
that the Adviser or a Portfolio Manager 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.
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STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of the
Portfolios as stated elsewhere in this Statement of Additional
Information, certain of the Portfolios may, but are not required to,
utilize various investment strategies as described herein to hedge
various market risks, to manage the effective maturity or duration of
fixed income securities, or to seek potentially higher returns Utilizing
these investment strategies, the Portfolio may purchase and sell, to the
extent not otherwise limited or restricted for such Portfolios, exchange-
listed and over-the-counter put and call on securities, equity and fixed
income indexes and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various
Interest Rate Transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on
currencies or currency futures (collectively, all the above are called
"Strategic Transactions").
Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be
purchased for the Portfolios resulting from securities markets or
currency exchange rate fluctuations, to protect the Portfolio's
unrealized gains in the value of its Portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Portfolio, or to establish a
position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Some Strategic Transactions
may also be used to seek potentially higher returns, although no more
than 5% of the Portfolio's assets will be used as the initial margin or
purchase price of options for Strategic Transactions entered into for
purposes other than "bona fide hedging" positions as defined in the
regulations adopted by the Commodity Futures Trading Commission. Any or
all of these investment techniques may be used at any time, as use of any
Strategic Transaction is a function of numerous variables including
market conditions. The ability of the Portfolio to utilize these
Strategic Transactions successfully will depend on the Manager'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.
SPECIAL SITUATIONS
A special situation arises when, in the opinion of the Portfolio
Manager, the securities of a particular company will, within a reasonably
estimable period of time, be accorded market recognition at an
appreciated value solely by reason of a development applicable to that
company, and regardless of general business conditions or movements of
the market as a whole. Developments creating special situations might
include, among others: liquidations, reorganizations, recapitalizations,
mergers, material litigation, technical breakthroughs, and new management
or management policies. Investments in unseasoned companies and special
situations often involve much greater risk than in inherent in ordinary
investment securities.
TEMPORARY DEFENSIVE INVESTMENTS
For temporary and defensive purposes, each Portfolio may invest up to
100% of its total assets in investment grade short-term fixed income
securities (including short-term U.S. government securities, money market
instruments, including negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances, commercial paper and floating
rate notes) and repurchase agreements. Each Portfolio may also hold
significant amounts of its assets in cash, subject to the applicable
percentage limitations for short-term securities.
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INVESTMENT OBJECTIVES AND ADDITIONAL
INVESTMENT STRATEGIES AND ASSOCIATED RISKS
ASSET ALLOCATION GROWTH PORTFOLIO:
Investment Objective:Maximize total return over the long term by
allocating its assets among stocks, bonds, short-term
instruments and other investments.
The Portfolio may also purchase illiquid or restricted securities (such
as private placements). The Portfolio may not invest more than 15% of
its net assets in illiquid securities.
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 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.
Asset Allocation: The stock class includes domestic and foreign equity
-----------------
securities for all types (other than adjustable rate preferred stocks
that are included in the bond class). Securities in the stock class may
include common stocks, fixed-rate preferred stocks (including convertible
preferred stocks), warrants, rights, depositary receipts, securities of
closed-end investment companies, and other equity securities issued by
companies of any size, located anywhere in the world.
The bond class includes all varieties of domestic and foreign fixed-
income securities maturing in more than one year. The Portfolio Manager
will seek to maximize total return within the bond class by adjusting the
Portfolio's investments in securities with different credit qualities,
maturities, and coupon or dividend rates, and by seeking to take
advantage of yield differentials between securities. Securities in these
asset classes may include bonds, notes, adjustable-rate preferred stocks,
convertible bonds, mortgage-related and asset-backed securities, domestic
and foreign government and government agency securities, zero coupon
bonds, and other intermediate and long-term securities. These securities
may be denominated in U.S. dollars or foreign currency.
The short-term/money market class includes all types of domestic and
foreign short-term and money market instruments. Short-term and money
market instruments may include commercial paper, notes, and other
corporate debt securities, government securities issued by U.S. or
foreign governments or their agencies or instrumentalities, bank deposits
and other financial institution obligations, repurchase agreements
involving any type of security, and other similar short-term instruments.
These instruments may be denominated in U.S. dollars or foreign currency.
The Portfolio Manager may use its judgment to place a security in the
most appropriate asset class based on its investment characteristics.
Fixed-income securities may be classified in the bond or short-term/money
market class according to interest rate sensitivity as well as maturity.
The Portfolio may also make other investments that do not fall within
these asset classes. In making asset allocation decisions, the Portfolio
Manager will evaluate projections of risk, market conditions, economic
conditions, volatility, yields, and returns. The Portfolio Manager's
management will use database systems to help analyze past situations and
trends, research specialists in each of the asset classes to help in
securities selection, portfolio management professionals to determine
asset allocation and to select individual securities, and its own credit
analysis as well as credit analyses provided by rating services.
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DIVERSIFIED MID-CAP PORTFOLIO:
Investment Objective:Long-term growth of capital.
The Portfolio may also purchase illiquid or restricted securities (such
as private placements). The Portfolio may not invest more than 15% of
its net assets in illiquid securities.
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 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.
SPECIAL SITUATIONS PORTFOLIO AND GROWTH AND INCOME PORTFOLIO:
Special Situations Portfolio's Investment Objective: Capital
appreciation.
Growth and Income Portfolio's Investment Objective: Long-term capital
growth and current
income.
In addition to the Portfolios' primary strategies discussed in the
Prospectus, each Portfolio may engage in several other strategies. To
hedge against changes in net asset value or to attempt to increase its
investment return, each 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 a Portfolio holds positions in futures contracts and
related options that do not fall within the definition of bona fide
hedging transactions, the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of the fair market value
of the Portfolio's net assets, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into.
When the Portfolio Manager believes that market conditions are not
favorable for profitable investing or when the Portfolio Manager is
otherwise unable to locate favorable investment opportunities, a
Portfolio's investments may be hedged to a greater degree and/or its cash
or similar investments may increase. In other words, the Portfolio does
not always stay fully invested in stocks and bonds. Cash or similar
investments are a residual -- they represent the assets that remain after
a portfolio manager has committed available assets to desirable
investment opportunities. Larger hedged positions and/or larger cash
positions may serve as a means of preserving capital in unfavorable
market conditions.
Securities that each Portfolio may invest in as a means of receiving a
return on idle cash include high-grade commercial paper, certificates of
deposit, repurchase agreements or other short-term obligations. Each
Portfolio may also invest in money market funds (including funds managed
by the Portfolio Manager). When a Portfolio is hedged or its investments
in cash or similar investments increase, it may not participate in stock
or bond market advances or declines to the same extent that it would if
the Portfolio was not hedged or remained more fully invested in stocks or
bonds.
At times each 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 Manager
believed that the investment return available
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from concentration in that
sector justified any additional risk associated with concentration in
that sector. When a 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.
Each 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.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are considered fundamental, which
means they may be changed only with the approval of the holders of a
majority of a Portfolio's outstanding voting securities, defined in the
1940 Act as the lesser of: (1) 67% or more of that Portfolio's voting
securities present at a meeting if the holders of more than 50% of that
Portfolio's outstanding voting securities are present or represented by
proxy, or (2) more than 50% of that Portfolio's outstanding voting
securities.
