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THE GCG TRUST
PROSPECTUS
FEBRUARY 1, 2000
STOCK FUNDS
Investors Series
Large Cap Value Series
All Cap Series
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
FOR THE SEPARATE ACCOUNT. BOTH PROSPECTUSES SHOULD BE READ
CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
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IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION,
WE REFER TO THE GCG TRUST AS "THE GCG TRUST," AND TO A SERIES OF
THE GCG TRUST INDIVIDUALLY AS A "PORTFOLIO" AND COLLECTIVELY AS THE
"PORTFOLIOS."
PAGE
INTRODUCTION
Investing through your Variable
Contract 2
Why Reading this Prospectus is
Important 2
Types of Funds 2
General Risk Factors 3
PORTFOLIOS AT A GLANCE
Investors Portfolio 4
Large Cap Value Portfolio 6
All Cap Portfolio 8
MORE INFORMATION
A Word about Portfolio Diversity 10
Additional Information about the
Portfolios 10
Non-Principal Investments and
Strategies 10
Temporary Defensive Positions 10
Portfolio Turnover 10
Legal Counsel 10
Independent Auditors 10
DESCRIPTION OF THE PORTFOLIOS
Investors Portfolio 11
Large Cap Value Portfolio 13
All Cap Portfolio 15
OVERALL MANAGEMENT OF THE TRUST
The Adviser 18
Advisory Fee 19
SHARE PRICE 19
TAXES AND DISTRIBUTIONS 21
AN INVESTMENT IN ANY PORTFOLIO OF THE GCG TRUST IS NOT A BANK DEPOSIT
AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY.
1
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INTRODUCTION
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INVESTING THROUGH YOUR VARIABLE MONEY MARKET FUNDS. Money market
CONTRACT instruments (also known as cash
Shares of the portfolios of the investments) are debt securities
GCG Trust currently are sold to issued by governments,
segregated asset accounts corporations, banks, or other
("Separate Accounts") of insurance financial institutions.
companies as funding choices for
variable annuity contracts and BOND FUNDS. Bonds are debt
variable life insurance policies securities representing loans
("Variable Contracts"). Assets in from investors. A bond fund's
the Separate Account are invested share price - and therefore the
in shares of the portfolios based value of your investment - can
on your allocation instructions. rise or fall in value because
Not all portfolios described in of changing interest rates or
this prospectus may be available other factors.
under your Variable Contract. You
do not deal directly with the BALANCED FUNDS. A balanced fund
portfolios to purchase or redeem holds a mix of stocks, bonds
shares. The accompanying Separate and sometimes, cash
Account prospectus describes your investments. A balanced fund
rights as a Variable Contract offers the convenience of
owner. We may sell shares of the investing in both stocks and
portfolios to qualified pension bonds through a single fund.
and retirement plans outside of
the separate account context. STOCK FUNDS. Stocks - which
represent shares of ownership
WHY READING THIS PROSPECTUS IS in a company - generally offer
IMPORTANT the greatest potential for long
This prospectus explains the term growth of principal. Many
investment objective, risks and stocks also provide regular
strategy of three of the portfolios dividends, which are generated
of the GCG Trust. Reading the by corporate profits. While
prospectus will help you to decide stocks have historically
whether a portfolio is the right provided the highest long-term
investment for you. We suggest returns, they have also
that you keep this prospectus and exhibited the greatest short-
the prospectus for the Separate term price fluctuations - so a
Account for future reference. stock fund has a higher risk of
losing value over the short
TYPES OF FUNDS term.
All portfolios offered by The GCG
Trust are generally classified This prospectus describes the
among three major asset Investors Portfolio, All Cap
classes: stock, bond and money Portfolio and Large Cap Value
market. Portfolio,. There are other
portfolios in the GCG Trust.
They are described in a
separate prospectus. Each of
the portfolios in this prospectus
is a stock portfolio.
MONEY MARKET BOND STOCK
FUNDS FUNDS FUNDS
|----------------------------------------------------------|
| LOWER <---------- RISK/RETURN ----------> HIGHER |
|----------------------------------------------------------|
2
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INTRODUCTION (CONTINUED)
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GENERAL RISK FACTORS for shorter-
Investing in the portfolios, as term bonds, moderate for
with an investment in any intermediate-term bonds, and
security, involves risk factors high for longer-term bonds. A
and special considerations. A bond's duration measures its
portfolio's risk is defined sensitivity to changes in
primarily by its principal interest rates. The longer
investment strategies. An the duration, the greater the
investment in a portfolio is not bond's price movement will be
insured against loss of principal. as interest rates change.
As with any mutual fund, there can
be no assurance that a portfolio o CREDIT RISK. A bond issuer
will achieve its investment (debtor) may fail to repay
objective. Investing in shares of interest and principal in a
a portfolio should not be timely manner. The price of a
considered a complete investment security a portfolio holds may
program. The share value of each fall due to changing economic,
portfolio 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
interest rates are
increasingly difficult to
predict over longer periods of
time. Fixed income securities
with longer maturities will
therefore be more volatile
RISK RELATED TO STOCK INVESTING: than other fixed income
securities with shorter
o MARKET AND COMPANY RISK. The maturities. Conversely, fixed
price of a security held by a income securities with shorter
portfolio may fall due to maturities will be less
changing economic, political volatile but generally provide
or market conditions or lower returns than fixed
disappointing earnings income securities with longer
results. Stock prices in maturities. The average
general may decline over short maturity of a portfolio's
or even extended periods. The fixed income investments will
stock market tends to be affect the volatility of the
cyclical, with periods when portfolio's share price.
stock prices generally rise
and periods when stock prices Because of these and other risks
generally decline. Further, that may be particular to a
even though the stock market portfolio, your investment could
is cyclical in nature, returns lose or not make any money.
from a particular stock market
segment in which a portfolio
invests may still trail
returns from the overall stock
market.
RISKS RELATED TO BOND INVESTING:
o INCOME RISK. A portfolio's
income may fall due to falling
interest rates. Income risk
is generally the greatest for
short-term bonds, and the
least for long-term bonds.
Changes in interest rates will
affect bond prices as well as
bond income.
o INTEREST RATE RISK. This is the
risk that bond prices overall
will decline over short or
even extended periods due to
rising interest rates.
Interest rate risk is
generally modest
3
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PORTFOLIOS AT A GLANCE
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INVESTORS PORTFOLIO
INVESTMENT
OBJECTIVE Seek long-term growth of capital. Current income
is a secondary objective
PRINCIPAL The Portfolio invests primarily in equity securities of
INVESTMENT U.S. companies. The Portfolio may also invest in other
STRATEGY equity securities. To a lesser degree, the Portfolio invests
in income producing securities such as debt securities.
The Portfolio Manager emphasizes individual security selection
while spreading the Portfolio's investment across industries,
which may help to reduce risk. The Portfolio Manager focuses
on established large capitalization companies, defined by the
Portfolio Manager as companies with over $5 billion in market
capitalization, seeking to identify those companies with solid
growth potential at reasonable values. The Portfolio Manager
employs fundamental analysis to analyze each company in detail,
ranking its management, strategy and competitive market position.
In selecting individual companies for investment, the Portfolio
Manager looks for the following:
o Long-term history of performance
o Competitive market position
o Competitive products and services
o Strong cash flow
o High return on equity
o Strong financial condition
o Experienced and effective management
o Global scope
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
INVESTORS
I LCV AC
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<<< xxXXXXxx >>>
<<<---------------------------------------------------------------------->>>
<<LOWER RISK HIGHER RISK>>
4
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PORTFOLIOS AT A GLANCE (CONTINUED)
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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 Market and Company Risk
o Call Risk
o Income Risk
o Interest Rate Risk
o Credit Risk
o Maturity Risk
An investment in the Portfolio is subject to the following
additional principal risk described under "Description of the
Portfolios -- Investors Portfolio."
o Growth Investing Risk
An investment in the Portfolio will fluctuate depending on
its investment performance. Since the Investors Portfolio
became available to investors after January 1, 2000,
performance information for previous calender years
is not available.
You should read the Relative Risk Comparison, presented for
this portfolio, in conjunction with the one presented
in the GCG Trust prospectus dated May 1, 1999 as amended
June 30, 1999, August 17, 1999 and September 30, 1999,
which gives descriptions of the other portfolios offered
by the GCG Trust.
5
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PORTFOLIOS AT A GLANCE (CONTINUED)
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LARGE CAP VALUE PORTFOLIO
Investment
Objective Seek long-term growth of capital and income
Principal The Portfolio Manager seeks to achieve the Portfolio's
Investment investment objective by investing, under normal market
Strategy conditions, primarily in equity and equity-related
securities of companies with market capitalization
greater than $1 billion at the time of purchase.
In selecting investments, greater consideration is
given to potential appreciation and future dividends
than to current income. The Portfolio may hold American
Depository Receipts and other U.S. registered securities
of foreign issuers which are denominated in U.S. dollars.
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 risk described under "Description of
the Portfolios -- Large Cap Value Portfolio".
o Growth Investment Risk
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
LARGE-CAP
I LCV AC
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<<LOWER RISK HIGHER RISK>>
6
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PORTFOLIOS AT A GLANCE (CONTINUED)
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An investment in the Portfolio will fluctuate depending
on its investment performance. Since the Large Cap Value
Portfolio became available to investors after January 1,
2000, performance information for previous calender years
is not available.
You should read the Relative Risk Comparison, presented for
this portfolio in conjunction with the one presented in the
GCG Trust prospectus dated May 1, 1999 as amended June 30,
1999, August 17, 1999 and September 30, 1999, which gives
descriptions of other portfolios offered by the Trust.
7
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PORTFOLIOS AT A GLANCE (CONTINUED)
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ALL-CAP PORTFOLIO
INVESTMENT Capital Appreciation through investment in securities which
OBJECTIVE the Portfolio Manager believes have above-average capital
appreciation potential
PRINCIPAL The Portfolio invests primarily in equity securities
INVESTMENT of U.S. companies of any size. The Portfolio Manager
STRATEGY emphasizes individual security selection while
spreading the Portfolio's investments across industries,
which may help to reduce risk. The Portfolio Manager seeks
to identify those companies which offer the greatest
potential for capital appreciation through careful fundamental
analysis of each company and its financial characteristics.
In selecting individual companies for investment, the Portfolio
Manager looks for the following:
o Share prices that appear to undervalue the company's
assets or do not adequately reflect factors such as
favorable industry trends, lack of investor recognition
or the short-term nature of earnings' declines
o Special situations such as existing or possible changes
in management, corporate policies, capitalization or
regulatory environment which may boost earnings or the
market price of the company's shares
o Growth potential due to technological advances, new
products or services, new methods of marketing or
production, changes in demand or other significant new
developments which may enhance future earnings.
The Portfolio is non-diversified and, when compared with other
funds, may invest a larger portion of its assets in a particular
issuer. A non-diversified portfolio has greater exposure to the
risks of default or the poor earnings of any such issuer.
===RELATIVE RISK COMPARISON=================================================
Not intended to indicate
future risk or performance.
ALL-CAP
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<<LOWER RISK HIGHER RISK>>
8
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PORTFOLIOS AT A GLANCE (CONTINUED)
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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 risk described under "Description of the
Portfolios -- All Cap Portfolio":
o Growth Investing Risk
o Small Company Risk
o Mid-cap Company Risk
o Undervalued Securities Risk
An investment in the Portfolio will fluctuate depending on its
investment performance. Since the All Cap Portfolio became
available to investors after January 1, 2000, performance
information for previous calender years is not available.
You should read the Relative Risk Comparison, presented with
this portfolio, in conjunction with the one presented in the
GCG Trust prospectus dated May 1, 1999 as amended June 30,
1999, August 17, 1999 and September 30, 1999, which gives
descriptions of the other portfolios offered by the GCG Trust.
9
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MORE INFORMATION
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A WORD Each portfolio in this prospectus, unless
ABOUT specifically noted in the portfolio's
PORTFOLIO investment strategy, is diversified, as
DIVERSITY defined in the Investment Company Act of 1940.
A diversified portfolio may not, as to 75% of
its total assets, invest more than 5% of its
total assets in any one issuer and may not
purchase more than 10% of the outstanding
voting securities of any one issuer (other
than U.S. Government securities). The
investment objective and certain of the
investment restrictions of each portfolio in
this prospectus are fundamental. This means
they may not be modified or changed without a
vote of the shareholders.
ADDITIONAL A Statement of Additional Information is made
INFORMATION a part of this prospectus. It identifies and
ABOUT THE discusses non-principal investment strategies and
PORTFOLIOS associated risks of each portfolio, as well as
investment restrictions, secondary or
temporary investments and associated risks, a
description of how the bond rating system
works and other information that may be
helpful to you in your decision to invest.
You may obtain a copy without charge by
calling our Customer Service Center at 1-800-
344-6864, or visiting the Securities and
Exchange Commission's website
(http://www.sec.gov).
NON-PRINCIPAL This prospectus does not describe various
INVESTMENTS types of securities, strategies and practices
AND which are available to, but are not the
STRATEGIES principal focus of, a particular portfolio.
Such non-principal investment and strategies
are discussed in the Statement of Additional
Information.
TEMPORARY This prospectus does not describe temporary
DEFENSIVE defensive positions. A portfolio may depart
POSOTIONS from its principal investment strategies by
temporarily investing for defensive purposes
when adverse market, economic or political
conditions exist. While a portfolio invests
defensively, it may not be able to pursue its
investment objective. A portfolio's defensive
investment position may not be effective in
protecting its value. The types of defensive
positions in which a portfolio may engage are
identified and discussed, together with their
risks, in the Statement of Additional
Information.
PORTFOLIO Before investing in a portfolio, you should
TURNOVER review its portfolio turnover rate, if available,
for an indication of the potential effect of
transaction costs on the portfolio's future
returns. In general, the greater the volume
of buying and selling by the portfolio, the
greater the impact that brokerage commissions
and other transaction costs will have on its
return. However, because the three Portfolios
included in this prospectus are new, none have
historic portfolio tunover rates available.
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
COUNSEL 1275 Pennsylvania Avenue, N.W., Washington,
D.C. 20004.
INDEPENDENT
AUDITORS Ernst & Young LLP, located at Two Commerce Square,
Suite 4000, 2001 Market Street, Philadelphia, PA 19103.
10
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DESCRIPTION OF THE PORTFOLIOS
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INVESTORS PORTFOLIO
PORTFOLIO
MANAGER Solomon Brothers Asset Management, Inc.
INVESTMENT
OBJECTIVE Seek long-term growth of capital. Current income is a
secondary objective.
PRINCIPAL The Portfolio invests primarily in equity securities
INVESTMENT of U.S. companies. The Portfolio may also invest in other
STRATEGY equity securities. To a lesser degree, the Portfolio invests in
income producing securities such as debt securities.
The Portfolio Manager emphasizes individual security selection
while spreading the Portfolio's investments across industries,
which may help to reduce risk. The Portfolio Manager focuses on
established large capitalization companies, defined by the
Portfolio Manager as companies with over $5 billion in market
capitalization, seeking to identify those companies with solid
growth potential at reasonable values. The Portfolio Manager
employs fundamental analysis to analyze each company in detail,
ranking its management, strategy and competitive market position.
In selecting individual companies for investment, the Portfolio
Manager looks for the following:
o Long-term history of performance
o Competitive market position
o Competitive products and services
o Strong cash flow
o High return on equity
o Strong financial condition
o Experienced and effective management
o Global scope
Investment ideas are subjected to extensive, fundamental analysis,
focusing on four key criteria:
o Operating characteristics
o Financial character
o Quality of management
o Valuation
Only companies that pass the Portfolio Manager's strict, in-depth
research and debate are eligible for purchase. The Portfolio
Manager's bottom-up approach focuses on creating an information
advantage through a thorough understanding of company
fundamentals.
11
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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PRINCIPAL Any investment in the Portfolio is subject to the following
RISKS principal risks described under "Introduction -- General Risk
Factors":
o Manager Risk
o Market and Company Risk
o Call Risk
o Income Risk
o Interest Rate Risk
o Credit Risk
o Maturity Risk
An investment in the Portfolio is subject to the following
additional principal risk:
o Growth Investing Risk. Growth stocks may be more
volatile than other stocks because they are more sensitive
to investor perceptions of the issuing company's growth
potential. Growth-oriented funds will typically
underperform when value investing is in favor.
This prospectus does not describe all of the risks of every
technique, strategy or temporary defensive position that the
Portfolio Manager may use. For such information, please refer
to the Statement of Additional Information.
MORE ON Solomon Brothers Asset Management, Inc. (SBAM) is a full-service,
THE global investment management organization and is wholly owned by
PORTFOLIO Solomon Smith Barney Holdings Inc., which is a subsidiary of
MANAGER Citigroup Inc. SBAM has been registered as a U.S. Investment
Advisor since 1989. As of September 30, 1999, SBAM manages over
$30 billion in assets, including a wide spectrum of equity and
fixed income products for both institutional and private investors,
including corporations, pension funds, public funds, central banks,
insurance companies, supranational organizations, endowments
and foundations. The headquarters of SBAM is located at 7 World
Trade Center New York City, NY 10048. Additionally, the firm
maintains investment management offices in Frankfurt, London,
Hong Kong and Tokyo.
Name Position and Recent Business Experience
---- ---------------------------------------
Ross Margolies Managing Director and Senior Portfolio Manager
Mr. Margolies has been working with insurance
companies throughout his career, including in
his previous positions at Lehman Brothers and
Prudential Securities. Prior to working for
SBAM, he served as Vice President in various
investment management positions for three years
at Guy Carpenter Corporation, one of the
world's largest reinsurance brokerage
companies. Mr. Margolies began his career at
SBAM management in 1994, also working in
various investment management positions.
John Cunningham Senior Portfolio Manager and Director
Mr. Cunningham joined SBAM in 1995 and has
ten years experience in the industry. Prior
to becoming a Portfolio Manager, Mr. Cunningham
was an investment banker in the Global power
group at Solomon Brothers Inc. Mr. Cunningham
has served in various investment management
positions during his tenure at SBAM.
12
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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LARGE CAP VALUE PORTFOLIO
Portfolio
Manager Capital Guardian Trust Company
Investment
Objective Seek long-term growth of capital and income
Principal The Portfolio Manager seeks to achieve the Portfolio's
Investment investment objective by investing, under normal market
Strategy conditions, primarily in equity and equity-related
securities of companies with market capitalization greater
than $1 billion at the time of purchase.
In selecting investments, greater consideration is given
to potential appreciation and future dividends than to current
income. The portfolio may hold American Depository Receipts,
which are U.S. registered securities of foreign issuers that
are denominated in U.S. dollars, and other securities representing
ownership interests in securities of foreign companies, such as
European Depository Receipts and Global Depository Receipts.
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 INVESTMENT RISK. Growth stocks may be more
volatile than other stocks because they are more
sensitive to investor perceptions of the issuing
company's growth potential. Growth-oriented funds
will typically underperform when value investing
is in favor.