A Portfolio may not:
1. with respect to 75% of each Portfolio's total assets (50% of the
Special Situations Portfolio's total assets), purchase the
securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, (a) more than 5% of the
Portfolio's total assets would be invested in the securities of
that issuer, or (b) a Portfolio would hold more than 10% of the
outstanding voting securities of that issuer;
2. issue senior securities, except as permitted under the Investment
Company Act of 1940;
3. borrow money, except that the Portfolio may borrow money for
temporary or emergency purposes (not for leveraging or investment)
in an amount not exceeding 33 1/3% of its total assets (including
the amount borrowed) less liabilities (other than borrowings).
Any borrowings that come to exceed this amount will be reduced
within three days (not including Sundays and holidays) to the
extent necessary to comply with the 33 1/3% limitation;
4. underwrite securities issued by others, except to the extent that
the Portfolio may be considered an underwriter within the meaning
of the Securities Act of 1933 in the
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disposition of restricted securities or in connection with
investments in other investment companies.
5. purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities, or securities of other investment
companies), if, as a result, more than 25% of the Portfolio's
total assets would be invested in companies whose principal
business activities are in the same industry;
6. purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this will not
prevent the Portfolio from investing in securities or other
instruments backed by real estate or securities of companies
engaged in the real estate business);
7. purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall
not prevent the Portfolio from purchasing or selling options and
futures contracts or from investing in securities or other
instruments backed by physical commodities); and
8. lend any security or make any loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to
repurchase agreements.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions are not fundamental and may be modified by
the Trustees without shareholder approval.
A Portfolio may not:
1. The Portfolio does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short, and provided that
transactions in futures contracts and options are not deemed to
constitute selling securities short.
2. The Portfolio does not currently intend to purchase securities on
margin, except that the Portfolio may obtain such short-term
credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts
and options on futures contracts shall not constitute purchasing
securities on margin.
3. The Portfolio may borrow money only (a) from a bank or from a
registered investment company or portfolio for which the Portfolio
Manager or an affiliate serves as investment adviser or (b) by
engaging in reverse repurchase agreements with any party (reverse
repurchase agreements are treated as borrowings for purposes of
fundamental investment limitation (3)).
4. The Portfolio does not currently intend to purchase any security
if, as a result, more than 15% of its net assets would be invested
in securities that are deemed to be illiquid because they are
subject to legal or contractual restrictions on resale or because
they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.
5. The Portfolio does not currently intend to lend assets other than
securities to other parties, except by (a) lending money (up to
15% of the Portfolio's net assets) to a registered investment
company or portfolio for which the Portfolio Manager or an
affiliate serves as investment adviser or (b) acquiring loans,
loan participations, or other forms of direct debt instruments
and, in connection therewith, assuming any associated unfunded
commitments of the sellers. (This limitation does not apply to
purchases of debt securities or to repurchase agreements.)
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With respect to Limitation (iv), if through a change in values, net
assets, or other circumstances, the Portfolio were in a position where
more than 15% of its net assets was invested in illiquid securities, it
would consider appropriate steps to protect liquidity.
Except with respect to 300% asset coverage for borrowing, whenever any
investment restriction states a maximum percentage of a Portfolio's
assets that may be invested in any security, such percentage limitation
will be applied only at the time the Portfolio acquires such security and
will not be violated by subsequent increases in value relative to other
assets held by the Portfolio.
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 Barnett Chernow, J. Michael Earley, R.
Barbara Gitenstein, Robert A. Grayson, Elizabeth J. Newell, Stanley B.
Seidler, John R. Barmeyer 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 WITH BUSINESS AFFILIATIONS AND
THE TRUST PRINCIPAL OCCUPATIONS
Barnett Chernow* President, President and Chairman of the GCG
Golden American Trustee and Trust since December 1999; President
Life Insurance Co. Chairman and Director, Golden American
1475 Dunwoody Drive Life Insurance Company, May 1998 to
West Chester, PA present; Executive Vice President,
19380 Directed Services, Inc., October
1993 to present; Executive Vice
President and then President, First
Golden American Life Insurance Company
of New York, October 1993 to present.
Age 49.
John R. Barmeyer* Trustee Senior Vice President, General Counsel
ING's American Region and Secretary of ING America Life
5780 Powers Ferry Road Corporation and its subsidiaries
Atlanta, GA 30327-4390 since 1992. Age 55.
J. Michael Earley Trustee President, and Chief Executive Officer,
665 Locust Street Bankers Trust Company, Des Moines,
Des Moines, IA 50309 Iowa since July 1992. Age 53.
R. Barbara Gitenstein Trustee President, The College of New Jersey
Office of the President since January, 1999; Trustee Provost,
The College of Drake University from July 1992 to
New Jersey December 1998. Age 50.
200 Pennington Road
Ewing, NJ 08628-0718
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Robert A. Grayson Trustee Co-founder, Grayson Associates, Inc.
Grayson Associates since 1970; Adjunct Professor of
108 Loma Media Road Marketing, New York University School
Santa Barbara, CA 93103 of Business Administration; former
Director, The Golden Financial Group,
Inc.; former Senior Vice President,
David & Charles Advertising.
Age 72.
Myles R. Tashman Secretary Executive Vice President, Secretary,
Golden American Life Golden American Life Insurance
Insurance Co. Company since 1993; General Counsel
1475 Dunwoody Drive since July 1996 and Director since
West Chester, PA 19380 January 1998; Director, Executive
Vice President, Secretary and General
Counsel, Directed Services, Inc. since
August 1994; Executive Vice President,
Secretary, First Golden American Life
Insurance Company of New York; since
1993; General Counsel since July
1996 and Director since January 1998.
Age 57.
Stanley B. Seidler Trustee President, Iowa Periodicals, Inc. since
P.O. Box 1297 1990 and President, Excell Marketing
3301 McKinley Avenue L.C. since 1994. Age 71.
Des Moines, IA 50321
Mary Bea Wilkinson Treasurer Senior Vice President & Treasurer,
Golden American Life First Golden American Life Insurance
1475 Dunwoody Drive Company of New York from November
West Chester, PA 19380 1997 to present; Senior Vice
President and Treasurer, Golden
American Life
Insurance Co. from November 1993 to
November 1997; and President and
Treasurer, Directed Services, Inc.
October1993 to December 1996.
Age 43.
Roger B. Vincent Trustee President, Springwell Corporation
Springwell Corporation since June 1989; Director Amerigas
230 Park Avenue Partners, Inc.; Director, Tatham
New York, NY 10169 Offshore, Inc. since June 1996
formerly, Managing Director Bankers
Trust Company. Age 54.
Elizabeth J. Newell Trustee President and Chief Executive Officer
KRAGIE/NEWELL, Inc. of KRAGIE/NEWELL, Inc. since 1990.
2633 Fleur Drive Age 52.
Des Moines, IA 50321
* Messrs. Chernow and Barmeyer are deemed to be "interested
persons" of the Trust pursuant to the 1940 Act.
As of May 31, 2000, none of the Trustees directly owned shares of the
Portfolios. In addition, as of May 31, 2000, the Trustees and Officers
as a group owned Variable Contracts that entitled them
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to give voting instructions with respect to less than one percent of
the outstanding shares of each Portfolio in the aggregate.
Effective May 18, 2000, each Trustee of the Trust who is not an
interested person of the Trust or Manager or Portfolio Manager (the "non-
interested Trustees") receives an annual retainer of $20,000 plus $5,000
for each regular quarterly Board meeting attended in person ($1,250 if
attended by telephone), as well as reimbursement for expenses incurred in
connection with attendance at such meetings or carrying out their
responsibilities as Trustees of the Trust. In addition, the Trust pays
the Trustees an annual stipend of $5,000 for each committee chairmanship
and $1,000 for attendance at any committee meeting not held in
conjunction with a regular Board meeting or for any specially called
telephonic meeting. The Trustee designated by the Board as Lead Trustee
also receives additional compensation in an amount 50% greater than the
amount paid for services as a non-interested Trustee (i.e. 50% of the
regular retainer of $20,000 plus 50% of the full quarterly meeting fee of
$20,000 or $20,000).
With respect to the 12 month period ended December 31, 1999, the Trust
paid the Trustees a fee in the amount of $6,000 for each Trustees'
meeting attended and reimbursed any expenses incurred in attending such
meetings in the aggregate amount of $144,000. The following table shows
the compensation paid to each Trustee for the year ended December 31,
1999:
COMPENSATION TABLE
(1) (2) (3) (4) (5)
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
AGGREGATE BENEFITS ANNUAL FROM REGISTRANT
COMPENSATION ACCRUED AS BENEFITS AND FUND
NAME OF PERSON, FROM PART OF FUND UPON COMPLEX PAID
POSITION REGISTRANT EXPENSES RETIREMENT TO TRUSTEES
J. Michael Earley $24,000 N/A N/A $24,000
Trustee
R. Barbara Gitenstein $24,000 N/A N/A $24,000
Trustee
Robert A. Grayson $24,000 N/A N/A $24,000
Trustee
Stanley B. Seidler $24,000 N/A N/A $24,000
Trustee
Elizabeth J. Newell $24,000 N/A N/A $24,000
Trustee
Roger B. Vincent $24,000 N/A N/A $24,000
Trustee
THE MANAGEMENT AGREEMENT
Directed Services, Inc. ("DSI" or the "Manager") serves as Manager to
the Portfolios pursuant to a Management Agreement (the "Management
Agreement") between the Manager and the Trust. DSI's address is 1475
Dunwoody Drive, West Chester, PA 19380-1478. DSI is a New York
corporation that is a wholly owned subsidiary of Equitable of Iowa
Companies, Inc. ("Equitable of Iowa"), which, in turn, is a subsidiary of
ING Groep N.V. ("ING"), a global financial services holding company based
in The Netherlands. DSI is registered with the SEC as an investment
adviser and a broker-dealer.
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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 a wholly owned
subsidiary of Equitable of Iowa.
Pursuant to the Management Agreement, the Manager, subject to the
direction of the Board of Trustees, is responsible for providing all
supervisory, management, and administrative services reasonably necessary
for the operation of the Trust and its Portfolios other than the
investment advisory services performed by the Portfolio Managers. These
services include, but are not limited to, (i) coordinating for all
Portfolios, at the Manager's expense, all matters relating to the
operation of the Portfolios, including any necessary coordination among
the Portfolio Managers, Custodian, Dividend Disbursing Agent, Portfolio
Accounting Agent (including pricing and valuation of the Portfolio's
portfolios), accountants, attorneys, and other parties performing
services or operational functions for the Trust; (ii) providing the Trust
and the Portfolio, at the Manager's expense, with the services of a
sufficient number of persons competent to perform such administrative and
clerical functions as are necessary to ensure compliance with federal
securities laws and to provide effective supervision and administration
of the Trust; (iii) maintaining or supervising the maintenance by third
parties selected by the Manager of such books and records of the Trust
and the Portfolios as may be required by applicable federal or state law;
(iv) preparing or supervising the preparation by third parties selected
by the Manager of all federal, state, and local tax returns and reports
of the Trust relating to the Portfolios required by applicable law; (v)
preparing and filing and arranging for the distribution of proxy
materials and periodic reports to shareholders of the Portfolios as
required by applicable law in connection with the Portfolios; (vi)
preparing and arranging for the filing of such registration statements
and other documents with the SEC 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 continues in effect from year to year so long
as it 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 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 last approved by the Board of Trustees, including the Trustees
who are not parties to the Management Agreement or interested persons of
such parties, at a meeting held on November 16, 1999. 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.
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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.
As compensation for its services under the Management Agreement, the
Trust pays the Manager a monthly fee expressed as an annual percentage of
the applicable Portfolio's average daily net assets as follows:
Diversified Mid-Cap and Asset
Allocation Growth Series 1.00% of the first $500 million;
0.95% of the next $250 million;
0.90% of the next $500 million; and
0.85% of the amount in excess of $1.25
billion.
Special Situation Series and 1.10% of the first $250 million;
Growth and Income Series 1.05% of the next $400 million;
1.00% of the next $450 million; and
0.95% of the amount in excess of $1.1
billion
PORTFOLIO MANAGERS
The Manager has engaged the services of certain portfolio managers (the
"Portfolio Managers") to provide portfolio management services to the
Portfolios. The Trust, DSI and each Portfolio Manager have entered into
Portfolio Management Agreements, which were approved by the Trustees of
the Trust and by shareholders of each Portfolio of the Trust.
Pursuant to the separate Portfolio Management Agreements, the Manager
(and not the Trust) pays each Portfolio Manager for its services a
monthly fee expressed as an annual percentage of the applicable
Portfolio's average daily net assets as follows:
PORTFOLIO MANAGER PORTFOLIO PORTFOLIO MANAGEMENT FEE
Fidelity Research & Diversified Mid- 0.50% of First $250 million
Management Company Cap & Asset 0.40% of next $500 million
Allocation 0.35% of amount in excess of
Growth $750 million
Janus Capital Special 0.55% of first $100 million
Corporation Situations and 0.50% of next $400 million
Growth and Income 0.45% of amounts in excess of
$500 million
Fidelity Research & Management Company ("FMR") is the portfolio manager
to the Diversified Mid-Cap and Asset Allocation Growth Portfolios. Its
principal office is located at 82 Devonshire Street, Boston,
Massachusetts 02109. FMR is a corporation organized in the Commonwealth
of Massachusetts. FMR is a registered investment adviser and has been
providing investment advisory services focused in the financial services
industry since 1946.
Fidelity Investments Money Management, Inc. ("FIMM") serves as sub-
adviser to the Asset Allocation Growth Portfolio. FIMM is responsible for
choosing certain types of fixed income securities for the Portfolio. The
principal office of FIMM is One Spartan Way, Merrimack, New Hampshire
03054.
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Janus Capital Corporation ("Janus") is the Portfolio Manager to the
Growth and Income and Special Situations Portfolios. Its principal
office is located at 100 Fillmore Street, Denver, Colorado 80206. Janus
is a corporation registered in the state of Colorado. Janus is a
registered investment adviser and has been providing advisory services to
managed accounts and investment companies since 1970. Currently
Stillwell Financial, Inc. owns 81.5% of the outstanding voting stock of
Janus.
DISTRIBUTION OF TRUST SHARES
DSI serves as the Portfolio's Distributor and Principal Underwriter.
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. DSI also serves as Manager tot he Trust and therefore is an
affiliate to the Trust.
CODE OF ETHICS
To mitigate the possibility that a Portfolio will be adversely affected
by personal trading of employees, the Portfolios, Manager, Portfolio
Managers, any sub-advisers and Distributor have adopted Codes of Ethics
under Rule 17j-1 of the 1940 Act. These Codes of Ethics contain policies
restricting securities trading in personal trading accounts of Trustees
and others who normally come into possession of information on portfolio
transactions. The Codes of Ethics permit personnel subject to the codes
to invest in securities, including securities that may be purchased or
held by the Trust. These Codes of Ethics can be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C., and information on
the operation of the Public Reference Room may be obtained by calling the
SEC at 1-202-942-8090. The Codes of Ethics are available on the EDGAR
Database on the SEC's Internet site at http://www.sec.gov and copies of
the Codes of Ethics also may be obtained, after paying a duplicating fee,
by electronic request at the following E-mail address:
[email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20549-0102.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Portfolio are made by the 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. In the event
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.