This prospectus does not describe all of the risks of every
technique, strategy or temporary defensive position that the
Portfolio may use. For such information, please refer to the
Statement of Additional Information.
MORE ON Capital Guardian Trust Company ("Capital Guardian"), located at
THE 333 South Hope Street, Los Angeles, CA 90071, began management
PORTFOLIO of the Portfolio on February 1, 2000. Capital Guardian
MANAGER is a wholly owned subsidiary of Capital Group International,
Inc. Capital Guardian has been providing investment management
services since 1968 and manages over $98 billion
in assets as of September 30, 1999.
13
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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The following persons at Capital Guardian are primarily
responsible for the day-to-day investment decisions of
the Portfolio:
Name Position and Recent Business Experience
---- ---------------------------------------
Donnalisa P. Barum Ms. Barum is a Senior Vice President and
Portfolio Manager. She joined the Capital
Guardian Organization in 1986 where she
served in various portfolio management
positions.
Michael R. Erickson Mr. Erickson is a Senior Vice President
and Portfolio Manager. He joined the
Capital Guardian organization in 1987
where he served in various investment
management capacities.
David Fisher Mr. Fisher is Chairman of the Board of
Capital Guardian Group International,
Inc. and Capital Guardian. He joined
the Gapital Guardian organization in
1969 where he served in various
portfolio management positions.
Theodore R. Samuels Mr. Samuels is a Senior Vice President
and Director for Capital Guardian, as
well as a Director of Capital
International Research, Inc. He joined
the Capital Guardian organization in 1981
where he served in various portfolio
management positions.
Eugene P. Stein Mr. Stein is Executive Vice President,
a Director, a portfolio manager, and
Chairman of the Investment Committee
for Capital Guardian. He joined the
Capital Guardian organization in 1972
where he served in various portfolio
manager positions.
14
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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ALL CAP PORTFOLIO
PORTFOLIO
MANAGER Solomon Brothers Asset Management, Inc.
INVESTMENT Capital Appreciation through investment in securities
OBJECTIVE which the Portfolio Manager believes have above-average
capital appreciation potential
PRINCIPAL
INVESTMENT The Portfolio invests primarily in equity securities of
STRATEGY U.S. companies.
The Portfolio Manager emphasizes individual security
selection while spreading the Portfolio's investments
across industries, which may help to reduce risk. The Portfolio
Manager seeks to identify those companies that offer the greatest
potential for capital appreciation through careful fundamental
analysis of each company and its financial characteristics. The
Portfolio Manager evaluates companies of all sizes.
In selecting individual companies for investment, the Portfolio
Manager looks for the following:
o Share prices that appear to undervalue the company's
assets or do not adequately reflect factors such as
favorable industry trends, lack of investor recognition
or the short-term nature of earnings declines
o Special situations such as existing or possible changes
in management, corporate policies, capitalization or
regulatory environment which may boost earnings or the
market price of the company's shares
o Growth potential due to technological advances, new
products or services, new methods of marketing or
production, changes in demand or other significant new
developments which may enhance future earnings
Equity investments may involve added risks. Investors could lose
money on their investment in the Portfolio.
The Portfolio is non-diversified and, when compared with other
funds, may invest a portion of its assets in a particular issuer.
A non-diversified portfolio has greater exposure to the risk of
default or the poor earnings of the issuer.
The Portfolio may engage in active and frequent trading to
achieve its principal investment strategies. Frequent trading
increases transaction costs, which may affect the Portfolio's
performance.
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 Market and Company Risk
15
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
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An investment in the Portfolio is subject to the following
additional principal risks:
o GROWTH INVESTING RISK. Growth stocks may be more
volatile than other stocks because they are more
sensitive to investor perceptions of the issuing
company's growth potential. Growth-oriented funds
will typically underperform when value investing
is in favor.
o SMALL COMPANY RISK. Investing in securities of small
companies may involve greater risks than investing in
larger, more established issuers. Smaller companies
may have limited product lines, markets or financial
resources. Their securities may trade less frequently
and in more limited volume than the securities of
larger, more established companies. In addition,
smaller companies are typically subject to greater
changes in earnings and business prospects than are
larger companies. Consequently, the prices of small
company stocks tend to rise and fall in value more
than other stocks. Although investing in small
companies offers potential for above-average returns,
the companies may not succeed, and the value of stock
shares could decline significantly.
o MID-CAP COMPANY RISK. Investment in securities of
mid-cap companies entails greater risks than investments
in larger, more established companies. Mid-cap companies
tend to have more narrow product lines, more limited
financial resources and a more limited trading market
for their stocks, as compared with larger companies.
As a result, their stock prices may decline significantly
as market conditions change.
o UNDERVALUED SECURITIES RISK. Prices of securities react
to the economic condition of the company that issued the
security. The Portfolio's equity investments in an issuer
may rise and fall based on the issuer's actual and
anticipated earnings, changes in management and the
potential for takeovers and acquisitions. The Portfolio
Manager invests in securities that are undervalued based
on its belief that the market value of these securities
will rise due to anticipated events and investor
perceptions. If these events do not occur or are delayed,
or if investor perceptions about the securities do not
improve, the market price of these securities may not
rise or may fall.
This prospectus does not describe all of the risks of every
technique, strategy or temporary defensive position that the
Portfolio may use. For such information, please refer to the
Statement of Additional Information.
MORE ON Solomon Brothers Asset Management, Inc. (SBAM) is a full-
THE services, global investment management organization and
PORTFOLIO is wholly owned by Solomon Smith Barney Holdings Inc.,
MANAGER which is a subsidiary of Citigroup Inc. SBAM was registered
as a U.S. investment advisor in 1989. As of September 30,
1999, SBAM manages over $30 billion in assets, including a
wide spectrum of equity and fixed income products for both
institutional and private investors, including corporations,
pension funds, public funds, central banks, insurance
companies, supranational organizations, endowments and
foundations. The headquarters of SBAM is located at 7 World
Trade Center New York, NY 10048. Additionally, the firm
maintains investment management offices in Frankfurt, London,
Hong Kong and Tokyo.
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DESCRIPTION OF THE PORTFOLIOS (CONTINUED)
- -------------------------------------------------------------------------
Name Position and Recent Business Experience
---- ---------------------------------------
Ross Margolies Managing Director and Senior Portfolio Manager
Mr. Margolies has been working with insurance
companies throughout his career, including in
his previous positions at Lehman Brothers and
Prudential Securities. Prior to working for
SBAM, he served as Vice President in various
investment management positions for three years
at Guy Carpenter Corporation, one of the
world's largest reinsurance brokerage
companies. Mr. Margolies began his career at
SBAM management in 1994, also working in
various investment management positions.
Robert Donahue Director and Co-Portfolio Manager
Mr. Donahue has been employed by SBAM since 1987
and has managed various mutual funds and private
accounts during that time.
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OVERALL MANAGEMENT OF THE TRUST
- -------------------------------------------------------------------------
THE Directed Services, Inc. ("DSI") is the overall
ADVISER adviser to the GCG Trust. DSI is a New York
corporation and is a wholly owned indirect
subsidiary of ING Groep N.V., a global financial
services holding company. DSI is registered with the
SEC as an investment adviser and a broker-dealer.
DSI is the principal underwriter and distributor
of the variable contracts that Golden American Life
Insurance Company issues. The address of DSI is
1475 Dunwoody Drive, West Chester, Pennsylvania
19380.
DSI has overall responsibility for hiring
portfolio managers and for periodically
monitoring their performance. DSI considers
performance records in light of a portfolio's
investment objectives and policies. The GCG
Trust pays DSI for its services an advisory fee.
Out of this advisory fee, DSI in turn pays the
portfolio managers their respective portfolio
management fee.
In addition to advisory services, DSI provides
administrative and other services necessary for
the ordinary operation of the portfolios. DSI
procures and pays for the services and
information necessary to the proper conduct of
the portfolios' business, including custodial,
administrative, transfer agency, portfolio
accounting, dividend disbursing, auditing, and
ordinary legal services. DSI also acts as
liaison among the various service providers to
the portfolios, including the custodian,
portfolio accounting agent, portfolio managers,
and the insurance company or companies to which
the portfolios offer their shares. DSI also
ensures that the portfolios operate in compliance
with applicable legal requirements and monitors
the portfolio managers for compliance with
requirements under applicable law and with the
investment policies and restrictions of the
portfolios. DSI does not bear the expense of
brokerage fees and other transactional expenses
for securities or other assets (which are
generally considered part of the cost for the
assets), taxes (if any) paid by a portfolio,
interest on borrowing, fees and expenses of the
independent trustees, and extraordinary expenses,
such as litigation or indemnification expenses.
DSI has full investment discretion and makes all
determinations with respect to the investment of
a portfolio's assets and the purchase and sale of
portfolio securities for one or more portfolios.
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ADVISORY The Trust pays DSI an advisory fee at the following
FEE annual rates (based on average daily net assets):
Investors Series and 1.00% of first $500 million;
All Cap Series .95% of next $250 million;
Combined: .90% of next $500 million;
.85% thereafter.
Large Cap Value 1.00% of first $500 million;
Series: .95% of next $250 million;
.90% of next $500 million;
.85% thereafter.
Out of the advisory fee, 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.
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SHARE PRICE
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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 the next
business day. Net asset value per share is computed by
adding up the total value of the portfolio's investments
and other assets, subtracting its liabilities and then
dividing by the number of portfolio shares outstanding.
The net asset values per share of each portfolio,
offered in this prospectus, fluctuates in response to changes
in market conditions and other factors.
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
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valued using the amortized cost method of
valuation. The value of a foreign security is determined
in its national currency based upon the price on the
foreign exchange at close of business.
Securities traded in over-the-counter markets
outside the United States are valued at the last
available price in the over-the-counter market
before the time of valuation.
Debt securities, including those to be purchased
under firm commitment agreements (other than
obligations having a maturity sixty days or less
at their date of acquisition valued under the
amortized cost method), are normally valued on
the basis of quotes obtained from brokers and
dealers or pricing services, which take into
account appropriate factors such as institutional-
size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market
data. Debt obligations having a maturity of sixty
days or less may be valued at amortized cost
unless the portfolio manager believes that
amortized cost does not approximate market value.
When a portfolio writes a put or call option, the
amount of the premium is included in the
portfolio's assets and an equal amount is
included in its liabilities. The liability
thereafter is adjusted to the current market
value of the option. The premium a portfolio pays
for an option is recorded as an asset, and
subsequently adjusted to market value. Futures
and options traded on commodities exchanges or
boards of trade are valued at their closing
settlement price on such exchange or board of
trade. Foreign securities quoted in foreign
currencies generally are valued at translated
foreign market closing prices.
Trading in securities on exchanges and over-the-
counter markets in European and Pacific Basin
countries is normally completed well before 4:00
p.m., New York City time. The calculation of the
net asset value of a portfolio investing in
foreign securities may not take place
contemporaneously with the determination of the
prices of the securities included in the
calculation. Further, the prices of foreign
securities are determined using information
derived from pricing services and other sources.
Prices derived under these procedures will be
used in determining daily net asset value.
Information that becomes known to the GCG Trust
or its agents after the time that the net asset
value is calculated on any business day may be
assessed in determining net asset value per share
after the time of receipt of the information, but
will not be used to retroactively adjust the
price of the security so determined earlier or on
a prior day. Events that may affect the value of
these securities that occur between the time their
prices are determined and the time the portfolio's
net asset value is determined may not be reflected
in the calculation of net asset value of the
portfolio unless DSI or the portfolio manager,
acting under authority delegated by the Board of
Trustees, deems that the particular event would
materially affect net asset value. In this event,
the securities would be valued at fair market value
as determined in good faith by DSI or the portfolio
manager acting under the direction of the Board.
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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 of the GCG Trust has qualified and
expect to continue to qualify as a regulated
investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended
("Code"). As qualified regulated investment
companies, the portfolios are generally not
subject to Federal income tax on the part of
their investment company taxable income
(including any net capital gains) that they
distribute to shareholders. It is each
portfolio's intention to distribute all such
income and gains.
Shares of each portfolio are offered to the
Separate Accounts of insurance companies. Under
the Code, an insurance company pays no tax with
respect to income of a qualifying Separate
Account when the income is properly allocable to
the value of eligible variable annuity or
variable life insurance contracts. Under current
tax law, your gains under your Contract are taxed
only when you take them out. Contract purchasers
should review the Contract prospectus for a
discussion of the tax treatment applicable to
holders of the Contracts.
The foregoing is only a summary of some of the
important Federal income tax considerations
generally affecting a portfolio and you. Please
refer to the Statement of Additional Information
for more information about the tax status of the
portfolios. You should consult with your tax
adviser for more detailed information regarding
taxes applicable to the Contracts.
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<TABLE>
<C> <C>
TO OBTAIN THE GCG TRUST
MORE INFORMATION TRUSTEES
A Statement of Additional Information, dated Barnett Chernow,
February 1, 2000, has been filed with the Chairman and Trustee
Securities and Exchange Commission, and is
made a part of this prospectus by reference. J. Michael Earley, Trustee
To obtain a free copy of the Statement of Additional R. Barbara Gitenstein, Trustee
Information or to make inquiries about the portfolios,
please write to our Customer Service Center at Robert A. Grayson, Trustee
P.O. Box 2700, West Chester, Pennsylvania 19380
or call (800)366-0066, or access the SEC's website Elizabeth J. Newell, Trustee
(http://www.sec.gov).
Stanley B. Seidler, Trustee
Roger B. Vincent, Trustee
</TABLE>
Information about the GCG Trust can be reviewed
and copied at the SEC's Public Reference Room.
Information about its operation may be obtained
by calling 1-800-SEC-0330. You may obtain copies
of reports and other information about the GCG
Trust, for payment of a duplication fee, by
writing to Public Reference Section of the
Commission, Washington, D.C. 20549-6009.
ING VARIABLE ANNUITIES
2/00 106432
<PAGE>
<PAGE>
THE GCG TRUST
1475 Dunwoody Drive
West Chester, PA 19380
(800) 366-0066
Statement of Additional Information
The date of this Statement of Additional Information is
February 1, 2000
This Statement of Additional Information discusses the Investors
Portfolio, the Large Cap Value Portfolio, the and the All Cap
Portfolio, three portfolios (the "Portfolios") of The GCG Trust
(the "Trust"). The Trust is an open-end management investment
company organized as a Massachusetts business trust. The Portfolios'
Manager is Directed Services, Inc. ("DSI" or the "Manager").
This Statement of Additional Information is intended to supplement the
information provided to investors in the Prospectus dated February 1,
2000 and has been filed with the Securities and Exchange Commission
as part of the Trust's Registration Statement. Investors should note,
however, that this Statement of Additional Information is not itself
a prospectus and should be read carefully in conjunction with the
Prospectus and retained for future reference. The contents of this
Statement of Additional Information are incorporated by reference in
the Prospectus in their entirety. A copy of the Prospectus may be
obtained free of charge from the Trust at the address and telephone
number listed above.
MANAGER:
DIRECTED SERVICES, INC.
(800) 447-3644
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION 1
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 1
U.S. Government Securities 1
Debt Securities 1
High Yield Bonds 2
Brady Bonds 3
Sovereign Debt 4
Mortgage-Backed Securities 4
GNMA Certificates 4
FNMA and FHLMC Mortgage-Backed Obligations 5
Collateralized Mortgage Obligations (CMOs) 6
Other Mortgage-Backed Securities 6
Asset-Backed Securities 7
Variable and Floating Rate Securities 8
Derivatives 8
Banking Industry and Savings Industry Obligations 8
Commercial Paper 9
Repurchase Agreements 10
Reverse Repurchase Agreements 11
Lending Portfolio Securities 11
Other Investment Companies 11
Short Sales 12
Short Sales Against the Box 12
Futures Contracts and Options on Futures Contracts 12
General Description of Futures Contracts 12
Interest Rate Futures Contracts 12
Options on Futures Contracts 13
Stock Index Futures Contracts 13
Investment in Gold and Other Precious Metals 14
Gold Futures Contracts 14
Limitations 15
Options on Securities and Securities Indexes 16
Purchasing Options on Securities 16
Risks of Options Transactions 16
Writing Covered Call and Secured Put Options 17
Options on Securities Indexes 17
Over-the-Counter Options 18
General 18
Risks Associated with Futures and Futures Options 18
When-Issued or Delayed Delivery Securities 20
Foreign Securities 20
Foreign Currency Transactions 21
Options on Foreign Currencies 23
Common Stock and Other Equity Securities 23
Convertible Securities 23
Currency Management 23
Hybrid Investments 24
Dollar Roll Transactions 25
Equity and Debt Securities Issued or Guaranteed by
Supranational Organizations 26
Exchange Rate Related Securities 26
Geographical and Industry Concentration 26
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Illiquid Securities 27
Restricted Securities 27
Lease Obligation Bonds 27
Borrowing 27
Real Estate Securities 28
Swaps 28
Zero-Coupon Bonds 29
Small Companies 29
Strategic Transactions 29
Lending of Portfolio Securities 30
Special Situations 30
Warrants 31
INVESTMENT OBJECTIVES AND ADDITIONAL
INVESTMENT STRATEGIES AND ASSOCIATED RISKS 31
Investors Portfolio 31
Large Cap Value Portfolio 32
All Cap Portfolio 34
INVESTMENT RESTRICTIONS 35
Investors Portfolio 35
Large Cap Value Portfolio 37
All Cap Portfolio 38
MANAGEMENT OF THE TRUST 40
The Management Agreement 43
Portfolio Managers 45
Distribution of Trust Shares 45
PORTFOLIO TRANSACTIONS AND BROKERAGE 45
Investment Decisions 45
Brokerage and Research Services 46
NET ASSET VALUE 47
PERFORMANCE INFORMATION 48
TAXES 49
OTHER INFORMATION 51
Capitalization 51
Voting Rights 51
Purchase of Shares 52
Redemption of Shares 52
Exchanges 52
Custodian and Other Service Providers 53
Independent Auditors 53
Counsel 53
Registration Statement 53
Financial Statements 53
APPENDIX 1: DESCRIPTION OF BOND RATINGS A-1
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INTRODUCTION
This Statement of Additional Information is designed to elaborate upon
information contained in the 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 Prospectus. Terms not
defined herein will have the meanings given them in the Prospectus.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
U.S. government securities are obligations of, or are guaranteed by,
the U.S. government, its agencies or instrumentalities. Treasury bills,
notes, and bonds are direct obligations of the U.S. Treasury. Securities
guaranteed by the U.S. government include: federal agency obligations
guaranteed as to principal and interest by the U.S. Treasury (such as
GNMA certificates, described in the section on "Mortgage-Backed
Securities," and Federal Housing Administration debentures). In
guaranteed securities, the payment of principal and interest is
unconditionally guaranteed by the U.S. government, and thus they are of
the highest credit quality. Such direct obligations or guaranteed
securities are subject to variations in market value due to fluctuations
in interest rates, but, if held to maturity, the U.S. government is
obligated to or guarantees to pay them in full.