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
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transactions on stock exchanges in the United States, payments of
brokerage commissions are negotiated. In effecting purchases and sales
of portfolio securities in transactions on U.S. stock exchanges for the
account of 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. Consistent
with this practice, the Portfolio Manager for a Portfolio may receive
research services from many broker-dealers with which the Portfolio
Manager places the Portfolio's portfolio transactions. These services,
which in some cases may also be purchased for cash, include such matters
as general economic and security market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase
and sale of securities. Some of these services may be of value to the
Portfolio Manager and its affiliates in advising its various clients
(including the Portfolio), although not all of these services are
necessarily useful and of value in managing a Portfolio. The advisory
fee paid by the Portfolio to the Portfolio Manager is not reduced because
the Portfolio Manager and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Portfolio Manager may cause a Portfolio to pay a broker-dealer, which
provides "brokerage and research services" (as defined in the Act) to the
Portfolio Manager, a disclosed commission for effecting a securities
transaction for the Portfolio in excess of the commission which another
broker-dealer would have charged for effecting that transaction.
A Portfolio Manager may place orders for the purchase and sale of
exchange-listed portfolio securities with a broker-dealer that is an
affiliate of the Portfolio Manager where, in the judgment of the
Portfolio Manager, such firm will be able to obtain a price and execution
at least as favorable as other qualified brokers.
Pursuant to SEC Rules, 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.
SEC 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
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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. Barings Securities
Corporation, Furman Selz Securities Corp. and ING Securities are also
registered broker-dealers and each is an affiliate of Directed Services,
Inc. the Manager to the GCG Trust. Any of the above firms may retain
compensation on transactions effected for a Portfolio in accordance with
these rules and procedures.
The Manager, Directed Services, Inc., is an affiliate of the GCG Trust.
NET ASSET VALUE
As indicated under "Net Asset Value" in the prospectus, the Portfolio's
net asset value per share for the purpose of pricing purchase and
redemption orders is determined at the close of the New York Stock
Exchange (generally 4:00 P.M.), Eastern time, on each day the New York
Stock Exchange is open for trading, exclusive of federal holidays.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield of the Portfolios,
and the total return of the Portfolios in advertisements or sales
literature. In the case of Variable Contracts, performance information
for a Portfolio will not be advertised or included in sales literature
unless accompanied by comparable performance information for the separate
account to which the Portfolio offers its shares.
Quotations of yield for the Portfolios 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 SEC), 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
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deduction of a
proportional share of Portfolio expenses on an annual basis, and assume
that all dividends and distributions are reinvested when paid.
Each Portfolio may be categorized as to its market capitalization make-
up ("large cap," mid cap" or "small cap") with regard to the market
capitalization of the issuers whose securities it holds. A Portfolio
average or median market capitalization may also be cited. Certain other
statistical measurements may be used to provide measures of a Portfolio's
characteristics. Some of these statistical measures include without
limitation: median or average P/E ratios, duration and beta. Median and
average P/E ratios are measures describing the relationship between the
price of a Portfolio's various securities and their earnings per share.
Duration is a weighted-average term-to-maturity of the bond's cash flows,
the weights being present value of each cash flow as a percentage of the
bond's full price.
Beta is a historical measure of a portfolio's market risk; a Beta of
1.10 indicates that the portfolio's returns tended to be 10% higher
(lower) than the market return during periods in which market returns
were positive (negative).
Performance information for a Portfolio may be compared, in
advertisements, sales literature, and reports to shareholders to: (i) the
Standard & Poor's 500 Stock Index ("S&P 500"), the Dow Jones Industrial
Average ("DJIA"), the Lehman Brothers Government Bond Index, the Donoghue
Money Market Institutional Averages, the Lehman Brothers Government
Corporate Index, the Salomon HighYield Index, the Russell MidCap Index,
the Wilshire 5000 Index, the Lehman Brothers Aggregate 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
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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 prospectus 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 intends to qualify, and expects to continue to qualify,
for treatment as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended (the "Code"). In order to
qualify for that treatment, a Portfolio must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-
term capital gain, and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several
additional requirements. These requirements include the following (1)
the Portfolio must derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans,
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) at the close
of each quarter of the Portfolio's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items,
U.S. government securities, securities of other RICs, and other
securities that, with respect to any one issuer, do not exceed 5% of the
value of the Portfolio's total assets and that do not represent more than
10% of the outstanding voting securities of the issuer; and (3) at the
close of each quarter of the Portfolio's taxable year, not more than 25%
of the value of its total assets may be invested in securities (other
than U.S. government securities or the securities of other RICs) of any
one issuer. If each Portfolio qualifies as a regulated investment
company and distributes to its shareholders substantially all of its net
income and net capital gains, then each Portfolio should have little or
no income taxable to it under the Code.
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
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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 Portfolio that does not qualify for this exemption intends to make
its distributions in accordance with the calendar year distribution
requirement.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the income received in connection
therewith by the Portfolios. Income from the disposition of foreign
currencies (except certain gains therefrom that may be excluded by future
regulations); and income from transactions in options, futures, and
forward contracts derived by a Portfolio with respect to its business of
investing in securities or foreign currencies, are expected to qualify as
permissible income under the Income Requirement.
Foreign Investments -- Portfolios investing in foreign securities or
currencies may be required to pay withholding, income or other taxes to
foreign governments or U.S. possessions. 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 prospectus 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.
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OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust dated August 3, 1988, an open-end
management investment company and currently consists of 28 Portfolios.
Three Portfolios are discussed in this Statement of Additional
Information and accompanying prospectus. Twenty-five additional
operational portfolios and one non-operational portfolio are described in
separate prospectuses and statements of additional information. The
capitalization of the Trust consists of an unlimited number of shares of
beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional Portfolios (with different investment
objectives and fundamental policies) at any time in the future.
Establishment and offering of additional Portfolios will not alter the
rights of the Trust's shareholders, the Separate Accounts. When issued in
accordance with the terms of the Agreement and Declaration of Trust,
shares are fully paid, redeemable, freely transferable, and non-
assessable by the Trust. Shares do not have preemptive rights or
subscription rights. In liquidation of a Portfolio of the Trust, each
shareholder is entitled to receive his or her pro rata share of the net
assets of that Portfolio. All of the Portfolios discussed in this
Statement of Additional Information are diversified with the exception of
the Special Situations Portfolio.
On January 31, 1992, the name of the Trust was changed to The GCG
Trust. Prior to that change, the name of the Trust was The Specialty
Managers Trust.
VOTING RIGHTS
Shareholders of the Portfolio are given certain voting rights. Each
share of each Portfolio will be given one vote, unless a different
allocation of voting rights is required under applicable law for a mutual
fund that is an investment medium for variable insurance products.
Massachusetts business trust law does not require the Trust to hold
annual shareholder meetings, although special meetings may be called for
a specific Portfolio, or for the Trust as a whole, for purposes such as
electing or removing Trustees, changing fundamental policies, or
approving a contract for investment advisory services. The Trust will be
required to hold a meeting to elect Trustees to fill any existing
vacancies on the Board if, at any time, fewer than a majority of the
Trustees have been elected by the shareholders of the Trust. In
addition, the Agreement and Declaration of Trust provides that the
holders of not less than two-thirds of the outstanding shares or other
voting interests of the Trust may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose.
The Trust's shares do not have cumulative voting rights. The Trustees
are required to call a meeting for the purpose of considering the removal
of a person serving as Trustee, if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the Trust. The
Trust is required to assist in shareholders' communications.
PURCHASE OF SHARES
Shares of a Portfolio may be offered for purchase by separate accounts
of insurance companies to serve as an investment medium for the variable
contracts issued by the insurance companies and to certain qualified
pension and retirement plans, as permitted under the federal tax rules
relating to the Portfolios serving as investment mediums for variable
contracts. Shares of the Portfolios are sold to insurance company
separate accounts funding both variable annuity contracts and variable
life insurance contracts and may be sold to insurance companies that are
not affiliated. The Trust currently does not foresee any disadvantages
to variable contract owners or other investors arising from offering the
Trust's shares to separate accounts of unaffiliated insurers, separate
accounts funding both life insurance polices and annuity contracts in
certain qualified pension and retirement plans; however, due to
differences in tax treatment or other considerations, it is theoretically
possible that the interests of owners of various contracts or pension and
retirement plans participating in the Trust might at sometime be in
conflict. However, the Board of Trustees and insurance companies whose
separate accounts invest in the Trust are required to monitor events in
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order to identify any material conflicts between variable annuity
contract owners and variable life policy owners, between separate
accounts of unaffiliated insurers, and between various contract owners or
pension and retirement plans. The Board of Trustees will determine what
action, if any, should be taken in the event of such a conflict. If such
a conflict were to occur, in one or more insurance company separate
accounts might withdraw their investment in the Trust. This might force
the Trust to sell securities at disadvantageous prices.
Shares of each Portfolio are sold at their respective net asset values
(without a sales charge) next computed after receipt of a purchase order
by an insurance company whose separate account invests in the Trust.
REDEMPTION OF SHARES
Shares of any Portfolio may be redeemed on any business day.
Redemptions are effected at the per share net asset value next determined
after receipt of the redemption request by an insurance company whose
separate account invests in the Portfolio. Redemption proceeds normally
will be paid within seven days following receipt of instructions in
proper form. The right of redemption may be suspended by the Trust or
the payment date postponed beyond seven days when the New York Stock
Exchange is closed (other than customary weekend and holiday closings) or
for any period during which trading thereon is restricted because an
emergency exists, as determined by the SEC, making disposal of portfolio
securities or valuation of net assets not reasonably practicable, and
whenever the SEC has by order permitted such suspension or postponement
for the protection of shareholders. If the Board of Trustees should
determine that it would be detrimental to the best interests of the
remaining shareholders of a Portfolio to make payment wholly or partly in
cash, the Portfolio may pay the redemption price in whole or part by a
distribution in kind of securities from the portfolio of the Portfolio,
in lieu of cash, in conformity with applicable rules of the SEC. If
shares are redeemed in kind, the redeeming shareholder might incur
brokerage costs in converting the assets into cash.
EXCHANGES
Shares of any one Portfolio may be exchanged for shares of any of the
other Portfolios described in the Prospectus. Exchanges are treated as a
redemption of shares of one Portfolio and a purchase of shares of one or
more of the other Portfolios and are effected at the respective net asset
values per share of each Portfolio on the date of the exchange. The
Trust reserves the right to modify or discontinue its exchange privilege
at any time without notice. Variable contract owners do not deal directly
with the Trust with respect to the purchase, redemption, or exchange of
shares of the Portfolios, and should refer to the Prospectus for the
applicable variable contract for information on allocation of premiums
and on transfers of contract value among divisions of the pertinent
insurance company separate account that invest in the Portfolio.
The Trust reserves the right to discontinue offering shares of one or
more Portfolios at any time. In the event that a Portfolio ceases
offering its shares, any investments allocated by an insurance company to
such Portfolio will be invested in the Liquid Asset Portfolio or any
successor to such Portfolio.
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Bank of New York, One Wall Street, New York, NY 10286, serves as
Custodian of the Trust's securities and cash and is responsible for
safekeeping the Trust's assets. PFPC Inc., a Delaware corporation,
located at 103 Bellevue Parkway, Wilmington, DE 19809, provides
administrative and portfolio accounting services for all Portfolios.
INDEPENDENT AUDITORS
Ernst & Young LLP, Two Commerce Square, Suite 4000, 2001 Market Street,
Philadelphia, Pennsylvania 19103 serves as the Trust's independent
auditor. The auditor examines financial statements for the Trust and
provides other audit, tax and related services.
47
<PAGE>
<PAGE>
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 accompanying
Prospectus do not contain all the information included in the Trust's
Registration Statement filed with the SEC 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 SEC.
The Registration Statement, including the exhibits filed therewith, may
be examined at the offices of the SEC 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
Audited Financial Statements of the Trust for each annual period ended
December 31 are included in the Trust's Annual Report to Shareholders.
Financial statements and financial highlights for the Portfolios
discussed in this Statement of Additional Information will be included in
the Trust's Annual Report for the calendar year ended December 31, 2000.
Shareholders also will receive unaudited semi-annual reports describing
the Portfolios' investment operations.
You can obtain a copy of the Trust's Annual Report dated December 31,
1999 by writing or calling the Distributor at the address or telephone
number set forth on the cover of this Statement of Additional
Information.
48
<PAGE>
<PAGE>
APPENDIX 1: DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc.'s ("Moody's") description
of its bond ratings:
Aaa - judged to be the best quality; they carry the smallest degree of
investment risk. Aa - judged to be of high quality by all standards;
together with the Aaa group, they comprise what are generally known as
high grade bonds. A - possess many favorable investment attributes and
are to be considered as "upper medium grade obligations." Baa -
considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured; interest payments and principal security
appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of
time. Ba - judged to have speculative elements; their future cannot be
considered as well assured. B - generally lack characteristics of the
desirable investment. Caa - are of poor standing; such issues may be in
default or there may be present elements of danger with respect to
principal or interest. Ca - speculative in a high degree; often in
default. C - lowest rate class of bonds; regarded as having extremely
poor prospects.
Moody's also applies numerical indicators 1, 2, and 3 to rating
categories. The modifier 1 indicates that the security is in the higher
end of its rating category; 2 indicates a mid-range ranking; and 3
indicates a ranking toward the lower end of the category.
Excerpts from Standard & Poor's Rating Group ("S&P") description of its
bond ratings:
AAA - highest grade obligations; capacity to pay interest and repay
principal is extremely strong. AA - also qualify as high grade
obligations; a very strong capacity to pay interest and repay principal
and differs from AAA issues only in small degree. A - regarded as upper
medium grade; they have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories. BBB - regarded as having an adequate capacity to pay
interest and repay principal; whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity than in
higher rated categories - this group is the lowest which qualifies for
commercial bank investment. BB, B, CCC, CC, C- predominately speculative
with respect to capacity to pay interest and repay principal in
accordance with terms of the obligation: BB indicates the lowest degree
of speculation and C the highest.
S&P applies indicators "+", no character, and "-" to its rating
categories. The indicators show relative standing within the major
rating categories.
DESCRIPTION OF MOODY'S RATINGS OF NOTES AND VARIABLE RATE DEMAND
INSTRUMENTS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term
ratings on issues with demand features (variable rate demand obligations)
are differentiated by the use of the VMIG symbol to reflect such
characteristics as payment upon periodic demand rather than fixed
maturity dates and payments relying on external liquidity.
MIB 1/VMIG 1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection are
ample although not as large as in the preceding group.