Securities issued by U.S. government instrumentalities and certain
federal agencies are neither direct obligations of nor guaranteed by the
Treasury. However, they involve federal sponsorship in one way or
another: some are backed by specific types of collateral; some are
supported by the issuer's right to borrow from the Treasury; some are
supported by the discretionary authority of the Treasury to purchase
certain obligations of the issuer; others are supported only by the
credit of the issuing government agency or instrumentality. These
agencies and instrumentalities include, but are not limited to, Federal
Land Banks, Farmers Home Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"),
Student Loan Mortgage Association, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, and Federal Home Loan Banks.
Each Portfolio 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
Each Portfolio 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 a Portfolio's Portfolio Manager.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market
value of corporate debt obligations may be expected to rise and fall
inversely with interest rates generally. There also exists the risk that
the issuers of the securities may not be able to meet their obligations
on interest or principal payments at the time called for by an instrument.
Bonds rated BBB or Baa, which are considered medium-grade category
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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, a Portfolio will not accrue any income on these
securities prior to delivery. The Portfolio will maintain in a
segregated account with its custodian an amount of cash or high quality
debt securities equal (on a daily marked-to-market basis) to the amount
of its commitment to purchase the when-issued securities or securities
purchased on a firm-commitment basis.
Many securities of foreign issuers are not rated by Moody's or
Standard and Poor's; therefore, the selection of such securities depends,
to a large extent, on the credit analysis performed or used by a
Portfolio 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 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 on which high yield bonds are traded may be less
liquid than the market for higher grade bonds. Less liquidity in
secondary trading market could adversely affect the price at which a
Portfolio could sell a high yield bond, and could adversely affect and
cause large fluctuations in the daily net asset value of the Portfolio's
shares. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of high
yield bonds, especially in a thinly traded market. When secondary
markets for high yield bonds are less liquid than the market for higher
grade bonds, it may be more difficult to value the securities because
such valuation may require more research, and elements of judgment may
play a greater role in the valuation because there is less reliable,
objective data available.
There are also certain risks involved in using credit ratings for
evaluating high yield bonds. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of
high yield bonds. Also, credit rating agencies may fail to reflect
subsequent events.
BRADY BONDS
"Brady Bonds," are created through the exchange of existing commercial
bank loans to sovereign entities for new obligations in connection with
debt restructuring under a plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Bonds are not
considered U.S. Government securities and are considered speculative.
Brady Plan debt restructuring have been implemented to date in several
countries, including Mexico, Venezuela, Argentina, Uruguay, Costa Rica,
Bulgaria, the Dominican Republic, Jordan, Nigeria, Bolivia, Ecuador,
Niger, Brazil, Peru, Panama, Poland and the Philippines (collectively,
the "Brady Countries"). It is expected that other countries will
undertake a Brady Plan debt restructuring in the future. Brady Bonds
have been issued only recently, and accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are U.S. dollar-denominated)
and they are actively traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds
which have the same maturity as the Brady Bonds. Interest payments on
these Brady Bonds generally are collateralized on a one-year or longer
rolling-forward basis by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of interest
payments or, in the case of floating rate bonds, initially is equal to at
least one year's interest payments based on the applicable interest rate
at the time and is adjusted at regular intervals thereafter.
Certain Brady Bonds are entitled to "value payments" in certain
circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as
having three or four valuation components: (i) the collateralized
repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv)
any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero coupon bonds
(or comparable collateral denominated in other currencies) and interest
coupon payments collateralized on an 18-month rolling-forward basis by
funds held in escrow by an agent for the bondholders. A significant
portion of the Venezuelan Brady Bonds and the Argentine Brady Bonds
issued to date have principal repayments at final maturity collateralized
by U.S. Treasury zero coupon bonds (or comparable collateral denominated
in other currencies) and/or interest coupon payments collateralized on a
14-month (for Venezuela) or 12-month (for Argentina) rolling-forward basis
by securities held by the Federal Reserve Bank of New York as collateral
agent.
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Brady Bonds involve various risk factors including residual risk and
the history of defaults with respect to commercial bank loans by public
and private entities of countries issuing Brady Bonds. There can be no
assurance that Brady Bonds in which a Portfolio may invest will not be
subject to restructuring arrangements or to requests for new credit,
which may cause a Portfolio to suffer a loss of interest or principal on
any of its holdings.
SOVEREIGN DEBT
Debt obligations known as "sovereign debt" are obligations of
governmental issuers in emerging market countries and industrialized
countries. Some Portfolios may invest in obligations issued or
guaranteed by a foreign government or its political subdivisions,
authorities, agencies, or instrumentalities, or by supranational
entities, which, at the time of investment, are rated A or better by
Standard & Poor's or Moody's or, if not rated by Standard & Poor's or
Moody's, determined by a 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
involved in negotiating the terms of these arrangements and may therefore
have access to information not available to other market participants.
MORTGAGE-BACKED SECURITIES
GNMA CERTIFICATES. Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership
of a pool of mortgage loans on which timely payment of interest and
principal is guaranteed by the full faith and credit of the U.S.
government. GNMA is a wholly owned U.S. government corporation within
the Department of Housing and
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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 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
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Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal Home
Loan Banks. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection
of principal and maintains reserves to protect holders against losses due
to default. PCs are not backed by the full faith and credit of the U.S.
government. As is the case with GNMA certificates, the actual maturity
and realized yield on particular FNMA and FHLMC pass-through securities
will vary based on the prepayment experience of the underlying pool of
mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between
a mortgage-backed bond and a mortgage pass-through security. Similar to
a bond, interest and prepaid principal are paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but
are more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified
form of call protection through a de facto breakdown of the underlying
pool of mortgages according to how quickly the loans are repaid. Monthly
payment of principal received from the pool of underlying investors,
including prepayments, is first returned to investors holding the
shortest maturity class. Investors holding the longer maturity classes
receive principal only after the first class has been retired. An
investor is partially guarded against a sooner-than-desired return of
principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
portfolios (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the
Bond offering are used to purchase mortgages or mortgage pass-through
certificates ("Collateral"). The Collateral is pledged to a third-party
trustee as security for the Bonds. Principal and interest payments from
the Collateral are used to pay principal on the Bonds in the order A, B,
C, Z. The portfolio A, B, and C Bonds all bear current interest.
Interest on the portfolio Z Bond is accrued and added to the principal; a
like amount is paid as principal on the portfolio A, B, or C Bond
currently being paid off. When the portfolio A, B, and C Bonds are paid
in full, interest and principal on the portfolio Z Bond begin to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to
borrow against their loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and
other secondary market issuers also create pass-through pools of
conventional residential mortgage loans. In addition, such issuers may be
the originators and/or servicers of the underlying mortgage loans as well
as the guarantors of the mortgage-backed securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct
or indirect government or agency guarantees of payments in the former
pools. Timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit.
The insurance and guarantees are issued by governmental entities, private
insurers, and the mortgage poolers. Such insurance, guarantees, and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-backed security meets a Portfolio' s investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or
guarantee arrangements.
Some Portfolios may buy mortgage-backed securities without insurance
or guarantees, if the Portfolio Manager determines that the securities
meet a Portfolio's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. A Portfolio will
not purchase mortgage-backed securities or any other assets which, in the
opinion of the Portfolio Manager, are illiquid if, as a
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result, the Portfolio will exceed its illiquidity cap. As new types of
mortgage-backed securities are developed and offered to investors, the
Portfolio Manager will, consistent with a Portfolio's investment objectives,
policies, and quality standards, consider making investments in such new
types of mortgage-backed securities.
It is expected that governmental, government-related, or private
entities may create mortgage loan pools and other mortgage-backed
securities offering mortgage pass-through and mortgage-collateralized
investments in addition to those described above. As new types of
mortgage-backed securities are developed and offered to investors,
investments in such new types of mortgage-backed securities may be
considered for the Portfolios.
ASSET-BACKED SECURITIES
Asset-backed securities (unrelated to mortgage loans) are securities
such as "CARSSM" ("Certificates for Automobile ReceivablesSM") and Credit
Card Receivable Securities. The Market Manager Portfolio may not invest
in these securities.
CARSSM represent undivided fractional interests in a trust whose
assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARSSM are "passed-through" monthly
to certificate holders, and are guaranteed up to certain amounts by a
letter of credit issued by a financial institution unaffiliated with the
trustee or originator of the trust. Underlying sales contracts are
subject to prepayment, which may reduce the overall return certificate
holders. Certificate holders may also experience delays in payment or
losses on CARSSM if the full amounts due on underlying sales contracts
are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts, or because of
depreciation, damage, or loss of the vehicles securing the contracts, or
other factors.
If consistent with its investment objective and policies, a Portfolio
may invest in "Credit Card Receivable Securities." Credit Card Receivable
Securities are asset-backed securities backed by receivables from
revolving credit card agreements. Credit balances on revolving credit
card agreements ("Accounts") are generally paid down more rapidly than
are Automobile Contracts. Most of the Credit Card Receivable Securities
issued publicly to date have been Pass-Through Certificates. In order to
lengthen the maturity of Credit Card Receivable Securities, most such
securities provide for a fixed period during which only interest payments
on the underlying Accounts are passed through to the security holder and
principal payments received on such Accounts are used to fund the
transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an
Account. The initial fixed period usually may be shortened upon the
occurrence of specified events which signal a potential deterioration in
the quality of the assets backing the security, such as the imposition of
a cap on interest rates. The ability of the issuer to extend the life of
an issue of Credit Card Receivable Securities thus depends upon the
continued generation of additional principal amounts in the underlying
Accounts during the initial period and the non-occurrence of specified
events. Competitive and general economic factors could adversely affect
the rate at which new receivables are created in an Account and conveyed
to an issuer, shortening the expected weighted average life of the
related Credit Card Receivable Security, and reducing its yield. An
acceleration in cardholders' payment rates or any other event which
shortens the period during which additional credit card charges on an
Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could have a similar effect on the weighted
average life and yield.
Credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holder
the right to set off certain amounts against balances owed on the credit
card, thereby reducing amounts paid on Accounts. In addition, unlike
most other asset-backed securities, Accounts are unsecured obligations of
the cardholder.
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VARIABLE AND FLOATING RATE SECURITIES
Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually,
etc.). Floating rate securities provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes. The
interest rate on variable or floating rate securities is ordinarily
determined by reference to or is a percentage of a bank's prime rate, the
90-day U.S. Treasury bill rate, the rate of return on commercial paper or
bank certificates of deposit, an index of short-term interest rates, or
some other objective measure.
Variable or floating rate securities frequently include a demand
feature entitling the holder to sell the securities to the issuer at par
value. In many cases, the demand feature can be exercised at any time on
7 days' notice; in other cases, the demand feature is exercisable at any
time on 30 days' notice or on similar notice at intervals of not more
than one year. Some securities which do not have variable or floating
interest rates may be accompanied by puts producing similar results and
price characteristics.
DERIVATIVES
Certain Portfolios may invest in derivatives, which are securities
and contracts whose value is based on performance of an underlying
financial asset, index or other investment. Examples of the derivatives
are CMOs, variable and floating rate securities, futures contracts,
options contracts, and forward currency exchange contracts.
Derivative securities and contracts may be used as a direct
investment or as a hedge for a portfolio of investments. Hedging
involves using a security or contract to offset investment risk, and can
reduce the risk of a position held in an investment portfolio. If a
Portfolio Manager's judgement about fluctuations in securities prices,
interest rates or currency prices proves incorrect, or the strategy does
not correlate well with a Portfolio's volatility. In addition, in the
event that non-exchange traded derivatives are used, they could result in
a loss if the counter-party to the transaction does not perform as
promised.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Each Portfolio may invest in (i) certificates of deposit, time
deposits, bankers' acceptances, and other short-term debt obligations
issued by commercial banks and in (ii) certificates of deposit, time
deposits, and other short-term obligations issued by savings and loan
associations ("S&Ls"). Some Portfolios may invest in obligations of
foreign branches of commercial banks and foreign banks so long as the
securities are U.S. dollar-denominated, and some Portfolios also may
invest in obligations of foreign branches of commercial banks and foreign
banks if the securities are not U.S. dollar-denominated. See "Foreign
Securities" discussion in this Statement of Additional Information for
further information regarding risks attending investment in foreign
securities.
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts
or bills of exchange, which are normally drawn by an importer or exporter
to pay for specific merchandise, and which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed-time deposits are bank
obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed-time deposits may be withdrawn on demand by the investor,
but may be subject to early withdrawal penalties which vary depending upon
market conditions and the remaining maturity of the obligation. There are
no contractual restrictions on the right to transfer a beneficial interest
in a fixed-time deposit to a third party, because there is no market for
such deposits. A Portfolio will not invest in fixed-time deposits (i)
which are not subject to prepayment or (ii) which provide for withdrawal
penalties upon prepayment (other than overnight deposits), if, in the
aggregate, more than 10% or 15%, depending on the Portfolio, of its
assets would be invested in such deposits, in repurchase agreements
maturing in more than seven days, and in other illiquid assets.
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Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of U.S. banks, which include: (i)
the possibility that their liquidity could be impaired because of future
political and economic developments; (ii) their obligations may be less
marketable than comparable obligations of U.S. banks; (iii) a foreign
jurisdiction might impose withholding taxes on interest income payable on
those obligations; (iv) foreign deposits may be seized or nationalized;
(v) foreign governmental restrictions, such as exchange controls, may be
adopted which might adversely affect the payment of principal and
interest on those obligations; and (vi) the selection of those
obligations may be more difficult because there may be less publicly
available information concerning foreign banks and/or because the
accounting, auditing, and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable
to U.S. banks. Foreign banks are not generally subject to examination by
any U.S. Government agency or instrumentality.
Certain of the Portfolios invest only in bank and S&L obligations as
specified in that Portfolio's investment policies. Other Portfolios,
except the Managed Global Portfolio, will not invest in obligations
issued by a commercial bank or S&L unless:
(i) the bank or S&L has total assets of at least $1 billion, or
the equivalent in other currencies, and the institution has
outstanding securities rated A or better by Moody's or Standard
and Poor's, or, if the institution has no outstanding securities
rated by Moody's or Standard & Poor's, it has, in the
determination of the Portfolio Manager, similar creditworthiness
to institutions having outstanding securities so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are insured
by the FDIC or the Savings Association Insurance Fund ("SAIF"), as
the case may be; and
(iii) in the case of a foreign bank, the security is, in the
determination of the Portfolio Manager, of an investment quality
comparable with other debt securities which may be purchased by
the Portfolio. These limitations do not prohibit investments in
securities issued by foreign branches of U.S. banks, provided such
U.S. banks meet the foregoing requirements.
The Managed Global Portfolio will not invest in obligations issued by
a U.S. or foreign commercial bank or S&L unless:
(i) the bank or S&L has total assets of at least $10 billion
(U.S.), or the equivalent in other currencies, and the institution
has outstanding securities rated A or better by Moody's or
Standard & Poor's, or, if the institution has no outstanding
securities rated by Moody's or Standard & Poor's, it has, in the
determination of the Portfolio Manager, similar creditworthiness
to institutions having outstanding securities so rated; and
(ii) in the case or a U.S. bank or S&L, its deposits are insured
by the FDIC or the SAIF, as the case may be.
COMMERCIAL PAPER
All of the Portfolios may invest in commercial paper (including
variable amount master demand notes and extendable command notes
("ECN")), denominated in U.S. dollars, issued by U.S. corporations or
foreign 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.
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Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements
between a Portfolio, as lender, and the borrower. These notes permit
daily changes in the amounts borrowed. The lender has the right to
increase or to decrease the amount under the note at any time up to the
full amount provided by the note agreement; and the borrower may prepay
up to the full amount of the note without penalty. Because variable
amount master demand notes are direct lending arrangements between the
lender and borrower, and because no secondary market exists for those
notes, such instruments will probably not be traded. However, the notes
are redeemable (and thus immediately repayable by the borrower) at face
value, plus accrued interest, at any time. In connection with master
demand note arrangements, the Portfolio Manager will monitor, on an
ongoing basis, the earning power, cash flow, and other liquidity ratios
of the borrower and its ability to pay principal and interest on demand.
The Portfolio Manager also will consider the extent to which the variable
amount master demand notes are backed by bank letters of credit. These
notes generally are not rated by Moody's or Standard & Poor's; the
Portfolio may invest in them only if the Portfolio Manager believes that
at the time of investment, the notes are of comparable quality to the
other commercial paper in which the Portfolio may invest. Master demand
notes are considered by the Portfolio to have a maturity of one day,
unless the Portfolio Manager has reason to believe that the borrower
could not make immediate repayment upon demand. See the Appendix for a
description of Moody's and Standard & Poor's ratings applicable to
commercial paper.
For purposes of limitations on purchases of restricted securities,
commercial paper issued pursuant to Section 4(2) of the 1933 Act as part
of a private placement that meets liquidity standards under procedures
adopted by the Board shall not be considered to be restricted.
REPURCHASE AGREEMENTS
All Portfolios may invest in repurchase agreements. The term of such
an agreement is generally quite short, possibly overnight or for a few
days, although it may extend over a number of months (up to one year)
from the date of delivery. The resale price is in excess of the purchase
price by an amount which reflects an agreed-upon market rate of return,
effective for the period of time the Portfolio is invested in the
security. This results in a fixed rate of return protected from market
fluctuations during the period of the agreement. This rate is not tied
to the coupon rate on the security subject to the repurchase agreement.
The Portfolio Manager monitors the value of the underlying securities
at the time the repurchase agreement is entered into and at all times
during the term of the agreement to ensure that their value always equals
or exceeds the agreed-upon repurchase price to be paid to the Portfolio.
The Portfolio Manager, in accordance with procedures established by the
Board of Trustees, also evaluates the creditworthiness and financial
responsibility of the banks and brokers or dealers with which the
Portfolio enters into repurchase agreements.
A Portfolio may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Portfolio
engages in repurchase transactions, obtaining collateral at least equal
in value to the repurchase obligation, and marking the collateral to
market on a daily basis.
A Portfolio may not enter into a repurchase agreement having more than
seven days remaining to maturity if, as a result, such agreements,
together with any other securities that are not readily marketable, would
exceed that Portfolio's limitation, either 10% or 15% of the net assets
of the Portfolio, depending on the Portfolio, on investing in illiquid
securities. If the seller should become bankrupt or default on its
obligations to repurchase the securities, a Portfolio may experience
delay or difficulties in exercising its rights to the securities held as
collateral and might incur a loss if the value of the securities should
decline. A Portfolio also might incur disposition costs in connection
with liquidating the securities.