A1
<PAGE>
<PAGE>
DESCRIPTION OF MOODY'S TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations which have an original
maturity not exceeding nine months. Moody's makes no representation that
such obligations are exempt from registration under the Securities Act of
1933, nor does it represent that any specific note is a valid obligation
of a rated issuer or issued in conformity with any applicable law. The
following designations, all judged to be investment grade, indicate the
relative repayment ability of rated issuers of securities in which the
Trust may invest:
PRIME-1: Issuers rates Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term promissory
obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term promissory obligations.
DESCRIPTION OF S&P'S RATINGS FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in a small
degree.
A: Debt rated "A" has strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
SPECULATIVE GRADE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CI: The "CI" rating is reserved for income bonds on which no interest
is being paid.
D: Debt rated "D" is in default, and repayment of interest and/or
repayment of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
A2
<PAGE>
<PAGE>
DESCRIPTION OF S&P'S RATINGS FOR INVESTMENT GRADE MUNICIPAL NOTES AND
SHORT-TERM DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Those issued determined to
possess overwhelming safety characteristics will be given a plus (+)
designation.
SP-2: Issues carrying this designation have a satisfactory capacity to
pay principal and interest.
A2
DESCRIPTION OF S&P'S RATINGS FOR DEMAND OBLIGATIONS AND TAX-EXEMPT
COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the
likelihood of timely repayment of debt having an original maturity of no
more than 365 days. The two rating categories for securities in which
the Trust may invest are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics will be denoted with a plus (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
Exhibits
(a) (1) Amended and Restated Agreement and Declaration of
Trust 3/19/96 (1)
(2) Amendment to the Restated Agreement and Declaration of
Trust adding the Managed Global Series 6/10/96 (2)
(3) Amendment to the Restated Agreement and Declaration of
Trust changing the name of the Natural Resources Series
to the Hard Assets Series and adding the Mid-Cap
Growth Series 1/23/97 (43)
(4) Amendment to the Restated Agreement and Declaration of
Trust redesigning the Global Equity Series as the Managed
Global Series; terminating the Mid-Cap Growth Series-added
January 23, 1997; 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 1/12/98 (3)
(5) Amendment to the Restated Agreement and Declaration of
Trust adding Large Cap Value Series and the International
Equity Series, also to change the names of the Multiple
Allocation Series to the Equity Income Series and Value +
Growth Series to the Growth Series 2/16/99 (43)
(6) Amendment to the Restated Agreement and Declaration of
Trust changing the name of the Growth & Income Series
to the Capital Growth Series 6/30/99 (43)
(7) Amendment to the Restated Agreement and Declaration of
Trust adding the Investors Series, All Cap Series
and the Large Cap Growth Series 8/17/99 (43)
(8) Amendment to the Restated Agreement and Declaration of
Trust adding the Diversified Mid-Cap Series, Asset
Allocation Growth Series and the Special Situations
Series 5/18/00 -- filed electronically herewith
(b) By-laws (17)
(c) Instruments Defining Rights of Security Holders (18)
(d) (1) (A) Management Agreement for all Series except The
Fund For Life (4)
(B) Addendum to the Management Agreement, 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 1/2/98 (43)
(C) Addendum to the Management Agreement, adding
International Equity Series and the Large Cap
Value Series 2/16/99 (43)
(D) Addendum to the Management Agreement, adding
Investors Series, All Cap Series and the
Large Cap Growth Series 8/17/99 (43)
(E) Addendum to the Management Agreement, adding Diversified
Mid-Cap Series, Asset Allocation Growth Series and the
Special Situations Series 5/18/00 -- filed electronically
herewith
(F) Management Agreement for The Fund For Life (19)
(2) Portfolio Management Agreements
(A) Portfolio Management Agreement with T. Rowe
Price Associates, Inc. (5)
(B) Portfolio Management Agreement with ING Investment
Management LLC, formerly Equitable Investment
Services, Inc. (6)
(C) Portfolio Management Agreement with Kayne
Anderson Investment Management, LLC. (7)
(D) Addendum to the Kayne Anderson Investment Management, LLC
Agreement (43)
(E) Portfolio Management Agreement with Eagle
Asset Management, Inc. (8)
(F) Portfolio Management Agreement with
Massachusetts Financial Services Company (9)
(G) Portfolio Management Agreement with
Baring International Investment Limited (20)
(H) Portfolio Management Agreement with
A I M Capital Management, Inc. (21)
(I) Portfolio Management Agreement with
Janus Capital Corporation (22)
(J) Portfolio Management Agreement with
Alliance Capital Management L.P. (23)
(K) Schedule Pages for T. Rowe Price Associates, Inc. (24)
(L) Portfolio Management Agreement with Salomon Smith
Barney Asset Management, Inc. (44)
(M) Portfolio Management Agreement with Capital Guardian
Trust Company (44)
(N) Form of Portfolio Management Agreement with The Prudential
Investment Corporation (44)
(O) Addendum to the A I M Capital Management, Inc. Agreement (44)
(P) Addendum to the Baring International Investment Limited
Agreement (44)
(Q) Addendum to the Capital Guardian Trust Company
Agreement (44)
(R) Form of Portfolio Management Agreement with Fidelity
Management & Research Company -- filed electronically herewith
(S) Form of Sub-Advisory Agreement between Fidelity Management
& Research Company and Fidelity Investments Money Management,
Inc. -- filed electronically herewith
(T) Form of Addendum to the Janus Capital Corporation Agreement
-- filed electronically herewith
(3) Administrative Services Agreement for The Fund For Life (25)
(4) (A) Administration and Fund Accounting Agreement among the Trust,
Directed Services, Inc., and PFPC, Inc. (formerly, First Data
Corporation) (26)
(B) Consent to Transaction signed by Directed Services, Inc. and
The GCG Trust dated 9/9/99 -- filed electronically herewith
(e) Distribution Agreement (10)
(f) Not Applicable
(g) Custodial Agreement with Bank of New York (44)
(h) (1) (A) Transfer Agency and Service Agreement (27)
(B) Addendum to the Transfer Agency and Service
Agreement for The Fund For Life, Zero Target 2002
Series, and Capital Appreciation Series (12)
(2) (A) Organizational Agreement for Golden American
Life Insurance Company (28)
(B) Assignment Agreement for Organizational Agreement (29)
(C) Organizational Agreement for The Mutual
Benefit Life Insurance Company (30)
(D) Assignment Agreement for Organizational Agreement (31)
(E) Addendum to Organizational Agreement adding
Market Manager Series and Value Equity Series (13)
(F) Addendum to the Organizational Agreement adding
the Strategic Equity Series (32)
(G) Addendum to the Organizational Agreement adding
the Small Cap Series (14)
(H) Addendum to the Organizational Agreement adding
Managed Global Series (15)
(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 (11)
(J) Addendum to the Organizational Agreement adding
International Equity Series and the Large Cap
Value Series 2/16/99 (44)
(K) Addendum to the Organizational Agreement adding
Investors Series, All Cap Series and the
Large Cap Growth Series 6/15/99 (44)
(L) Addendum to the Organizational Agreement adding
Diversified Mid-Cap Series, Asset Allocation Growth Series
and the Special Situations Series 5/18/00 -- filed
electronically herewith
(3) (A) Settlement Agreement for Golden American Life
Insurance Company (33)
(B) Assignment Agreement for Settlement Agreement (16)
(C) Settlement Agreement for The Mutual Benefit Life
Insurance Company (34)
(D) Assignment Agreement for Settlement Agreement (35)
(4) Indemnification Agreement (36)
(5) (A) Expense Reimbursement Agreement (37)
(B) Amendment No. 1 to the Expense Reimbursement Agreement (38)
(C) Amendment No. 2 to the Expense Reimbursement Agreement (39)
(D) Amendment No. 3 to the Expense Reimbursement Agreement (40)
(E) Amendment No. 4 to the Expense Reimbursement Agreement (41)
(i) Consent of Sutherland Asbill & Brennan LLP -- filed electronically
herewith
(j) Not Applicable
(k) Not Applicable
(l) Initial Capital Agreement (42)
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(p) Other Exhibits
(1) Powers of Attorney -- filed electronically herewith
(2) ING Group affiliate list -- filed electronically herewith
(3) The GCG Trust Code of Ethics -- filed electronically herewith
(4) Fidelity Management & Research Company Code of Ethics -- filed
electronically herewith
(5) Janus Capital Corporation Code of Ethics -- filed
electronically herewith
(1) Incorporated by reference to Exhibit 1(a) of Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 2, 1996, File No. 33-23512.
(2) 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.
(3) Incorporated by reference to Exhibit (b)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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) Incorporated by reference to Exhibit 9(b)(vii) of Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A of
The GCG Trust as filed on December 22, 1995, File No. 33-23512.
(15) 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.
(16) Incorporated by reference to Exhibit 9(c)(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.
(17) Incorporated by reference to Exhibit (b) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(18) Incorporated by reference to Exhibit (c) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(19) Incorporated by reference to Exhibit (d)(1)(B) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(20) Incorporated by reference to Exhibit (d)(2)(K) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(21) Incorporated by reference to Exhibit (d)(2)(L) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(22) Incorporated by reference to Exhibit (d)(2)(M) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(23) Incorporated by reference to Exhibit (d)(2)(N) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(24) Incorporated by reference to Exhibit (d)(2)(O) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(25) Incorporated by reference to Exhibit (d)(3) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(26) Incorporated by reference to Exhibit (d)(4) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(27) Incorporated by reference to Exhibit (h)(1)(A) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(28) Incorporated by reference to Exhibit (h)(2)(A) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(29) Incorporated by reference to Exhibit (h)(2)(B) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(30) 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.
(31) Incorporated by reference to Exhibit (h)(2)(D) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(32) Incorporated by reference to Exhibit (h)(2)(F) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(33) Incorporated by reference to Exhibit (h)(3)(A) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(34) Incorporated by reference to Exhibit (h)(3)(C) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(35) Incorporated by reference to Exhibit (h)(3)(D) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(36) Incorporated by reference to Exhibit (h)(4) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(37) Incorporated by reference to Exhibit (h)(5)(A) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(38) Incorporated by reference to Exhibit (h)(5)(B) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(39) Incorporated by reference to Exhibit (h)(5)(C) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(40) Incorporated by reference to Exhibit (h)(5)(D) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(41) Incorporated by reference to Exhibit (h)(5)(E) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(42) Incorporated by reference to Exhibit (l)(1) of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A of
The GCG Trust as filed on May 3, 1999 File No. 33-23512.
(43) Incorporated by reference to Post-Effective Amendment No. 41 to
the Registration Statement on Form N-1A of The GCG Trust as filed
on November 8, 1999 File No. 33-23512.
(44) Incorporated by reference to Post-Effective Amendment No. 42 to
the Registration Statement on Form N-1A of The GCG Trust as filed
on February 29, 2000 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 Security Equity Life Insurance Company; a separate
account of Equitable Life Insurance Company of Iowa; Golden
American Life Insurance Company and its separate account;
and First Golden American Life Insurance Company of New York
own all of the outstanding shares of the Registrant.
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 is required to vote fund shares in accordance with
instructions received from owners of variable life insurance
and annuity contracts funded by separate accounts of the relevant
company.
The subsidiaries of ING Groep N.V. are -- filed electronically
herewith as Exhibit p(2) this Registration Statement.
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.
Item 26. Business and Other Connections of Investment Adviser.
Directed Services, Inc.
The Manager of all Series of the Trust is Directed Services, Inc.
("DSI"). The directors and officers of the Manager have, during the past
two fiscal years, had substantial affiliations with Golden American Life
Insurance Company ("Golden American") and Equitable of Iowa Companies ("EIC")
and its affiliates. Unless otherwise indicated below all officers of DSI
have a principal business address of 1475 Dunwoody Drive, West Chester,
Pennsylvania 19380. Most directors of DSI are employees of either EIC or
one of its affiliates and each serves as a director 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, and Secretary, The GCG Trust.
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; and President,
Chairmand and Trustee of The GCG Trust.
Stephen J. Preston Executive 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
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.
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.
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.
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.
Salomon Smith Barney Asset Management, Inc.
For information regarding Salomon Smith Barney Asset Management, Inc.,
reference is made to Form ADV of Salomon Smith Barney Asset Management, Inc.,
SEC File No. 801-32046, which is incorporated by reference.
The Prudential Investment Corporation
For information regarding The Prudential Investment Corporation reference
is made to Form ADV of The Prudential Investment Corporation SEC File
No. 801-22808, which is incorporated by reference.
Capital Guardian Trust Company
The information as to the directors and officers of Capital Guardian Trust
company is set forth below. to the knowledge of the Trust, none of the
directors or officers of Capital Guardian is or has been at anytime during the
past two fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature, except as set forth below.
These persons may be contacted c/o Capital Guardian Trust Company, 333 South
Hope Street, Los Angeles, California 90071.
Donnalisa Barnum, Senior Vice President of Capital Guardian Trust Company. Vice
President, Capital International Limited.
Andrew F. Barth, Director of Capital Guardian Trust Company. Executive Vice
President and Research Manager, Capital Guardian Research Company.
Michael D. Beckman, Senior Vice President, Treasurer and Director of Capital
Guardian Trust Company. Director, Capital Guardian Trust Company of Nevada; and
Treasurer, Capital Guardian Research Company.
Elizabeth A. Burns, Senior Vice President of Capital Guardian Trust Company.
Larry P. Clemmensen, Director of Capital Guardian Trust Company and American
Funds Distributors, Inc. Chairman of the Board, American Funds Service Company;
Director and President, The Capital Group Companies, Inc.; Senior Vice
President and Director, Capital Research and Management Company; President and
Director, Capital Management Services, Inc.; Treasurer, Capital Strategy
Research, Inc.; and Senior Vice President, Capital Income Builder, Inc. and
Capital World Growth & Income Fund, Inc.
Roberta A. Conroy, Senior Vice President, Director and Counsel of Capital
Guardian Trust Company. Senior Vice President and Secretary, Capital
International, Inc. and Emerging Markets Growth Fund, Inc.; Assistant General
Counsel, The Capital Group Companies, Inc.; and Secretary. Capital Management
Services, Inc.
John B. Emerson, Senior Vice President of Capital Guardian Trust Company.
Deputy Assistant to the President for Intergovernmental Affairs and Deputy
Director of Presidential Personnel, The White House.
Michael E. Ericksen, Senior Vice President of Capital Guardian Trust Company.
Senior Vice President, Capital International, Limited.
David I. Fisher, Chairman and Director of The Capital Group Companies, Inc. and
Capital Guardian Trust Company. Vice Chairman and Director, Capital
International, Inc., Capital International K.K., Capital International Limited
and Emerging Markets Growth Fund, Inc.; President and Director, Capital Group
International, Inc. and Capital International Limited (Bermuda); Presidente du
Conseil, Capital International S.A.; and Director, Capital Group Research,
Inc., Capital Research International, EuroPacific Growth Fund and New
Perspective Fund.