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REVERSE REPURCHASE AGREEMENTS
A reverse repurchase agreement involves the sale of a security by the
Portfolio and its agreement to repurchase the instrument at a specified
time and price. A Portfolio will use the proceeds of a reverse
repurchase agreement to purchase other money market instruments which
either mature at a date simultaneous with or prior to the expiration of
the reverse repurchase agreement or which are held under an agreement to
resell maturing as of that time. A Portfolio will maintain a segregated
account consisting of cash and/or securities to cover its obligations
under reverse repurchase agreements. Under the Investment Company Act of
1940, reverse repurchase agreements may be considered to be borrowings by
the seller; accordingly, a Portfolio will limit its investments in
reverse repurchase agreements consistent with the borrowing limits
applicable to the Portfolio. See "Borrowing" for further information on
these limits. The use of reverse repurchase agreements by a Portfolio
creates leverage which increases a Portfolio's investment risk. If the
income and gains on securities purchased with the proceeds of reverse
repurchase agreements exceed the cost of the agreements, the Portfolio's
earnings or net asset value will increase faster than otherwise would be
the case; conversely, if the income and gains fail to exceed the costs,
earnings or net asset value would decline faster than otherwise would be
the case.
LENDING PORTFOLIO SECURITIES
Some Portfolios may lend portfolio securities to broker-dealers or
institutional investors for the purpose of realizing additional income.
A Portfolio will only enter into this type of transaction if (1) the loan
is fully collateralized at all times with U.S. Government securities,
cash, or cash equivalents (cash, U.S. Government securities, negotiable
certificates of deposit, bankers' acceptances, or letters of credit)
maintained on a daily marked-to-market basis, in an amount at least equal
to the value of the securities loaned; (2) it may at any time call the
loan and obtain the return of the securities loaned within five business
days; (3) it will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will
not at any time exceed 33% of the total assets of the Portfolio. As with
other extensions of secured credit, loans of portfolio securities involve
some risk of loss of rights in the collateral should the borrower fail
financially. Accordingly, the Portfolio Manager will monitor the value
of the collateral, which will be marked-to- market daily, and will
monitor the creditworthiness of the borrowers. There is no assurance
that a borrower will return any securities loaned; however, as discussed
above, a borrower of securities from a Portfolio must maintain with the
Portfolio cash or U.S. Government securities equal to at least 100% of
the market value of the securities borrowed. Voting rights attached to
the loaned securities may pass to the borrower with the lending of
portfolio securities; however, a Portfolio lending such voting securities
may call them if important shareholder meetings are imminent. A
Portfolio may only lend portfolio securities to entities that are not
affiliated with either the Manager or a Portfolio Manager.
OTHER INVESTMENT COMPANIES
All Portfolios may invest in shares issued by other investment
companies. A Portfolio is limited in the degree to which it may invest
in shares of another investment company in that it may not, at the time
of the purchase, (1) acquire more than 3% of the outstanding voting
shares of the investment company, (2) invest more than 5% of the
Portfolio's total assets in the investment company, or (3) invest more
than 10% of the Portfolio's total assets in all investment company
holdings. As a shareholder in any investment company, a Portfolio will
bear its ratable share of the investment company's expenses, including
management fees in the case of a management investment company.
Portfolios may invest in shares issued by other investment companies to
the extent allowable by the 1940 Act.
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SHORT SALES
A short sale is a transaction in which the Portfolio sells a security
it does not own in anticipation of a decline in market price. A
Portfolio may make short sales to offset a potential decline in a long
position or a group of long positions, or if the Portfolio Manager
believes that a decline in the price of a particular security or group of
securities is likely.
The Portfolio's obligation to replace the security borrowed in
connection with the short sale will be secured by collateral deposited
with 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 Prospectuses.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL DESCRIPTION OF FUTURES CONTRACTS. A futures contract provides
for the future sale by one party and purchase by another party of a
specified amount of a particular financial instrument (debt security) or
commodity for a specified price at a designated date, time, and place.
Although futures contracts by their terms require actual future delivery
of and payment for financial instruments, commodities futures contracts
are usually closed out before the delivery date. Closing out an open
futures contract position is effected by entering into an offsetting sale
or purchase, respectively, for the same aggregate amount of the same
financial instrument or commodities and the same delivery date. Where a
Portfolio has sold a futures contract, if the offsetting purchase price
is less than the original futures contract sale price, the Portfolio
realizes a gain; if it is more, the Portfolio realizes a loss. Where a
Portfolio has purchased a futures contract, if the offsetting price is
more than the original futures contract purchase price, the Portfolio
realizes a gain; if it is less, the Portfolio realizes a loss.
INTEREST RATE FUTURES CONTRACTS. An interest rate futures contract is
an obligation traded on an exchange or board of trade that requires the
purchaser to accept delivery, and the seller to make delivery, of a
specified quantity of the underlying financial instrument, such as U.S.
Treasury bills and bonds, in a stated delivery month, at a price fixed in
the contract.
A Portfolio may purchase and sell interest rate futures as a hedge
against adverse changes in debt instruments and other interest rate
sensitive securities. As a hedging strategy a Portfolio might employ, a
Portfolio would purchase an interest rate futures contract when it is not
fully invested in long-term debt securities but wishes to defer their
purchase for some time until it can orderly invest in such securities or
because short-term yields are higher than long-term yields. Such a
purchase would enable the Portfolio to earn the income on a short-term
security while at the same time minimizing the effect of all or part of
an increase in the market price of the long-term debt security which the
Portfolio intends to purchase in the future. A rise in the price of the
long-term debt security prior to its purchase either would be offset by
an increase in the value of the futures
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contract purchased by the Portfolio or avoided by taking delivery of the
debt securities under the futures contract.
A Portfolio would sell an interest rate futures contract in order to
continue to receive the income from a long-term debt security, while
endeavoring to avoid part or all of the decline in market value of that
security which would accompany an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security held
by the Portfolio would be substantially offset by the ability of the
Portfolio to repurchase at a lower price the interest rate futures
contract previously sold. While the Portfolio could sell the long-term
debt security and invest in a short-term security, ordinarily the
Portfolio would give up income on its investment, since long-term rates
normally exceed short-term rates.
OPTIONS ON FUTURES CONTRACTS. A futures option gives the Portfolio
the right, in return for the premium paid, to assume a long position (in
the case of a call) or short position (in the case of a put) in a futures
contract at a specified exercise price prior to the expiration of the
option. Upon exercise of a call option, the purchaser acquires a long
position in the futures contract and the writer of the option is assigned
the opposite short position. In the case of a put option, the converse
is true. A futures option may be closed out (before exercise or
expiration) by an offsetting purchase or sale of a futures option by the
Portfolio.
The Portfolio may use options on futures contracts in connection with
hedging strategies. Generally these strategies would be employed under
the same market conditions in which a Portfolio would use put and call
options on debt securities, as described hereafter in "Options on
Securities and Securities Indexes."
STOCK INDEX FUTURES CONTRACTS. A "stock index" assigns relative
values to the common stock included in an index (for example, the
Standard & Poor's 500 Index of Composite Stocks or the New York Stock
Exchange Composite Index), and the index fluctuates with changes in the
market values of such stocks. A stock index futures contract is a
bilateral agreement to accept or make payment, depending on whether a
contract is purchased or sold, of an amount of cash equal to a specified
dollar amount multiplied by the difference between the stock index value
at the close of the last trading day of the contract and the price at
which the futures contract is originally purchased or sold.
To the extent that changes in the value of a Portfolio corresponds to
changes in a given stock index, the sale of futures contracts on that
index ("short hedge") would substantially reduce the risk to the
Portfolio of a market decline and, by so doing, provide an alternative to
a liquidation of securities position, which may be difficult to
accomplish in a rapid and orderly fashion. Stock index futures contracts
might also be sold:
(1) when a sale of portfolio securities at that time would appear
to be disadvantageous in the long-term because such liquidation
would:
(a) forego possible price appreciation,
(b) create a situation in which the securities would be
difficult to repurchase, or
(c) create substantial brokerage commissions;
(2) when a liquidation of the portfolio has commenced or is
contemplated, but there is, in the Portfolio Manager's
determination, a substantial risk of a major price decline before
liquidation can be completed; or
(3) to close out stock index futures purchase transactions.
Where a Portfolio anticipates a significant market or market sector
advance, the purchase of a stock index futures contract ("long hedge")
affords a hedge against not participating in such advance
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at a time when the Portfolio is not fully invested. Such purchases would
serve as a temporary substitute for the purchase of individual stocks, which
may then be purchased in an orderly fashion. As purchases of stock are made,
an amount of index futures contracts which is comparable to the amount of
stock purchased would be terminated by offsetting closing sales
transactions. Stock index futures might also be purchased:
(1) if the Portfolio is attempting to purchase equity positions
in issues which it had or was having difficulty purchasing at
prices considered by the Portfolio Manager to be fair value based
upon the price of the stock at the time it qualified for inclusion
in the portfolio, or
(2) to close out stock index futures sales transactions.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS. Some Portfolios may
invest in gold bullion and coins and other precious metals (silver or
platinum) bullion and in futures contracts with respect to such metals.
In order to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, each Portfolio (with
the exception of the Hard Assets Portfolio) intends to manage its metal
investments and/or futures contracts on metals so that less than 10% of
the gross income of the Portfolio for tax purposes during any fiscal year
(the current limit on so-called non-qualifying income) is derived from
these and other sources that produce such non-qualifying income.
Metals will not be purchased in any form that is not readily
marketable, and gold coins will be purchased for their intrinsic value
only (i.e., coins) will not be purchased for their numismatic value. Any
metals purchased by a Portfolio will be delivered to and stored with a
qualified custodian bank. Metal investments do not generate interest or
dividend income.
Metal investments are considered speculative and are affected by
various worldwide economic, financial, and political factors. Prices may
fluctuate sharply over short time periods due to changes in inflation
expectations in various countries, metal sales by central banks of
governments or international agencies, speculation, changes in industrial
and commercial demand, and governmental prohibitions or restriction on
the private ownership of certain precious metals or minerals.
Furthermore, at the present time, there are four major producers of gold
bullion: the Republic of South Africa, the United States, Canada, and
Australia. Political and economic conditions in these countries will
have a direct effect on the mining and distribution of gold and,
consequently, on its price. Many of these risks also may affect the value
of securities of companies engaged in operations respecting gold and
other precious metals.
GOLD FUTURES CONTRACTS. A gold futures contract is a standardized
contract which is traded on a regulated commodity futures exchange, and
which provides for the future delivery of a specified amount of gold at a
specified date, time, and price. When the Portfolio purchases a gold
futures contract it becomes obligated to take delivery of and pay for the
gold from the seller, and when the Portfolio sells a gold futures
contract, it becomes obligated to make delivery of precious metals to the
purchaser, in each case at a designated date and price. A Portfolio may
be able to enter into gold futures contracts only for the purpose of
hedging its holdings or intended holdings of gold stocks and gold
bullion. The Portfolio will not engage in these contracts for
speculation or for achieving leverage. The Portfolio's hedging
activities may include purchases of futures contracts as an offset
against the effect of anticipated increases in the price of gold or sales
of futures contracts as an offset against the effect of anticipated
declines in the price of gold.
As long as required by regulatory authorities, each investing
Portfolio will limit its use of futures contracts and futures options to
hedging transactions and other strategies as described under the heading
"Limitations" in this section, in order to avoid being deemed a commodity
pool. For example, a Portfolio might use futures contracts to hedge
against anticipated changes in interest rates that might adversely affect
either the value of the Portfolio's securities or the price of the
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securities which the Portfolio intends to purchase. The Portfolio's
hedging may include sales of futures contracts as an offset against the
effect of expected increases in interest rates and purchases of futures
contracts as an offset against the effect of expected declines in
interest rates. Although other techniques could be used to reduce that
Portfolio's exposure to interest rate fluctuations, a Portfolio may be
able to hedge its exposure more effectively and perhaps at a lower cost
by using futures contracts and futures options. See this Statement of
Additional Information for a discussion of other strategies involving
futures and futures options.
If a purchase or sale of a futures contract is made by a Portfolio, it
is required to deposit with its custodian a specified amount of cash
and/or securities ("initial margin"). The margin required for a futures
contract is set by the exchange or board of trade on which the contract
is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith
deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have
been satisfied. Each investing Portfolio expects to earn interest income
on its initial margin deposits.
A futures contract held by a Portfolio is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Portfolio pays or receives cash, called "variation margin" equal to the
daily change in value of the futures contract. This process is known as
"marking to market." The payment or receipt of the variation margin does
not represent a borrowing or loan by a Portfolio but is settlement
between the Portfolio and the broker of the amount one would owe the
other if the futures contract expired. In computing daily net asset
value, each Portfolio will mark-to-market its open futures positions.
A Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts it writes. Such
margin deposits will vary depending on the nature of the underlying
futures contract (including the related initial margin requirements), the
current market value of the option, and other futures positions held by
the Portfolio.
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 gain, or if it is more, the Portfolio
realizes a loss. Conversely, if an offsetting sale price is more
than the original purchase price, the Portfolio realizes a gain,
or if it is less, the Portfolio realizes a loss. The transaction
costs must also be included in these calculations.
LIMITATIONS. When purchasing a futures contract, a Portfolio must
maintain with its custodian cash or securities (including any margin)
equal to the market value of such contract. When writing a call option
on a futures contract, the Portfolio similarly will maintain with its
custodian cash and/or securities (including any margin) equal to the
amount such option is "in-the-money" until the option expires or is
closed out by the Portfolio. A call option is "in-the-money" if the
value of the futures contract that is the subject of the option exceeds
the exercise price.
A Portfolio may not maintain open short positions in futures contracts
or call options written on futures contracts if, in the aggregate, the
market value of all such open positions exceeds the current value of its
portfolio securities, plus or minus unrealized gains and losses on the
open positions, adjusted for the historical relative volatility of the
relationship between the Portfolio and the positions. For this purpose,
to the extent the Portfolio has written call options on specific
securities it owns, the value of those securities will be deducted from
the current market value of the securities portfolio.
In compliance with the requirements of the Commodity Futures Trading
Commission ("CFTC") under which an investment company may engage in
futures transactions, the Trust will comply with certain regulations of
the CFTC to qualify for an exclusion from being a "commodity pool." The
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regulations require that the Trust enter into futures and options (1) for
"bona fide hedging" purposes, without regard to the percentage of assets
committed to initial margin and options premiums, or (2) for other
strategies, provided that the aggregate initial margin and premiums
required to establish such positions do not exceed 5% of the liquidation
value of a Portfolio, after taking into account unrealized profits and
unrealized gains on any such contracts entered into.
OPTIONS ON SECURITIES AND SECURITIES INDEXES
PURCHASING OPTIONS ON SECURITIES. An option on a security is a
contract that gives the purchaser of the option, in return or the premium
paid, the right to buy a specified security (in the case of a call
option) or to sell a specified security (in the case of a put option)
from or to the seller ("writer") of the option at a designated price
during the term of the option. A Portfolio may purchase put options on
securities to protect holdings in an underlying or related security
against a substantial decline in market value. Securities are considered
related if their price movements generally correlate to one another. For
example, the purchase of put options on debt securities held by a
Portfolio would enable it to protect, at least partially, an unrealized
gain in an appreciated security without actually selling the security.
In addition, the Portfolio would continue to receive interest income on
such security.
A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly
manner. A Portfolio may sell put or call options it has previously
purchased, which could result in a net gain or loss depending on whether
the amount realized on the sale is more or less than the premium and
other transactional costs paid on the put or call option which is sold.
A Portfolio may purchase long-term exchange traded equity options
called Long Term Equity Anticipation Securities ("LEAPS") and Buy Write
Option Unitary Derivatives ("BOUNDS"). LEAPs provide the holder the
opportunity to participate in the underlying securities' appreciation in
excess of a fixed dollar amount, BOUNDs provide a holder the opportunity
to retain dividends on the underlying securities while potentially
participating in underlying securities' 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
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trading interest, restrictions imposed by national securities exchanges,
trading halts or suspensions with respect to call options or their
underlying securities, inadequacy of the facilities of national securities
exchanges or the Options Clearing Corporation due to a high trading volume
or other event, and a decision by one or more national securities exchanges
to discontinue the trading of call options or to impose restrictions on types
of orders.
Since option premiums paid or received by a Portfolio, as compared to
underlying investments, are small in relation to the market value of such
investments, buying and selling put and call options offer large amounts
of leverage. Thus, the leverage offered by trading in options could
result in the Portfolio's net asset value being more sensitive to changes
in the value of the underlying securities.
WRITING COVERED CALL AND SECURED PUT OPTIONS. In order to earn
additional income on its portfolio securities or to protect partially
against declines in the value of such securities, a Portfolio may write
covered call options. The exercise price of a call option may be below,
equal to, or above the current market value of the underlying security at
the time the option is written. During the option period, a covered call
option writer may be assigned an exercise notice by the broker-dealer
through whom such call option was sold requiring the writer to deliver
the underlying security against payment of the exercise price. This
obligation is terminated upon the expiration of the option period or at
such earlier time in which the writer effects a closing purchase
transaction. Closing purchase transactions will ordinarily be effected
to realize a profit on an outstanding call option, to prevent an
underlying security from being called, to permit the sale of the
underlying security, or to enable the Portfolio to write another call
option on the underlying security with either a different exercise price
or expiration date or both.
In order to earn additional income or to facilitate its ability to
purchase a security at a price lower than the current market price of
such security, a Portfolio may write secured put options. During the
option period, the writer of a put option may be assigned an exercise
notice by the broker-dealer through whom the option was sold requiring
the writer to purchase the underlying security at the exercise price.
A Portfolio may write a call or put option only if the option is
"covered" or "secured" by the Portfolio holding a position in the
underlying securities. This means that so long as the Portfolio is
obligated as the writer of a call option, it will own the underlying
securities subject to the option or hold a call with the same exercise
price, the same exercise period, and on the same securities as the
written call. Alternatively, a Portfolio may maintain, in a segregated
account with the Trust's custodian, cash and/or securities with a value
sufficient to meet its obligation as writer of the option. A put is
secured if the Portfolio maintains cash and/or securities with a value
equal to the exercise price in a segregated account, or holds a put on
the same underlying security at an equal or greater 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.
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OVER-THE-COUNTER OPTIONS. Certain Portfolios may write or purchase
options in privately negotiated domestic or foreign transactions ("OTC
Options"), as well as exchange-traded or "listed" options. OTC Options
can be closed out only by agreement with the other party to the
transaction, and thus any OTC Options purchased by a Portfolio will be
considered an Illiquid Security. In addition, certain OTC Options on
foreign currencies are traded through financial institutions acting as
market-makers in such options and the underlying currencies.
The staff of the SEC has taken the position that purchased over-the-
counter options and assets used to cover written over-the-counter options
are illiquid and, therefore, together with other illiquid securities,
cannot exceed a certain percentage of a Portfolio's assets (the "SEC
illiquidity ceiling"). Except as provided below, the Portfolios intend to
write over-the-counter options only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York.
Also, the contracts which such Portfolio have in place with such primary
dealers will provide that each Portfolio has the absolute right to
repurchase any option it writes at any time at a price which represents
the fair market value, as determined in good faith through negotiation
between the parties, but which in no event will exceed a price determined
pursuant to a formula in the contract. Although the specific formula may
vary between contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by the Portfolio
for writing the option, plus the amount, if any, of the option's
intrinsic value (i.e., the amount that the option is in-the-money). The
formula may also include a factor to account for the difference between
the price of the security and the strike price of the option if the
option is written out-of-money. A Portfolio will treat all or a part of
the formula price as illiquid for purposes of the SEC illiquidity
ceiling. Certain Portfolio may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets
used to cover these options as illiquid for purposes of such SEC
illiquidity ceiling.
OTC Options entail risks in addition to the risks of exchange-traded
options. Exchange-traded options are in effect guaranteed by the Options
Clearing Corporation, while a Portfolio relies on the party from whom it
purchases an OTC Option to perform if the Portfolio exercises the option.
With OTC Options, if the transacting dealer fails to make or take
delivery of the securities or amount of foreign currency underlying an
option it has written, in accordance with the terms of that option, the
Portfolio will lose the premium paid for the option as well as any
anticipated benefit of the transaction. Furthermore, OTC Options are less
liquid than exchange-traded options.
GENERAL. The principal factors affecting the market value of a put or
a call option include supply and demand, interest rates, the current
market price of the underlying security in relation to the exercise price
of the option, the volatility of the underlying security, and the time
remaining until the expiration date.
The premium paid for a put or call option purchased by a Portfolio is
recorded as an asset of the Portfolio and subsequently adjusted. The
premium received for an option written by a Portfolio is included in the
Portfolio's assets and an equal amount is included in its liabilities.
The value of an option purchased or written is marked to market daily and
valued at the closing price on the exchange on which it is traded or, if
not traded on an exchange or no closing price is available, at the mean
between the last bid and asked prices.
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
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a loss on both the hedged securities in a Portfolio and the hedging
vehicle so that the Portfolio's return might have been better if hedging
had not been attempted. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures
and futures options on securities, including technical influences in
futures trading and futures options, and differences between the
financial instruments being hedged and the instruments underlying the
standard contracts available for trading in such respects as interest
rate levels, maturities, and creditworthiness of issuers. A decision as
to whether, when, and how to hedge involves the exercise of skill and
judgment and even a well conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected interest rate trends.
There can be no assurance that a liquid market will exist at a time
when a Portfolio seeks to close out a futures contract or a futures
option position. Most futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a
single day; once the daily limit has been reached on a particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain of these instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an
active secondary market will develop or continue to exist. The daily
limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts
to substantial losses. Lack of a liquid market for any reason may prevent
the Portfolio from liquidating an unfavorable position and the Portfolio
would remain obligated to meet margin requirements and continue to incur
losses until the position is closed.
In most instances, Portfolios will only enter into futures contracts
or futures options which are standardized and traded on a U.S. exchange
or board of trade, or, in the case of futures options, for which an
established over-the-counter market exists. A Portfolio will not enter
into a futures contract or purchase a futures option if immediately
thereafter the initial margin deposits for futures contracts held by the
Portfolio plus premiums paid by it for open futures options positions,
less the amount by which any such positions are "in-the-money," would
exceed 5% of the Portfolio's total assets.
Foreign markets may offer advantages such as trading in indexes that
are not currently traded in the United States. Foreign markets, however,
may have greater risk potential than domestic markets. Unlike trading on
domestic commodity exchanges, trading on foreign commodity markets is not
regulated by the CFTC and may be subject to greater risk than trading on
domestic exchanges. For example, some foreign exchanges are principal
markets so that no common clearing facility exists and a trader may look
only to the broker for performance of the contract. Trading in foreign
futures or foreign options contracts may not be afforded certain
of the protective measures provided by the Commodity Exchange Act, the
CFTC's regulations, and the rules of the National Futures Association and
any domestic exchange, including the right to use reparations proceedings
before the CFTC and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. Amounts received
for foreign futures or foreign options transactions may not be provided
the same protections as funds received in respect of transactions on
United States futures exchanges. A Portfolio could incur losses or lose
any profits that had been realized in trading by adverse changes in the
exchange rate of the currency in which the transaction is denominated.
Transactions on foreign exchanges may include both commodities that are
traded on domestic exchanges and boards of trade and those that are not.
The Trust reserves the right to engage in other types of futures
transactions in the future and to use futures and related options for
other than hedging purposes to the extent permitted by regulatory
authorities.
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WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
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 securities in an amount
sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns.
Purchasing securities on a when-issued or delayed delivery basis involves
a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of
decline in value of the Portfolio's other assets. Although a Portfolio
would generally purchase securities on a when-issued basis or enter into
forward commitments with the intention of acquiring securities, the
Portfolio may dispose of a when-issued or delayed delivery security prior
to settlement if the Portfolio Manager deems it appropriate to do so.
The Portfolio may realize short-term profits or losses upon such sales.
FOREIGN SECURITIES
Each Portfolio 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.
Investments in foreign securities offer potential benefits not
available solely in securities of domestic issuers by offering the
opportunity to invest in foreign issuers that appear to offer growth
potential, or in foreign countries with economic policies or business
cycles different from those of the United States, or to reduce
fluctuations in portfolio value by taking advantage of foreign stock
markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers.
Such risks include fluctuations in foreign exchange rates, future
political and economic developments, and the possible imposition of
exchange controls or other foreign governmental laws or restrictions.
Since each of these Portfolios may invest in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. In addition, with respect to
certain countries, there is the possibility of expropriation of assets,
confiscatory taxation, other foreign taxation, political or social
instability, or diplomatic developments that could adversely affect
investments in those countries.
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be
subject to accounting, auditing, and financial reporting standards and
requirements comparable to or as uniform as those of U.S. companies.
Foreign securities markets, while growing in volume, have, for the most
part, substantially less volume than U.S. markets. Securities of many
foreign companies are less liquid and their prices more volatile
than securities of comparable U.S. companies. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation
of exchanges, brokers, and issuers than there is in the United States.
A Portfolio might have greater difficulty taking appropriate legal action
with respect to foreign investments in non-U.S. courts than with respect
to domestic issuers in U.S. courts. In addition, transactions in foreign
securities may involve greater time from the trade date until settlement
than domestic securities transactions and involve the risk of possible
losses through the holding of securities by custodians and securities
depositories in foreign countries.
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
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invest potentially involves a high degree of risk and may be deemed
the equivalent in terms of quality to high risk, low rated securities
(i.e., high yield bonds) and subject to many of the same risks as such
securities. Similarly, the Portfolio may have difficulty disposing of
certain of these debt obligations because there may be a thin trading
market for such securities. In the event a governmental issuer defaults
on its obligations, the Portfolio may have limited legal recourse against
the issuer or guarantor, if any. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the
holder of foreign government debt securities to obtain recourse may be
subject to the political climate in the relevant country. The issuers of
the government debt securities in which the Portfolio may invest have in
the past experienced substantial difficulties in servicing their external
debt obligations, which has led to defaults on certain obligations and
the restructuring of certain indebtedness. See "Description of Securities
and Investment Techniques--High Yield Bonds" and "Debt Securities--
Sovereign Debt".
Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is
located and may not be recoverable by a Portfolio or its investors.
ADRs are Depositary Receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities issued by a
foreign corporation. EDRs and GDRs are typically issued by foreign banks
or trust companies, although they also may be issued by U.S. banks or
trust companies, and evidence ownership of underlying securities issued
by either a foreign or U.S. corporation. Generally, Depositary Receipts
in registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities
markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying
securities into which they may be converted. In addition, the issuers of
the securities underlying unsponsored Depositary Receipts are not
obligated to disclose material information in the United States and,
therefore, there may be less information available regarding such issuers
and there may not be a correlation between such information and the
market value of the Depositary Receipts. Depositary Receipts also involve
the risks of other investments in foreign securities.
On January 1, 1999, certain members of the European Economic and
Monetary Union ("EMU"), namely Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxenbourg, the Netherlands, Portugal, and Spain
established a common European currency known as the "euro" and each
member's local currency became a denomination of the euro. It is
anticipated that each participating country will replace its local
currency with the euro on July 1, 2002. Any other European country that
is a member of the European Union and satisfies the criteria for
participation in the EMU may elect to participate in the EMU and may
supplement its existing currency with the euro. The anticipated
replacement of existing currencies with the euro on July 1, 2002 could
market disruptions before or after July 1, 2002 and could
adversely affect the value of securities held by a Portfolio.
FOREIGN CURRENCY TRANSACTIONS
A forward currency contract is an obligation to purchase or sell a
currency against another currency at a future date and price as agreed
upon by the parties. A Portfolio may either accept or make delivery of
the currency at the maturity of the forward contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale
of an offsetting contract. A Portfolio will engage in forward currency
transactions in anticipation of or to protect itself against fluctuations
in currency exchange rates. A Portfolio might sell a particular currency
forward, for example, when it wants to hold bonds or bank obligations
denominated in that currency but anticipates or wishes to be protected
against a decline in the currency against the dollar. Similarly, it
might purchase a currency forward to "lock in" the dollar price of
securities denominated in or exposed to that currency which it
anticipated purchasing.
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A Portfolio may enter into forward foreign currency contracts in two
circumstances. When a Portfolio enters into a contract for the purchase
or sale of a security denominated in or exposed to a foreign currency,
the Portfolio may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for a fixed amount of
dollars for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and such foreign currency
during the period between the date on which the security is purchased or
sold and the date on which payment is made or received.
Second, when the Portfolio Manager believes that the currency of a
particular foreign country may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract for a fixed amount of
dollars to sell the amount of foreign currency approximating the value of
some or all of the Portfolio's securities denominated in or exposed to
such foreign currency. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible since the future value of securities in foreign currencies will
change as a consequence of market movements in the value of these
securities between the date on which the forward contract is entered into
and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-
term hedging strategy is highly uncertain. None of the Portfolios will
enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the
Portfolio to deliver an amount of foreign currency in excess of the value
of the Portfolio's securities or other assets denominated in that
currency.
At the maturity of a forward contract, a Portfolio may either sell the
portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast the market value of a particular
portfolio security at the expiration of the contract. Accordingly, if a
decision is made to sell the security and make delivery of the foreign
currency, it may be necessary for the Portfolio to purchase additional
foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency that the Portfolio is obligated to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as
described below) to the extent that there has been movement in forward
contract prices. Should forward prices decline during the period between
the Portfolio's entering into a forward contract for the sale of a foreign
currency and the date it enters into an offsetting contract for the purchase
of the foreign currency, the Portfolio will realize a gain to the extent that
the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the
Portfolio will suffer a loss to the extent that 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.
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For more information on forward currency contracts, including limits
upon the Portfolios with respect to such contracts, see "Foreign Currency
Transactions" in this Statement of Additional Information.
OPTIONS ON FOREIGN CURRENCIES
A call option on a foreign currency gives the buyer the right to buy,
and a put option the right to sell, a certain amount of foreign currency
at a specified price during a fixed period of time. Currently, options
are traded on the following foreign currencies on a domestic exchange:
British Pound, Canadian Dollar, German Mark, Japanese Yen, French Franc,
and Swiss Franc. A Portfolio may enter into closing sale transactions
with respect to such options, exercise them, or permit them to expire.
Each Portfolio may employ hedging strategies with options on
currencies before the Portfolio purchases a foreign security denominated
in the hedged currency that the Portfolio anticipates acquiring, during
the period the Portfolio holds the foreign security, or between the date
the foreign security is purchased or sold and the date on which payment
therefor is made or received.
In those situations where foreign currency options may not be readily
purchased (or where such options may be deemed illiquid) in the currency
in which the hedge is desired, the hedge may be obtained by purchasing or
selling an option on a "surrogate" currency, i.e., a currency where there
is tangible evidence of a direct correlation in the trading value of the
two currencies. A surrogate currency is a currency that can act, for
hedging purposes, as a substitute for a particular currency because the
surrogate currency's exchange rate movements parallel that of the primary
currency. Surrogate currencies are used to hedge an illiquid currency
risk, when no liquid hedge instruments exist in world currency markets
for the primary currency.
COMMON STOCK AND OTHER EQUITY SECURITIES
Common Stocks represent an equity (ownership) interest in a
corporation. This ownership interest generally gives a Portfolio the
right to vote on measures affecting the company's organization and
operations.
Certain of the Portfolios may also buy securities such as convertible
debt, preferred stock, warrants or other securities exchangeable for
shares of common stock. In selecting equity investments for a Portfolio,
the Adviser or Portfolio Manager will generally invest the Portfolio's
assets in industries and companies that it believes are experiencing
favorable demand for their products and services and which operate in a
favorable competitive and regulatory climate.
CONVERTIBLE SECURITIES
A convertible security is a security that may be converted either at a
stated price or rate within a specified period of time into a specified
number of shares of common stock. By investing in Convertible Securities,
a Portfolio seeks the opportunity, through the conversion feature, to
participate in the appreciation of the common stock into which
the securities are convertible, while earning a higher fixed rate of
return than is available in common stocks.
CURRENCY MANAGEMENT
A Portfolio's flexibility to participate in higher yielding debt
markets outside of the United States may allow the Portfolios to achieve
higher yields than those generally obtained by domestic money market
funds and short-term bond investments. When a Portfolio invests
significantly in securities denominated in foreign currencies, however,
movements in foreign currency exchange rates versus the U.S. dollar are
likely to impact the Portfolio's share price stability relative to
domestic short-term income funds. Fluctuations in foreign currencies can
have a positive or negative impact on returns. Normally, to the extent
that the Portfolio is invested in foreign securities, a weakening in the
U.S. dollar relative to the foreign currencies underlying a Portfolio's
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investments should help increase the net asset value of the Portfolio.
Conversely, a strengthening in the U.S. dollar versus the foreign
currencies in which a Portfolio's securities are denominated will
generally lower the net asset value of the Portfolio. The Manager or
relevant Portfolio Manager attempts to minimize exchange rate risk
through active Portfolio management, including hedging currency exposure
through the use of futures, options and forward currency transactions and
attempting to identify bond markets with strong or stable currencies.
There can be no assurance that such hedging will be successful and such
transactions, if unsuccessful, could result in additional losses or
expenses to a Portfolio.
HYBRID INSTRUMENTS
Hybrid Instruments (a type of potentially high-risk derivative) have
been developed and combine the elements of futures contracts or options
with those of debt, preferred equity, or a depository instrument
(hereinafter "Hybrid Instruments"). Generally, a Hybrid Instrument will
be a debt security, preferred stock, depository share, trust certificate,
certificate of deposit, or other evidence of indebtedness on which a
portion of or all interest payments, and/or the principal or stated
amount payable at maturity, redemption, or retirement, is determined by
reference to prices, changes in prices, or differences between prices, of
securities, currencies, intangibles, goods, articles, or commodities
(collectively "Underlying Assets") or by another objective index,
economic factor, or other measure, such as interest rates, currency
exchange rates, commodity indices, and securities indices (collectively
"Benchmarks"). Thus, Hybrid Instruments may take a variety of forms,
including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the
value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms
related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of
enhancing total return. For example, a Portfolio may wish to take
advantage of expected declines in interest rates in several European
countries, but avoid the transaction costs associated with buying and
currency-hedging the foreign bond positions. One solution would be to
purchase a U.S. dollar-denominated Hybrid Instrument whose redemption
price is linked to the average three-year interest rate in a designated
group of countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was lower than a
specified level, and payoffs of less than par if rates were above the
specified level. Furthermore, the Portfolio could limit the downside risk
of the security by establishing a minimum redemption price so that the
principal paid at maturity could not be below a predetermined minimum
level if interest rates were to rise significantly. The purpose of this
arrangement, known as a structured security with an embedded put option,
would be to give the Fund the desired European bond exposure while avoiding
currency risk, limiting downside market risk, and lowering transactions
costs. Of course, there is no guarantee that the strategy will be
successful, and the Portfolio could lose money if, for example, interest
rates do not move as anticipated or credit problems develop with the issuer
of the Hybrid Instrument.
The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies.
Thus, an investment in a Hybrid Instrument may entail significant risks
that are not associated with a similar investment in a traditional debt
instrument that has a fixed principal amount, is denominated in U.S.
dollars, or bears interest either at a fixed rate or a floating rate
determined by reference to a common, nationally published benchmark. The
risks of a particular Hybrid Instrument will, of course, depend upon the
terms of the instrument, but may include, without limitation, the
possibility of significant changes in the Benchmarks or the prices of
Underlying Assets to which the instrument is linked. Such risks generally
depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be
readily foreseen by the purchaser, such as economic and political events,
the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various
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Benchmarks and prices for Underlying Assets have been highly volatile,
and such volatility may be expected in the future. Reference is also
made to the discussion of futures, options, and forward contracts herein
for a discussion of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the
structure of the particular Hybrid Instrument, changes in a Benchmark may
be magnified by the terms of the Hybrid Instrument and have an even more
dramatic and substantial effect upon the value of the Hybrid Instrument.
Also, the prices of the Hybrid Instrument and the Benchmark or Underlying
Asset may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased
risk of principal loss (or gain). The latter scenario may result if
"leverage" is used to structure the Hybrid Instrument. Leverage risk
occurs when the Hybrid Instrument is structured so that a given change in
a Benchmark or Underlying Asset is multiplied to produce a greater value
change in the Hybrid Instrument, thereby magnifying the risk of loss as
well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments
are often "customized" to meet the portfolio needs of a particular
investor, and therefore, the number of investors that are willing and
able to buy such instruments in the secondary market may be smaller than
that for more traditional debt securities. In addition, because the
purchase and sale of Hybrid Instruments could take place in an over-the-
counter market without the guarantee of a central clearing organization
or in a transaction between the Fund and the issuer of the Hybrid
Instrument, the creditworthiness of the counter party of issuer of the
Hybrid Instrument would be an additional risk factor which the Fund would
have to consider and monitor. Hybrid Instruments also may not be subject
to regulation of the Commodities Futures Trading Commission, which
generally regulates the trading of commodity futures by U.S. persons, the
SEC, which regulates the offer and sale of securities by and to U.S.
persons, or any other governmental regulatory authority.
The various risks discussed above, particularly the market risk of
such instruments, may in turn cause significant fluctuations in the net
asset value of the Portfolio. Accordingly, the Portfolio will limit its
investments in Hybrid Instruments to 10% of total assets. However,
because of their volatility, it is possible that the Portfolio's
investment in Hybrid Instruments will account for more than 10% of the
Fund's return (positive or negative).
DOLLAR ROLL TRANSACTIONS
Certain Portfolios seeking a high level of current income may enter
into dollar rolls or "covered rolls" in which the Portfolio sells
securities (usually Mortgage-Backed Securities) and simultaneously
contracts to purchase, typically in 30 to 60 days, substantially similar,
but not identical securities, on a specified future date. The proceeds of
the initial sale of securities in the dollar roll transactions may be
used to purchase long-term securities which will be held during the roll
period. During the roll period, the Portfolio forgoes principal and
interest paid on the securities sold at the beginning of the roll period.