William Flumenbaum, Senior Vice President of Capital Guardian Trust Company
Personal Investment Management Division. Vice President, Capital Guardian Trust
Company, a Nevada Corporation; Director, Principal Gifts - UCLA Development;
Executive Director, UCLA Jonsson Cancer Center Foundation; and Deputy Director,
UCLA Health Science Development.
Richard N. Havas, Senior Vice President of Capital Guardian Trust Company,
Capital International Limited, Capital Research International and Capital
Guardian Canada, Inc.
Frederick M. Hughes, Jr., Senior Vice President of Capital Guardian Trust
Company.
William H. Hurt, Senior Vice President and Director of Capital Guardian Trust
Company. Chairman, Capital Guardian Trust Company of Nevada and Capital
Strategy Research, Inc.
Robert G. Kirby, Chairman Emeritus of Capital Guardian Trust Company. Senior
Partner, The Capital Group Partners L.P.
Nancy J. Kyle, Senior Vice President and Director of Capital Guardian Trust
Company. President, Capital Guardian Canada, Inc. and Vice President, Emerging
Markets Growth Fund, Inc.
Karin L. Larson, Director of Capital Guardian Trust Company and The Capital
Group Companies, Inc. President, Director and Director of Research, Capital
Guardian Research Company; Chairperson, President and Director, Capital Group
Research, Inc.; and President, Director and Director of International Research,
Capital Research International.
D. James Martin, Director of Capital Guardian Trust Company. Senior Vice
President and Director, Capital Guardian Research Company.
John R. McIlwraith, Senior Vice President and Director of Capital Guardian
Trust Company. Senior Vice President and Director, Capital International
Limited.
James R. Mulally, Senior Vice President and Director of Capital Guardian Trust
Company. Senior Vice President, Capital International Limited; Director,
Capital Guardian Research Company; and Vice President, Capital Research
Company.
Shelby Notkin, Senior Vice President of Capital Guardian Trust Company.
Director, Capital Guardian Trust Company of Nevada.
Mary M. O'Hern, Senior Vice President of Capital Guardian Trust Company and
Capital International Limited; Vice President, Capital International, Inc.
Jeffrey C. Paster, Senior Vice President of Capital Guardian Trust Company.
Robert V. Pennington, Senior Vice President of Capital Guardian Trust Company;
President, Capital Guardian Trust Company of Nevada.
Jason M. Pilalas, Director of Capital Guardian Trust Company. Senior Vice
President and Director, Capital Guardian Research Company.
Robert Ronus, President and Director of Capital Guardian Trust Company.
Chairman and Director, Capital Guardian Canada, Inc., Capital Guardian Research
Company and Capital Research International; Director, The Capital Group
Companies, Inc., Capital Group International, Inc. and Capital International
Fund S.A.; Directeur, Capital International S.A.; and Senior Vice President,
Capital International Limited.
Theodore R. Samuels, Senior Vice President and Director of Capital Guardian
Trust Company. Director, Capital Guardian Research Company.
Lionel A. Sauvage, Senior Vice President of Capital Guardian Trust Company.
Director, Capital Guardian Research Company; and Vice President, Capital
International Research, Inc.
John H. Seiter, Executive Vice President of Client Relations & Marketing and
Director of Capital Guardian Trust Company. Senior Vice President, Capital
Group International, Inc.; and Vice President, The Capital Group Companies,
Inc.
Robert L. Spare, Senior Vice President of Capital Guardian Trust Company.
Eugene P. Stein, Executive Vice President and Director of Capital Guardian
Trust Company. Director, Capital Guardian Research Company.
Bente L. Strong, Senior Vice President of Capital Guardian Trust Company
Personal Investment Management Division. Publisher, Capital Publishing's The
American Benefactor Magazine.
Philip A. Swan, Senior Vice President of Capital Guardian Trust Company.
Shaw B. Wagener, Director of Capital Guardian Trust Company, Capital
International Asia Pacific Management Company, S.A., Capital International
Management Company, Capital International Emerging Countries Fund and Capital
International Latin American Fund. President and Director, Capital
International, Inc.; and Senior Vice President, Capital Group International,
Inc. and Emerging Markets Growth Fund, Inc.
Eugene M. Waldron, Senior Vice President of Capital Guardian Trust Company.
Vice President, Loomis, Sayles & Company.
N. Dexter Williams, Senior Vice President of Capital Guardian Trust Company
Personal Investment Management Division. Senior Vice President, American Funds
Distributors, Inc.
Fidelity Management & Research Company
For information regarding Fidelity Management & Research Company reference
is made to Form ADV of Fidelity Investment Management SEC File No. 801-7884,
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.
<TABLE>
<S> <C> <C>
NAME and PRINCIPAL POSITIONS and OFFICES POSITIONS and OFFICES
BUSINESS ADDRESS with UNDERWRITER with FUND
Barnett Chernow Director and Executive President, Chairman and
Golden American Life Vice President Trustee
Insurance Co.
1475 Dunwoody Drive
West Chester, PA 19380
Myles R. Tashman Director, Executive Vice Secretary
Golden American Life President, Secretary and
Insurance Co. General Counsel
1475 Dunwoody Drive
West Chester, PA 19380
</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 1475 Dunwoody Drive, West Chester, Pennsylvania
19380-1478. The Trust's books of account are also kept at the offices
of PFPC Inc., 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.
<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. 43 to the Registration Statement on Form N-1A (File No. 33-23512)
to be signed on its behalf by the undersigned, thereto duly authorized, in
the City of West Chester, and the Commonwealth of Pennsylvania, on July
14, 2000.
THE GCG TRUST
(Registrant)
--------------------------
Barnett Chernow*
President
*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. 43 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 July 14, 2000.
Signature Title
Chairman, President and
Trustee
----------------------
Barnett Chernow*
Trustee
----------------------
John R. Barmeyer*
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
------ ------------ -------
(a)(8) Addendum to the Restated Agreement and Declaration EX99.a8
of Trust adding the Diversified Mid-Cap Series,
Asset Allocation Growth Series and Special Situations
Series 5/18/00
(d)(1)(E) Addendum to the Management Agreement adding EX99.d1e
Diversified Mid-Cap Series, Asset Allocation Growth
Series and Special Situations Series 5/18/00
(d)(2)(R) Form of Portfolio Management Agreement with Fidelity EX99.d2r
Management & Research Company
(d)(2)(S) Form of Sub-Advisory Agreement between Fidelity EX99.d2s
Management & Research Company and Fidelity Investments
Money Management, Inc.
(d)(2)(T) Form of Addendum to the Janus Capital Corporation EX99.d2t
Portfolio Management Agreement
(d)(4)(B) Consent to Transaction signed by Directed Services, Inc. EX99.d4b
and The GCG Trust dated 9/9/99
(h)(2)(l) Addendum to the Organizational Agreement adding EX99.h2l
Diversified Mid-Cap Series, Asset Allocation Growth
Series and Special Situations Series 5/18/00
(i) Consent of Sutherland Asbill & Brennan LLP EX99.i
(p)(1) Powers of Attorney EX99.p1
(p)(2) ING Group affiliate list EX99.p2
(p)(3) The GCG Trust Code of Ethics EX99.p3
(p)(4) Fidelity Management & Research CompanyCode of Ethics EX99.p4
(p)(5) Janus Capital Corporation Code of Ethics EX99.p5
<PAGE>