The Portfolio is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for
which there is an offsetting cash position or cash equivalent securities
position that matures on or before the forward settlement date of the
dollar roll transaction. As used herein the term "dollar roll" refers to
dollar rolls that are not "covered rolls." At the end of the roll
commitment period, the Portfolio may or may not take delivery of the
securities the Portfolio has contracted to purchase.
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The Portfolio will establish a segregated account with its custodian
in which it will maintain cash, U.S. Government Securities or other
liquid high- grade debt obligations equal in value at all times to its
obligations in respect of dollar rolls, and, accordingly, the Portfolio
will not treat such obligations as senior securities for purposes of the
Investment Company Act of 1940. "Covered rolls" are not subject to these
segregation requirements. Dollar Roll Transactions may be considered
borrowings and are, therefore, subject to the borrowing limitations
applicable to the Portfolio.
EQUITY AND DEBT SECURITIES ISSUED OR GUARANTEED BY
SUPRANATIONAL ORGANIZATIONS
Portfolios authorized to invest in securities of foreign issuers may
invest assets in equity and debt securities issued or guaranteed by
Supranational Organizations, such as obligations issued or guaranteed by
the Asian Development Bank, Inter-American Development Bank,
International Bank for Reconstruction and Development (World Bank),
African Development Bank, European Coal and Steel Community, European
Economic Community, European Investment Bank and the Nordic Investment
Bank.
EXCHANGE RATE RELATED SECURITIES
Each 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.
GEOGRAPHICAL AND INDUSTRY CONCENTRATION
Where a Portfolio invests at least 25% of its assets in Bank Obligations,
the Portfolio's investments may be subject to greater risk than a Portfolio
that does not concentrate in the banking industry. In particular, Bank
Obligations may be subject to the risks associated with interest rate
volatility, changes in federal and state laws and regulations governing banking
and the inability of borrowers to pay principal and interest when due. In
addition, foreign banks present the risks of investing in foreign securities
generally and are not subject to reserve requirements and other regulations
comparable to those of U.S. Banks.
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ILLIQUID SECURITIES
Illiquid securities are securities that are not readily marketable,
including, where applicable: (1) repurchase agreements with maturities
greater than seven calendar days; (2) time deposits maturing in more than
seven calendar days; (3) to the extent a liquid secondary market does not
exist for the instruments, futures contracts and options thereon; (4)
certain over-the-counter options, as described in this Statement of
Additional Information; (5) certain variable rate demand notes having a
demand period of more than seven days; and (6) securities the disposition
of which is restricted under Federal securities laws (excluding Rule 144A
Securities, described below).
RESTRICTED SECURITIES
The Portfolio may also purchase securities that are not registered
under the Securities Act of 1933 ("1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities"). The
Trust's Board of Trustees confirms based upon information and
recommendations provided by the Portfolio Manager that a specific Rule
144A security is liquid and thus not subject to the limitation on
investing in illiquid investments. The Board of Trustees has adopted
guidelines and has delegated to the Portfolio Manager the daily function
of determining and monitoring the liquidity of Rule 144A securities. The
Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations. This investment practice could have
the effect of decreasing the level of liquidity in the Portfolio to the
extent that qualified institutional buyers become for a time uninterested
in purchasing Rule 144A securities held in the investment Portfolio.
Subject to limitation on investments in illiquid investments and subject
to the diversification requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), the Portfolio may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain
risks. As a result, the Portfolio might not be able to sell these
securities when the Portfolio Manager wishes to do so, or might have to
sell them at less than fair value. In addition, market quotations are
less readily available. Therefore, judgment may at times play a greater
role in valuing these securities than in the case of unrestricted
securities.
LEASE OBLIGATION BONDS
Lease Obligation Bonds are mortgages on a facility that is secured by
the facility and are paid by a lessee over a long term. The rental stream
to service the debt as well as the mortgage are held by a collateral
trustee on behalf of the public bond holders. The primary risk of such
instrument is the risk of default. Under the lease indenture, the failure
to pay rent is an event of default. The remedy to cure default is to
rescind the lease and sell the assets. If the lease obligation is not
readily marketable or market quotations are not readily available, such lease
obligations will be subject to a Portfolio's limit on illiquid securities.
BORROWING
Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a
Portfolio's net asset value; money borrowed will be subject to interest
and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances), which may or may not exceed the
income received from the securities purchased with borrowed funds. The
use of borrowing tends to result in a faster than average movement, up or
down, in the net asset value of the Portfolio's shares. A Portfolio also
may be required to maintain minimum average balances in connection with
such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing
over the stated interest rate.
Reverse repurchase agreements, short sales of securities, and short
sales of securities against the box will be included as borrowing subject
to the borrowing limitations described above, except those Portfolios
that are permitted to engage in short sales of securities with respect to
an additional
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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.
REAL ESTATE SECURITIES
Real estate securities include real estate investment trusts ("REITs")
and other companies in the real estate industry or companies with
substantial real estate investments. A Portfolio investing in such real
estate securities may be subject to the risks associated with the direct
ownership of real estate because of its policy of concentration in the
securities of companies which own, construct, manage, or sell
residential, commercial, or industrial real estate. These risks include:
declines in the value of real estate, adverse changes in the climate for
real estate, risks related to general and local economic conditions, over-
building and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation
losses, limitations on rents, changes in neighborhood values, the appeal
of properties to tenants, leveraging of interests in real estate, and
increases in interest rates. The value of securities of companies which
service the real estate industry may also be affected by such risks.
In addition to the risks discussed above, REITs may be affected by any
changes in the value of the underlying property owned by the trusts or by
the quality of any credit extended. REITs are dependent upon management
skill, are not diversified, and are therefore subject to the risk of
financing single or a limited number of projects. REITs are also subject
to heavy cash flow dependency, defaults by borrowers, self liquidation,
and the possibility of failing to qualify for special tax treatment under
Subchapter M of the Internal Revenue Code of 1986 and to maintain an
exemption under the 1940. Act Finally, certain REITs may be self-
liquidating in that a specific term of existence is provided for in the
trust document and such REITs run the risk of liquidating at an
economically inopportune time.
SWAPS
Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than
one year. In a standard swap transaction, two parties agree to exchange
the returns (or differential in rates of return) earned or realized on
particular predetermined investments or instruments, which may be
adjusted for an interest factor. The gross returns to be exchanged or
"swapped" between the parties are generally calculated with respect to
a "notional amount," i.e., the return on or increase in value
of a particular dollar amount invested at a particular interest rate,
or in a "basket" of securities representing a particular index.
The use of swaps is a highly specialized activity which involved
investment techniques and risks different from those associated with
ordinary portfolio transactions. Whether the Portfolio's use of swap
agreements will be successful in furthering its investment objective will
depend on the Portfolio Manager's ability to predict correctly whether
certain types of investments are likely to produce greater returns than
other investments. Moreover, the Portfolio bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. Swaps are
generally considered illiquid and will be aggregated with other illiquid
positions for purposes of the limitation on illiquid investments.
The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market,
including potential government regulation, could adversely affect the
Portfolio's ability to terminate existing swap agreements or to realize
amounts to be received under such agreements.
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ZERO-COUPON BONDS
Zero-coupon bonds are issued at a significant discount from face value
and pay interest only at maturity rather than at intervals during the
life of the security. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or
in additional bonds. The values of zero-coupon bonds and payment-in-kind
bonds are subject to greater fluctuation in response to changes in market
interest rates than bonds which pay interest currently, and may involve
greater credit risk than such bonds.
The discount of zero-coupon and deferred interest bonds approximates
the total amount of interest the bonds will accrue and compound over the
period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of
issuance. While zero-coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide that the issuer thereof may, at
its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations
which make regular payments of interest. The Portfolio will accrue income
on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received
at the time of accrual, may require the liquidation of other Portfolio
securities to satisfy the Portfolio's distribution obligations.
SMALL COMPANIES
Each 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 other wise have sold the security. It is possible
that the Manager or a Sub-Adviser or its affiliates or clients may hold
securities issued by the same issuers, and may in some cases have
acquired the securities at different times, on more favorable terms, or
at more favorable prices, than a Portfolio which it manages.
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of the
Portfolios as stated elsewhere in this Statement of Additional
Information certain of the Portfolios may, but are not required to,
utilize various investment strategies as described herein to hedge
various market risks, to manage the effective maturity or duration of
fixed income securities, or to seek potentially higher returns. Utilizing
these investment strategies, the Portfolio may purchase and sell, to the
extent not otherwise limited or restricted for such Portfolios, exchange-
listed and over-the-counter put and call options on securities, equity
and fixed income indexes and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
Interest Rate Transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency
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forward contracts, currency futures contracts, currency swaps or options
on currencies or currency futures (collectively, all the above are called
"Strategic Transactions").
Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be
purchased for the Portfolios resulting from securities markets or
currency exchange rate fluctuations, to protect the Portfolio's
unrealized gains in the value of its Portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Portfolio, or to establish a
position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Some Strategic Transactions
may also be used to seek potentially higher returns, although no more
than 5% of the Portfolio's assets will be used as the initial margin or
purchase price of options for Strategic Transactions entered into for
purposes other than "bona fide hedging" positions as defined in the
regulations adopted by the Commodity Futures Trading Commission. Any or
all of these investment techniques may be used at any time, as use of any
Strategic Transaction is a function of numerous variables including
market conditions. The ability of the Portfolio to utilize these
Strategic Transactions successfully will depend on the Adviser's or
Portfolio Manager's ability to predict, which cannot be assured,
pertinent market movements. The Portfolio will comply with applicable
regulatory requirements when utilizing Strategic Transactions. Strategic
Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk
management or Portfolio management purposes.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, the relevant
Portfolios may make secured loans of portfolio securities. Securities
loans are made to banks, brokers and other financial institutions
pursuant to agreements requiring that the loans be continuously secured
by collateral at least equal at all times to the value of the securities
lent marked to market on a daily basis. The collateral received will
consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under the Portfolio's investment
program. While the securities are being lent, the Portfolio will
continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities, as well as interest on the investment of
the collateral or a fee from the borrower. The Portfolio has a right to
call each loan and obtain the securities on five business day's notice
or, in connection with securities trading on foreign markets, within such
longer period of time which coincides with the normal settlement period
for purchases and sales of such securities in such foreign markets. The
Fund will not have the right to vote securities while they are being
lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional
collateral in the event the value of the collateral decreased below the
value of the securities loaned or of delay in recovering the securities
loaned or even loss of rights in the collateral should the borrower of the
securities fail financially. Loans will not be made unless, in the
judgement of the Portfolio Manager, the consideration to be earned from
such loans would justify the risk.
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, reizations,
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.
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WARRANTS
Each Portfolio may, from time to time, invest in warrants. Warrants
are, in effect, longer-term call options. They give the holder the right
to purchase a given number of shares of a particular company at specified
prices within certain period of time. The purchaser of a warrant expects
that the market price of the security will exceed the purchase price of
the warrant plus the exercise price of the warrant, thus giving him a
profit. Of course, since the market price may never exceed the exercise
price before the expiration date of the warrant, the purchaser of the
warrant risks the losses of the entire purchase price of the warrant.
Warrants generally trade in the open market and may be sold rather than
exercised. Warrants are sometimes sold in unit form with other
qualification as a regulated investment company and a Portfolio's intent
to continue to qualify as such. The result of a hedging program cannot
be foreseen and may cause a Portfolio to suffer losses which it would not
otherwise sustain.
Such investments can provide a greater potential for profit or loss
than an equivalent investment in the underlying security. Prices of
warrants do not necessarily move in tandem with the prices of the
underlying securities, and are speculative investments. They pay no
dividends and confer no rights other than a purchase option. If a
warrant is not exercised by the date of its expiration, the Portfolio
will lose its entire investment in such warrant.
INVESTMENT OBJECTIVES AND ADDITIONAL
INVESTMENT STRATEGIES AND ASSOCIATED RISKS
INVESTORS PORTFOLIO
Investment Objective: Seek long-term growth of capital.
Current income is a secondary objective.
The Investors Portfolio from time to time may invest up to 5% of its
net assets in non-convertible debt securities rated below investment
grade by S&P and Moody's (with no minimum rating required), or comparable
unrated securities. There is no limit on the amount of Investors
Portfolio's assets that can be invested in convertible securities rated
below investment grade. For additional information on these high yield
debt securities, which involve a high degree of risk, see "Description
of Securities and Investment Techniques -- High Yield Bonds" in this
Statement of Additional Information.
The Investors Portfolio maintains a carefully selected portfolio of
securities diversified among industries and companies. The Portfolio may
invest up to 25% of its net assets in any one industry. The Portfolio
generally purchases marketable securities, primarily those traded on the
New York Stock Exchange ("NYSE") or other national securities exchanges,
but also purchases securities traded in the over-the-counter market. The
Portfolio will not invest more than 10% of the value of its total assets
in illiquid securities, such as "restricted securities" which are illiquid,
and securities that are not readily marketable. As more fully described below,
the Portfolio may purchase certain Rule 144A securities for which there is
a secondary market of qualified institutional buyers as contemplated by Rule
144A under the 1933 Act. The Portfolio's holdings of Rule 144A securities
which are liquid securities will not be subject to the 10% limitation on
investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see "Description of Securities and
Investment Techniques--Illiquid Securities."
From time to time, the Investors Portfolio may lend portfolio
securities to brokers or dealers or other financial institutions. Such
loans will not exceed 33 1/3% of the Portfolio's total assets, taken at
value. For a discussion of the risks associated with lending portfolio
securities, see "Description of Securities and Investment Techniques--
Lending Portfolio Securities."
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As indicated under "Investment Restrictions" the Investors Portfolio
may invest in repurchase agreements in an amount up to an aggregate of
25% of its total assets. For a description of repurchase agreements and
their associated risks, see "Description of Securities and Investment
Techniques--Repurchase Agreements." In addition, in order to meet
redemption requests or as a temporary measure, the Portfolio may borrow
up to an aggregate of 5% of its total assets taken at cost or value,
whichever is less. The Portfolio shall borrow only from banks.
As a hedge against either a decline in the value of securities
included in the Investors Portfolio's investments or against an increase
in the price of securities which it plans to purchase or in order to
preserve or maintain a return or spread on a particular investment or
portion of its portfolio or to achieve a particular return on cash
balances, or in order to increase income or gain, the Investors Portfolio
may use all of the various investment strategies referred to under
"Description of Securities and Investment Techniques--Derivatives." The
Portfolio's ability to pursue certain of these strategies may be limited
by applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies.
The foregoing investment policies, other than the Investors
Portfolio's investment objectives and the Portfolio's policies with
respect to repurchase agreements, borrowing of money and lending of
portfolio securities, are not fundamental policies and may be changed by
vote of the Board of Trustees without the approval of shareholders.
LARGE CAP VALUE PORTFOLIO
Investment Objective: Seek long-term growth of capital and income.
The Large Cap Value Portfolio may lend its securities so long as such
loans do not represent more than 33 1/3% of the Portfolio's total assets.
As with other extensions of credit, there are risks of delay in recovery
or even loss of rights in the collateral should the borrower of the
securities fail financially. For additional information on the risks of
lending the Portfolio's securities, see "Description of Securities and
Investment Techniques--Lending Portfolio Securities" in this Statement of
Additional Information.
In order to help ensure the availability of suitable securities, The
Portfolio may purchase debt securities on a "when-issued" or on a
"forward delivery" basis. For a discussion of the risks associated with
"when issued" and "Forward delivery" securities, see "Description of
Securities and Investment Techniques--When Issued or Delayed Securities"
in this Statement of Additional Information.
The Portfolio may also enter into repurchase agreements. Securities
subject to repurchase agreements will be valued every business day and
additional collateral will be requested if necessary so that the value of
the collateral is at least equal to the value of the repurchased
obligation, including the interest accrued thereon. In addition, the
Portfolio may also enter into "reverse" repurchase agreements. Here too,
the portfolio will maintain in a segregated custodial account cash,
Treasury bills or other U.S. Government Securities having an aggregate
value equal to the amount of such commitment to repurchase including
accrued interest, until payment is made. For a discussion of the risks
associated with repurchase arrangements and reverse repurchase
agreements, see "Description of Securities and Investment Techniques--
Repurchase Agreements" and "Description of Securities and Investment
Techniques--Reverse Repurchase Agreements" in this Statement of Additional
Information.
The Portfolio may enter into mortgage dollar rolls. At the time
the Portfolio enters into a mortgage dollar roll, it will establish a
segregated account with its custodian bank in which it will maintain
cash, U.S. Government Securities or other liquid assets equal in value to
its obligations in respect of dollar rolls, and accordingly, such dollar
rolls will not be considered borrowings.
Subject to certain restrictions, the Portfolio may purchase warrants,
including warrants traded independently of the underlying securities. For
a discussion of the risks associated with warrants,
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see "Description of Securities and Investment Techniques--Warrants" in
this Statement of Additional Information.
The Portfolio is precluded from investing in excess of 15% of its net
assets in securities that are not readily marketable. Also, the Portfolio
may be authorized to use a variety of investment strategies for hedging
purposes only, including hedging various market risks (such as interest
rates, currency exchange rates and broad or specific market movements)
and managing the effective maturity or duration of debt instruments held
by the portfolio. Hedging refers to protecting against possible changes
in the market value of securities a portfolio already owns or plans to
buy or protecting unrealized gains in the portfolio. Hedging and other
strategic transactions which may be used are described below:
(a) exchange-listed and over-the-counter put and call options on
securities, financial futures contracts and fixed-income
indices and other financial instruments,
(b) financial futures contracts (including stock index futures),
(c) interest rate transactions, and
(d) currency transactions.
These transactions are referred to in this Statement of Additional
Information under each transaction's respective title under "Description
of Securities and Investment Techniques".
The Portfolio may invest in investment grade fixed income securities
in the lowest rating category (rated "Baa" by Moody's or "BBB" by
Standard & Poor's and comparable unrated securities).
The Portfolio will not maintain open short positions in futures
contracts, call options written on futures contracts, and call options
written on securities indices if, in the aggregate, the current market
value of the open positions exceeds the current market value of that
portion of its securities portfolio being hedged by those futures and
options, plus or minus the unrealized gain or loss on those open
positions. The gain or loss on these open positions will be adjusted for
the historical volatility relationship between that portion of the
portfolio and the contracts (e.g., the Beta volatility factor).
For purposes of this limitation, to the extent the Portfolio has
written call options on specific securities in that portion of its
portfolio, the value of those securities will be deducted from the
current market value of that portion of the securities portfolio. If this
limitation should be exceeded at any time, the portfolio will take prompt
action to close out the appropriate number of open short positions to
bring its open futures and options positions within this limitation.
To meet redemption requests or pending investment of its assets or
during unusual market conditions, the Portfolio may invest all or a
portion of its assets in preferred stocks, bonds, cash and cash
equivalents. The Portfolio Manager's judgment regarding the current
investment outlook will determine the relative amounts to be invested in
these different asset classes.
The Portfolio is currently authorized to use hedging, futures, options
on futures, currency transactions, swaps, floors and collars referred
to in this Statement of Additional Information under "Description of
Securities and Investment Techniques". However, it is not presently
contemplated that any of these strategies will be used to a significant
degree by the portfolio.
ALL CAP PORTFOLIO
Investment Objective: Appreciation through investment in
securities which the Portfolio Manager believes
have above-average appreciation potential.
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In seeking appreciation, the All Cap Portfolio may purchase
securities of seasoned issuers, relatively smaller and newer companies as
well as in new issuers, and may be subject to wide fluctuations in market
value. Portfolio securities may have limited marketability or may be
widely and publicly traded. The Portfolio will not concentrate its
investment in any particular industry.
To meet operating expenses, to serve as collateral in connection with
certain investment techniques and to meet anticipated redemption requests,
the Portfolio generally holds a portion of its assets in short-term fixed
income securities (government obligations or investment grade debt securities)
or cash or cash equivalents. As described below, short-term investments may
include repurchase agreements with banks or broker-dealers. When management
deems it appropriate, for temporary defensive purposes, the Portfolio may
invest without limitation in investment grade fixed-income securities or hold
assets in cash or cash equivalents. Investment grade debt securities are
debt securities rated BBB or better by S&P or Baa or better by Moody's,
or if rated by other rating agencies or if unrated, securities deemed by
the Portfolio Manager to be of comparable quality. See "Appendix 1:
Description of Bond Ratings. "Investments in such investment grade
fixed-income securities may also be made for the purpose of appreciation,
as in the case of purchases of bonds traded at a substantial discount or
when the Portfolio Manager believes interest rates may decline.
There is no limit on the amount of the Portfolio's assets that can be
invested in securities rated below investment grade. For additional
information on these high-yield debt securities, which may involve a high
degree of risk, see "Description of Securities and Investment Techniques--
High Yield Bonds" in this Statement of Additional Information.
The All Cap Portfolio may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to
the public. The Portfolio will not invest more than 10% of the value of
its total assets in illiquid securities, such as "restricted securities"
which are illiquid, and securities that are not readily marketable. For
further discussion of illiquid securities and their associated risks,
see "Description of Securities and Investment Techniques--Illiquid
Securities." The Portfolio may purchase Rule 144A securities. The
Portfolio's holding of Rule 144A securities which are liquid securities
will not be subject to the 10% limitation on investments in illiquid
securities.
As indicated in "Investment Restrictions," in this Statement
of Additional Information, the Portfolio may from time to time lend
portfolio securities to selected members of the NYSE. Such loans will
not exceed 10% of the Portfolio's total assets taken at value. For a
discussion of the risks associated with lending portfolio securities,
see "Description of Securities and Investment Techniques--Lending
Portfolio Securities."
As indicated under the title "Investment Restrictions," the Portfolio
may invest in repurchase agreements in an amount up to 25% of its
total assets. The Portfolio enters into repurchase agreements with
respect to securities in which it may otherwise invest. For a description
of repurchase agreements and their associated risks, see "Description of
Securities and Investment Techniques--Repurchase Agreements." In
addition, in order to meet redemptions or to take advantage of promising
investment opportunities without disturbing an established portfolio, the
Portfolio may borrow up to an aggregate of 15% of the value of its total
assets taken at the time of borrowing. In addition, the Portfolio may
borrow for temporary or emergency purposes an aggregate amount which may
not exceed 5% of the value of its total assets at the time of borrowing.
The Portfolio shall borrow only from banks. Borrowings may be unsecured,
or may be secured by not more than 15% of the value of the Portfolio's
total assets. As a matter of operating policy, however, the Portfolio
will not secure borrowings by more than 10% of the value of the
Portfolio's total assets. For a discussion of the risks associated with
borrowings, see "Description of Securities and Investment Techniques--
Borrowing."
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As a hedge against either a decline in the value of the securities
included in the Portfolio's investments, or against an increase
in the price of the securities which it plans to purchase, or in order to
preserve or maintain a return or spread on a particular investment or
portion of its portfolio or to achieve a particular return on cash
balances, or in order to increase income or gain, the Portfolio
may use all of the investment strategies referred to under "Description
of Securities and Investment Techniques--Derivatives." The Portfolio's
ability to pursue certain of these strategies may be limited by
applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies.
The foregoing investment policies (other than the policy of the
Portfolio with respect to the borrowing of money and the lending
of portfolio securities) are not fundamental policies and may be changed
by vote of the Board of Trustees without the approval of shareholders.
The Portfolio may sell portfolio securities in anticipation of an
adverse market movement. Other than for tax purposes, frequency of
portfolio turnover will not be a limiting factor if the Portfolio Manager
considers it advantageous to purchase or sell securities. The Portfolio
does not anticipate that its annual portfolio turnover rate will exceed
160%. A high rate of portfolio turnover involves correspondingly
greater transaction expenses than a lower rate, which expenses must be
borne by the Portfolio and to shareholders.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective should be read, together with
the investment restrictions set forth below. The restrictions list both
fundamental and non-fundamental policies. Fundamental policies and
restrictions of each Portfolio may not be changed with respect to any
Portfolio without the approval of a majority of the outstanding voting
shares of that Portfolio. The vote of a majority of the outstanding
voting securities of a Portfolio means the vote, at an annual or special
meeting, of the lesser of (a) 67% or more of the voting securities
present at such meeting, if the holders of more than 50% of the
outstanding voting securities of such Portfolio are present or
represented by proxy; or (b) more than 50% of the outstanding voting
securities of such Portfolio. Non-fundamental policies and restrictions
may be changed by a vote of the Board of Trustees and without shareholder
approval, consistent with the Investment Company Act of 1940 and changes
in relevant SEC interpretations.
INVESTORS PORTFOLIO
The Investors Portfolio may not:
(1) purchase any securities of another issuer (other than the
United States of America) if upon said purchase more than 5% of
its net assets would consist of securities of such issuer, or
purchase more than 15% of any class of securities of such issuer;
(2) borrow money, except (i) in order to meet redemption requests
or (ii) as a temporary measure for extraordinary or emergency
purposes and, in the case of both (i) and (ii), only from banks
and only in an aggregate amount not to exceed 5% of its total
assets taken at cost or value, whichever is less, or mortgage or
pledge any of its assets and except that for purposes of this
restriction, collateral arrangements with respect to the writing
of options on stocks and stock indices, the purchase and sale of
futures contracts and options on futures contracts, and forward
currency contracts are not deemed a pledge of assets or a
borrowing of money;
(3) lend its funds or other assets to any other person other than
through the purchase of liquid debt securities pursuant to the
Portfolio's investment policies, except that (a) the Portfolio may
lend its portfolio securities in an amount up to 33 1/3% of its
total assets,
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provided that the borrower may not be affiliated,
directly or indirectly, with the Portfolio and (b) the Portfolio
may enter into repurchase agreements in an amount up to an
aggregate of 25% of its total assets;
(4) invest in the securities of issuers which have been in
operation for less than three years if such purchase at the time
thereof would cause more than 5% of the net assets of the
Portfolio to be so invested;
(5) purchase any securities on margin (except that the Portfolio
may make deposits in connection with transactions in options on
securities), make any so-called "short" sales of securities or
participate in any joint or joint and several trading accounts;
(6) act as underwriter of securities of other issuers;
(7) purchase the securities of another investment company or
investment trust except in the open market where no profit to a
sponsor or dealer, other than the customary broker's commission,
results from such purchase (but the aggregate of such investments
shall not be in excess of 10% of the net assets of the Portfolio),
or except when such purchase is part of a plan of merger or
consolidation;
(8) buy securities from, or sell securities to, any of its
officers, directors, employees, investment manager or distributor,
as principals;
(9) purchase or retain any securities of an issuer if one or more
persons affiliated with the Portfolio owns beneficially more than
1/2 of 1% of the outstanding securities of such issuer and such
affiliated persons so owning 1/2 of 1% together own beneficially
more than 5% of such securities;
(10) purchase real estate (not including investments in securities
issued by real estate investment trusts) or commodities or
commodity contracts, provided that the Portfolio may enter into
futures contracts, including futures contracts on interest rates,
stock indices and currencies, and options thereon, and may engage
in forward currency transactions and buy, sell and write options
on currencies;
(11) issue senior securities except as may be permitted by the
1940 Act.
(12) invest in warrants (other than warrants acquired by the
Investors Portfolio as part of a unit or attached to securities at
the time of purchase) if, as a result, the investments (valued at
the lower of cost or market) would exceed 5% of the value of the
Investors Portfolio's net assets or if, as a result, more than 2%
of the Investors Portfolio's net assets would be invested in
warrants that are not listed on AMEX or NYSE;
(13) invest in oil, gas and other mineral leases, provided,
however, that this shall not prohibit the Investors Portfolio from
purchasing publicly traded securities of companies engaging in
whole or in part in such activities; or
(14) purchase or sell real property (including limited partnership
interests) except to the extent described in investment
restriction number 10 above.
Investment restrictions (1) through (11) described above are fundamental
policies of the Investors Porftolio. Restrictions (12) through (14) are
non-fundamental policies of the Investors Portfolio.
LARGE CAP VALUE PORTFOLIO
The Large Cap Value Portfolio may not:
(1) issue senior securities, except to the extent that the
borrowing of money in accordance with restrictions (3) may
constitute the issuance of a senior security. (For purposes of
this
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restriction, purchasing securities on a when-issued or
delayed delivery basis and engaging in hedging and other strategic
transactions will not be deemed to constitute the issuance of a
senior security.)
(2) invest more than 25% of the value of its total assets in
securities of issuers having their principal activities in any
particular industry, excluding U. S. Government securities and
obligations of domestic branches of U.S. banks and savings and
loan associations.
(3) For purposes of this restriction, neither finance companies
as a group nor utility companies as a group are considered to be a
single industry. Such companies will be grouped instead according
to their services; for example, gas, electric and telephone
utilities will each be considered a separate industry. Also for
purposes of this restriction, foreign government issuers and
supranational issuers are not considered members of any industry.
(4) purchase the securities of any issuer if the purchase would
cause more than 5% of the value of the portfolio's total assets to
be invested in the securities of any one issuer (excluding U. S.
Government securities) or cause more than 10% of the voting
securities of the issuer to be held by the portfolio, except that
up to 25% of the value of each portfolio's total assets may be
invested without regard to these restrictions.
(5) borrow money, except that the portfolio may borrow (i) for
temporary or emergency purposes (not for leveraging) up to 33 1/3%
of the value of the portfolio's total assets (including amounts
borrowed) less liabilities (other than borrowings) and (ii) in
connection with reverse repurchase agreements, mortgage dollar
rolls and other similar transactions.
(6) underwrite securities of other issuers except insofar as the
Portfolio may be considered an underwriter under the 1933 Act in
selling portfolio securities.
(7) purchase or sell real estate, except that the Portfolio may
invest in securities issued by companies which invest in real
estate or interests therein and may invest in mortgages and
mortgage-backed securities.
(8) purchase or sell commodities or commodity contracts, except
that the Portfolio may purchase and sell futures contracts on
financial instruments and indices and options on such futures
contracts and may purchase and sell futures contracts on foreign
currencies and options on such futures contracts.
(9) lend money to other persons, except by the purchase of
obligations in which the Portfolio is authorized to invest and by
entering into repurchase agreements. For purposes of this
restriction, collateral arrangements with respect to options,
forward currency and futures transactions will not be deemed to
involve the lending of money.
(10) lend securities in excess of 33 1/3% of the value of its
total assets. For purposes of this restriction, collateral
arrangements with respect to options, forward currency and futures
transactions will not be deemed to involve loans of securities.
(11) knowingly invest more than 15% of the value of its net assets
in securities or other investments, including repurchase
agreements maturing in more than seven days but excluding master
demand notes, that are not readily marketable;
(12) sell securities short or purchase securities on margin,
except that it may obtain such short-term credits as may be
required to clear transactions. For purposes of this restriction,
collateral arrangements with respect to hedging and other
strategic transactions will not be deemed to involve the use of
margin.
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(13) write or purchase options on securities, financial indices or
currencies, except to the extent the Portfolio is specifically
authorized to engage in hedging and other strategic transactions.
(14) purchase securities for the purpose of exercising control or
management.
(15) purchase securities of other investment companies if the
purchase would cause more than 10% of the value of the portfolio's
total assets to be invested in investment company securities,
provided that (i) no investment will be made in the securities of
any one investment company if immediately after such investment
more than 3% of the outstanding voting securities of such company
would be owned by the portfolio or more than 5% of the value of
the Portfolio's total assets would be invested in such company and
(ii) no restrictions shall apply to a purchase of investment
company securities in connection with a merger, consolidation or
reorganization;
For purposes of this restriction, privately issued collateralized
mortgage obligations will not be treated as investment company
securities if issued by "Exemptive Issuers." Exemptive Issuers are
defined as unmanaged, fixed-asset issuers that (a) invest
primarily in mortgage-backed securities, (b) do not issue
redeemable securities as defined in Section 2(a) (32) of the 1940
Act, (c) operate under general exemptive orders exempting them
from all provisions of the 1940 Act, and (d) are not registered or
regulated under the 1940 Act as investment companies.
(16) pledge, hypothecate, mortgage or transfer (except as provided
in restriction (4)) as security for indebtedness any securities
held by the Portfolio, except in an amount of not more than 33
1/3% of the value of the Portfolio's total assets and then only to
secure borrowings permitted by restrictions (3) and (10). For
purposes of this restriction, collateral arrangements with respect
to hedging and other strategic transactions will not be deemed to
involve a pledge of assets.
If a percentage restriction is adhered to at the time of an
investment, a later increase or decrease in the investment's
percentage of the value of a portfolio's total assets resulting
from a change in such values or assets will not constitute a
violation of the percentage restriction.
Restrictions (1) through restriction (8) are fundamental.
Restrictions (9) through (15) are nonfundamental
ALL CAP PORTFOLIO
The ALL CAP Portfolio may not:
(1) hold more than 25% of the value of its total assets in the
securities of any single company or in the securities of companies
in any one industry. As to 50% of the value of its total assets,
the Portfolio's investment in any one security, other than United
States Government obligations, will not exceed 5% of the value of
its total assets and as to this 50%, the Portfolio will not invest
in more than 15% of the outstanding voting securities of any one
issuer;
(2) borrow money or pledge or mortgage its assets, except as
described under "Description of Securities and Investment
Techniques" and except that for purposes of this restriction,
collateral arrangements with respect to the writing of options on
stocks and stock indices, the purchase and sale of futures
contracts and options on futures contracts, and forward currency
contracts are not deemed a pledge of assets or a borrowing of
money;
(3) underwrite securities, except in instances where the
Portfolio has acquired portfolio securities which it may not be
free to sell publicly without registration under the 1933 Act
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("restricted securities"); in such registrations, the Portfolio
may technically be deemed an "underwriter" for purposes of the
1933 Act. No more than 10% of the value of Portfolio's total
assets may be invested in illiquid securities;
(4) make loans other than through (a) the lending of its
portfolio securities in accordance with the procedures described
under "Description of Securities and Investment Techniques--
Lending of Portfolio Securities" in this Statement of Additional
Information, or (b) entering into repurchase agreements in an
amount up to an aggregate of 25% of its total assets, but this
restriction shall not prevent the Portfolio from buying a portion
of an issue of bonds, debentures or other obligations which are
liquid, or from investing up to an aggregate of 10% (including
investments in other types of illiquid securities) of the value of
its total assets in portions of issues of bonds, debentures or
other obligations of a type privately placed with financial
institutions and which are illiquid;
(5) invest more than 10% of the value of the Portfolio's total
assets in securities of unseasoned issuers, including their
predecessors, which have been in operation for less than three
years, and equity securities which are not readily marketable;
(6) invest in companies for the purpose of exercising control or
management. (The Portfolio may on occasion be considered part of
a control group of a portfolio company by reason of the size or
manner of its investment, in which event the securities of such
portfolio company held by the Portfolio may not be publicly
saleable unless registered under the Securities Act of 1933 or
pursuant to an available exemption thereunder.);
(7) purchase securities on margin (except for such short-term
credits as are necessary for the clearance of transactions and
except that the Portfolio may make deposits in connection with
transactions in options on securities) or make short sales of
securities (except for sales "against the box", i.e., when a
security identical to one owned by the Portfolio, or which the
Portfolio has the right to acquire without payment of additional
consideration, is borrowed and sold short);
(8) purchase or sell real estate, interests in real estate,
interests in real estate investment trusts, or commodities or
commodity contracts; however, the Portfolio (a) may purchase
interests in real estate investment trusts or companies which
invest in or own real estate if the securities of such trusts or
companies are registered under the Securities Act of 1933 and are
readily marketable and (b) may enter into futures contracts,
including futures contracts on interest rates, stock indices and
currencies, and options thereon, and may engage in forward
currency contracts and buy, sell and write options on currencies;
(9) purchase more than 3% of the stock of another investment
company, or purchase stock of other investment companies equal to
more than 5% of the Portfolio's net assets in the case of any one
other investment company and 10% of such net assets in the case of
all other investment companies in the aggregate. Any such
purchase will be made only in the open market where no profit to a
sponsor or dealer results from the purchase, except for the
customary broker's commission. This restriction shall not apply to
investment company securities received or acquired by the
Portfolio pursuant to a merger or plan of reorganization. (The
return on such investments will be reduced by the operating
expenses, including investment advisory and administrative fees of
such investment Portfolios and will be further reduced by the
Portfolio's expenses, including management fees; that is, there
will be a layering of certain fees and expenses.);
(10) purchase or hold securities of an issuer if one or more
persons affiliated with the Portfolio or with Smith Barney Asset
Management owns beneficially more than 1/2 of 1% of the securities
of that issuer and such persons owning more than 1/2 of 1% of such
securities together own beneficially more than 5% of the
securities of such issuer;
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(11) buy portfolio securities from, or sell portfolio securities
to, any of the Portfolio's officers, directors or employees of its
investment manager or distributor, or any of their officers or
directors, as principals;
(12) purchase or sell warrants; however, the Portfolio may invest
in debt or other securities which have warrants attached (not to
exceed 10% of the value of the Portfolio's total assets). Covered
options with respect to no more than 10% in value of the
Portfolio's total assets will be outstanding at any one time;
(13) invest in interest in oil, gas or other mineral exploration
or development programs, or
(14) issue senior securities except as may be permitted by the
1940 Act.
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, 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,
THE TRUST PRINCIPAL OCCUPATIONS
AND AGES
Barnett Chernow* Trustee, President and Chairman of
Golden American Life and Chairman the GCG Trust since December,
Insurance Company; for the GCG 1999; President and Director,
1475 Dunwoody Drive, Trust Golden American Life Insurance
West Chester, PA Company; Executive Vice President,
19380 Directed Services, Inc.; Executive
Vice President and then President,
First Golden American Life
Insurance Company of New York;
formerly, Senior Vice President
and Chief Financial Officer,
Reliance Insurance Company,
August 1977 to April 1998.
Age 49.
J. Michael Earley Trustee President, and Chief Executive
665 Locust Street Officer, Bankers Trust Company,
Des Moines, IA 50309 Des Moines, Iowa since July
1992; President and Chief
Executive Officer, Mid-
America Savings Bank,
Waterloo, Iowa from April,
1987 to June, 1992. Age
54.
R. Barbara Gitenstein Trustee President, The College of
Office of the New Jersey since January
President 1999; Trustee Provost,
The College of New Drake University from July
Jersey 1992 to December 1998;
200 Pennington Road Assistant Provost, State
Ewing, NJ University of New York
08628-0718 from August, 1991 to July,
1992; Associate Provost,
State University of New
York-Oswego from
January, 1989 to August,
1991. Age 51.
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Robert A. Grayson Trustee Co-founder, Grayson
Grayson Associates Associates, Inc.; Adjunct
108 Loma Media Road Professor of Marketing,
Santa Barbara, CA New York University School
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,
Golden American Life Secretary and General
Insurance Company Counsel, Golden American
1475 Dunwoody Drive, Life Insurance Company;
West Chester, PA Director, Executive Vice
19380 President, Secretary and
General Counsel, Directed
Services, Inc.; Director,
Executive Vice President,
Secretary and General
Counsel, First Golden
American Life Insurance
Company of New York;
formerly, Senior Vice
President and General
Counsel, United Pacific
Life Insurance Company
(1986-1993). Age 57.
Stanley B. Seidler Trustee President, Iowa
P.O. Box 1297 Periodicals, Inc. since
3301 McKinley Avenue 1990 and President, Excell
Des Moines, IA 50321 Marketing L.C. since 1994.
Age 71.
Mary Bea Wilkinson Treasurer Senior Vice President &
Golden American Treasurer, First Golden
Insurance Company American Life Insurance
1475 Dunwoody Drive, Company of New York;
West Chester, PA Senior Vice President and
19380 Treasurer, Golden American
Life Insurance Co.; and
President and Treasurer,
Directed Services, Inc.
October 1993 to December
1996; Assistant Vice
President, CIGNA Insurance
Companies, August 1993 to
October 1993; various
positions with United
Pacific Life Insurance
Company, January 1987 to
July 1993, and was Vice
President and Controller
upon leaving. Age 43.
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Roger B. Vincent Trustee President, Springwell
Springwell Corporation; Director
Corporation Petralone, Inc.; formerly,
230 Park Avenue Managing Director Bankers
New York, NY 10169 Trust Company. Age 54.
Elizabeth J. Newell Trustee President and Chief
KRAGIE/NEWELL, Inc. Executive Officer of
2633 Fleur Drive KRAGIE/NEWELL, Inc.
Des Moines, IA 50321 Age 52.
* Interested Trustee
As of September 30, 1999, none of the Trustees directly owns shares of
the Portfolios. In addition, as of September 30, 1999, the Trustees and
Officers as a group owned Variable Contracts that entitled them to give
voting instructions with respect to less than one percent of the
outstanding shares of each Portfolio in the aggregate.
Each Trustee of the Trust who is not an interested person of the Trust
or Manager or Portfolio Manager receives a fee of $6,000 for each
Trustees' meeting attended and any expenses incurred in attending such
meetings or carrying out their responsibilities as Trustees of the Trust.
With respect to the period ended December 31, 1998, the Trust paid
Trustees' Fees aggregating $151,000. The following table shows 1998
compensation by Trustee.
<TABLE>
COMPENSATION TABLE
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
PENSION OR TOTAL
AGGREGATE RETIREMENT ESTIMATED COMPENSATION
COMPENSATION BENEFITS ACCRUED ANNUAL FROM REGISTRANT
NAME OF PERSON, FROM AS PART OF FUND BENEFITS UPON AND FUND COMPLEX
POSITION REGISTRANT EXPENSES RETIREMENT PAID TO TRUSTEES
J. Michael Earley, $24,000 N/A N/A $24,000
Trustee
R. Barbara Gitenstein, $24,750 N/A N/A $24,750
Trustee
Robert A. Grayson $24,000 N/A N/A $24,000
Trustee
Stanley B. Seidler, $24,750 N/A N/A $24,750
Trustee
Elizabeth J. Newell $24,000 N/A N/A $24,000
Trustee
Roger B. Vincent $24,000 N/A N/A $24,000
Trustee
</TABLE>
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
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Iowa"), which, in turn, is a subsidiary of ING Groep, N.V. ("ING").
DSI is registered with the Securities and Exchange Commission as an
investment adviser and a broker-dealer.
The Trust currently offers the shares of its operating Portfolios to,
among others, separate accounts of Golden American Life Insurance Company
("Golden American") to serve as the investment medium for Variable
Contracts issued by Golden American. DSI is the principal underwriter
and distributor of the Variable Contracts issued by Golden American.
Golden American is a stock life insurance company organized under the
laws of the State of Delaware. Prior to December 30, 1993, Golden
American was a Minnesota corporation. Golden American is an indirect
wholly owned subsidiary of Equitable of Iowa.
Pursuant to the Management Agreement, the Manager, subject to the
direction of the Board of Trustees, is responsible for providing all
supervisory, management, and administrative services reasonably necessary
for the operation of the Trust and its Portfolios other than the
investment advisory services performed by the Portfolio Managers. These
services include, but are not limited to, (i) coordinating for all
Portfolios, at the Manager's expense, all matters relating to the
operation of the Portfolios, including any necessary coordination among
the Portfolio Managers, Custodian, Dividend Disbursing Agent, Portfolio
Accounting Agent (including pricing and valuation of the Portfolio's
portfolios), accountants, attorneys, and other parties performing
services or operational functions for the Trust; (ii) providing the Trust
and the Portfolio, at the Manager's expense, with the services of a
sufficient number of persons competent to perform such administrative and
clerical functions as are necessary to ensure compliance with federal
securities laws and to provide effective supervision and administration
of the Trust; (iii) maintaining or supervising the maintenance by third
parties selected by the Manager of such books and records of the Trust
and the Portfolios as may be required by applicable federal or state law;
(iv) preparing or supervising the preparation by third parties selected by
the Manager of all federal, state, and local tax returns and reports of the
Trust relating to the Portfolios required by applicable law; (v) preparing
and filing and arranging for the distribution of proxy materials and periodic
reports to shareholders of the Portfolios as required by applicable law in
connection with the Portfolios; (vi) preparing and arranging for the filing
of such registration statements and other documents with the Securities and
Exchange Commission and other federal and state regulatory authorities
as may be required by applicable law in connection with the Portfolio;
(vii) taking such other action with respect to 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 continue in effect until October 24, 1999, and
from year to year thereafter, provided such continuance after August 13, 1998
is approved annually by (i) the holders of a majority of the outstanding voting
securities of the Trust or by the Board of Trustees, and (ii) a majority of the
Trustees who are not parties to such Management Agreement or "interested
persons" (as defined in the Investment Company Act of 1940 (the "1940 Act"))
of any such party. The Management Agreement, dated October 24, 1997, was
approved by shareholders at a meeting held on October 9, 1997 with respect
to the portfolios in operation on that date, 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
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on November 17, 1998. The Management Agreement may be terminated
without penalty by vote of the Trustees or the shareholders of the
Portfolio or by the Manager, on 60 days' written notice by either party
to the Management Agreement, and will terminate automatically if assigned
as that term is described in the 1940 Act.
Prior to October 24, 1997, DSI served as the manager to the Trust
pursuant to a Management Agreement dated August 13, 1996, and prior to
August 13, 1996, DSI served as manager to the Trust pursuant to a
Management Agreement dated October 1, 1993.
The Trust pays the Manager a monthly fee at the following annual rates,
based on average daily net assets of the Portfolios:
Investors Series and 1.00% of first $500 million;
All Cap Series .95% of next $250 million;
Combined: .90% of next $500 million;
.85% thereafter.
Large Cap Value 1.00% of first $500 million;
Series: .95% of next $250 million;
.90% of next $500 million;
.85% thereafter.
PORTFOLIO MANAGERS
The Trust, DSI, and Solomon Brothers Asset Management entered into a
Portfolio Management Agreement dated and effective as of February 1, 2000,
with regard to the Investors and All-Cap Portfolios. The Portfolio
Management Agreement was approved by the Trustees of the Trust at a
meeting held on June 15, 1999 and by the Portfolios' sole shareholder,
Golden American Life Insurance Company on the same date.
The Trust, DSI and Capital Guardian Trust Company entered into a
Portfolio Management Agreement dated and effective as of February 1, 2000,
with regard to the Large Cap Value Portfolios. The Portfolio Management
Agreement was approved by the Trustees of the Trust at a meeting held on
June 15, 1999 and by the Portfolios' sole shareholder, Golden American
Life Insurance Company on the same date.
Pursuant to the separate Portfolio Management Agreements, the Manager
(and not the Trust) pays the Portfolio Manager for its services a monthly
fee at annual rates which are expressed as percentages of the average
daily net assets of each Portfolio.
The Manager pays the following with respect to the Investors
Portfolio:
Investors Series: .45% of first $100 million;
.40% of next $100 million;
.35% of next $200 million;
.30% of next $350 million
.25% thereafter.
The Manager pays the following with respect to the All Cap Portfolio:
All Cap Series: .50% of first $100 million
.45% of next $100 million
.40% of next $200 million
.35% thereafter.
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The Manager pays the following with respect to the Large Cap Value
Portfolio:
Large Cap Value Series: .65% of first 150 million;
.50% of next 150 million;
.40% of next 200 million;
.35% over 500 million.
DISTRIBUTION OF TRUST SHARES
DSI serves as the Portfolios' Distributor. DSI is not obligated to
sell a specific amount of the Portfolios' shares. DSI bears all expenses
of providing distribution services including the costs of sales
presentations, mailings, advertising, and any other marketing efforts by
DSI in connection with the distribution or sale of the shares.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Portfolio are made by its Portfolio
Manager. The Portfolio Manager has investment advisory clients other
than the Portfolio. A particular security may be bought or sold by a
Portfolio Manager for clients even though it could have been bought or
sold for other clients at the same time. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in
which event each day's transactions in such security are, insofar as
possible, allocated between such clients in a manner deemed fair and
reasonable by the Portfolio Manager. Although there is no specified
formula for allocating such transactions, the various allocation methods
used by the Portfolio Manager, and the results of such allocations, are
subject to periodic review by the Trust's Manager and Board of Trustees.
There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other
clients.
The Portfolio Manager for a Portfolio may receive research services
from many broker-dealers with which the Portfolio Manager places the
Portfolio's portfolio transactions. These services, which in some
cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities, and recommendations as to the purchase and
sale of securities. Some of these services may be of value to the Portfolio
Manager and its affiliates in advising its various clients (including the
Portfolio), although not all of these services are necessarily useful and
of value in managing a Portfolio.
BROKERAGE AND RESEARCH SERVICES
The Portfolio Manager for a Portfolio places all orders for the
purchase and sale of portfolio securities, options, and futures contracts
for a Portfolio through a substantial number of brokers and dealers or
futures commission merchants. In executing transactions, the Portfolio
Manager will attempt to obtain the best execution for a Portfolio taking
into account such factors as price (including the applicable brokerage
commission or dollar spread), size of order, the nature of the market for
the security, the timing of the transaction, the reputation, experience
and financial stability of the broker-dealer involved, the quality of the
service, the difficulty of execution and operational facilities of the
firms involved, and the firm's risk in positioning a block of securities.
In transactions on stock exchanges in the United States, payments of
brokerage commissions are negotiated. In effecting purchases and sales
of portfolio securities in transactions on United States stock exchanges
for the account of the Trust, the Portfolio Manager may pay higher
commission rates than the lowest available when the Portfolio Manager
believes it is reasonable to do so in light of the value of the brokerage
and research services provided by the broker effecting the transaction,
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as described below. In the case of securities traded on some foreign
stock exchanges, brokerage commissions may be fixed and the Portfolio
Manager may be unable to negotiate commission rates for these
transactions. In the case of securities traded on the over-the-counter
markets, there is generally no stated commission, but the price includes
an undisclosed commission or markup. There is generally no stated
commission in the case of fixed income securities, which are generally
traded in the over-the-counter markets, but the price paid by the
Portfolio usually includes an undisclosed dealer commission or mark-up.
In underwritten offerings, the price paid by the Portfolio includes a
disclosed, fixed commission or discount retained by the underwriter or
dealer. Transactions on U.S. stock exchanges and other agency
transactions involve the payment by the Portfolio of negotiated brokerage
commissions. Such commissions vary among different brokers. Also, a
particular broker may charge different commissions according to such
factors as the difficulty and size of the transaction.
It has for many years been a common practice in the investment
advisory business for advisers of investment companies and other
institutional investors to receive research services from broker-dealers
which execute portfolio transactions for the clients of such advisers.
Consistent with this practice, the Portfolio Manager for a Portfolio may
receive research services from many broker-dealers with which the
Portfolio Manager places the Portfolio's portfolio transactions. These
services, which in some cases may also be purchased for cash, include
such matters as general economic and security market reviews, industry
and company reviews, evaluations of securities and recommendations as to
the purchase and sale of securities. Some of these services may be of
value to the Portfolio Manager and its affiliates in advising its various
clients (including the Portfolio), although not all of these services are
necessarily useful and of value in managing a Portfolio. The advisory
fee paid by the Portfolio to the Portfolio Manager is not reduced because
the Portfolio Manager and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Portfolio Manager may cause a Portfolio to pay a broker-dealer, which
provides "brokerage and research services" (as defined in the Act) to the
Portfolio Manager, a disclosed commission for effecting a securities
transaction for the Portfolio in excess of the commission which another
broker-dealer would have charged for effecting that transaction.
A Portfolio Manager may place orders for the purchase and sale of
exchange-listed portfolio securities with a broker-dealer that is an
affiliate of the Portfolio Manager where, in the judgment of the Portfolio
Manager, such firm will be able to obtain a price and execution at least
as favorable as other qualified brokers.
Pursuant to rules of the Securities and Exchange Commission, a broker-
dealer that is an affiliate of the Manager or a Portfolio Manager or, if
it is also a broker-dealer, the Portfolio Manager may receive and retain
compensation for effecting portfolio transactions for a Portfolio on a
national securities exchange of which the broker-dealer is a member if
the transaction is "executed" on the floor of the exchange by another
broker which is not an "associated person" of the affiliated broker-
dealer or Portfolio Manager, and if there is in effect a written contract
between the Portfolio Manager and the Trust expressly permitting the
affiliated broker-dealer or Portfolio Manager to receive and retain such
compensation. The Portfolio Management Agreements provide that each
Portfolio Manager may retain compensation on transactions effected for a
Portfolio in accordance with the terms of these rules.
Securities and Exchange Commission rules further require that
commissions paid to such an affiliated broker-dealer or Portfolio Manager
by a Portfolio on exchange transactions not exceed "usual and customary
brokerage commissions." The rules define "usual and customary"
commissions to include amounts which are "reasonable and fair compared to
the commission, fee or other remuneration received or to be received by
other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange
during a comparable period of time." The Board of Trustees has adopted
procedures for evaluating the reasonableness of
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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. Solomon Smith Barney, Inc. and Robinson-Huphrey
Company, LLC are registered broker-dealers and are affiliates of Solomon
Brothers Asset Management, Portfolio Manager to the All Cap and Investors
Portfolios. In addition, Barings Securities Corporation, Furman Selz
Securities Corp. and ING Securities are also registered broker-dealers
and each is an affiliate of Directed Services, Inc. the Manager to the
CGC Trust. 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, a Portfolio's
net asset value per share for the purpose of pricing purchase and
redemption orders is determined at or about 4:00 P.M., New York City
time, on each day the New York Stock Exchange is open for trading,
exclusive of federal holidays.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the total return of all
Portfolios in advertisements or sales literature. In the case of
Variable Contracts, performance information for the Portfolio will not be
advertised or included in sales literature unless accompanied by
comparable performance information for a separate account to which the
Portfolio offer their shares.
Quotations of average annual total return for a Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Portfolio over certain periods that will
include periods of one, five, and ten years (or, if less, up to the life
of the Portfolio), calculated pursuant to the following formula: P (1 +
T)n = ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return, n = the number of years, and ERV = the
ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). Quotations of total return may also be shown
for other periods. All total return figures reflect the deduction of a
proportional share of Portfolio expenses on an annual basis, and assume
that all dividends and distributions are reinvested when paid.
Each Portfolio may be categorized as to its market capitalization make-
up ("large cap," mid cap" or "small cap") with regard to the market
ization of the issuers whose securities it holds. A Portfolio
average or median market ization may also be cited. Certain other
statistical measurements may be used to provide measures of a Portfolio's
characteristics. Some of these statistical measures include without
limitation: median or average P/E ratios, duration and beta. Median and
average P/E ratios are measures describing the relationship between the
price of a Portfolio's various securities and their earnings per share.
Duration is a weighted-average term-to-maturity of the bond's cash flows,
the weights being present value of each cash flow as a percentage of the
bond's full price.
Beta is a historical measure of a portfolio's market risk; a Beta of
1.10 indicates that the portfolio's returns tended to be 10% higher
(lower) than the market return during periods in which market returns
were positive (negative).
Performance information for a Portfolio may be compared, in
advertisements, sales literature, and reports to shareholders to: (i) the
Standard & Poor's 500 Stock Index ("S&P 500"), the Dow Jones Industrial
Average ("DJIA"), the Lehman Brothers Government Bond Index, the Donoghue
Money Market Institutional Averages, the Lehman Brothers Government
Corporate Index, the
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Solomon High Yield Index, or other indexes that measure performance of a
pertinent group of securities, (ii) other groups of mutual funds tracked
by Lipper Analytical Services, Inc., a widely used independent research
firm which ranks mutual funds by overall performance, investment objectives,
and assets, or tracked by other services, companies, publications, or persons
who rank mutual funds on overall performance or other criteria; and (iii)
the Consumer Price Index (measure for inflation) to assess the real rate of
return from an investment in the Portfolio. Unmanaged indexes may assume the
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Reports and promotional literature may also contain other information
including (i) the ranking of any Portfolio derived from rankings of
mutual funds or other investment products tracked by Lipper Analytical
Services, Inc. or by other rating services, companies, publications, or
other persons who rank mutual funds or other investment products on
overall performance or other criteria, and (ii) the effect of tax
deferred compounding on a Portfolio's investment returns, or returns in
general, which may by illustrated by graphs, charts, or otherwise, and
which may include a comparison, at various points in time, of the return
from an investment in a Portfolio (or returns in general) on a tax-
deferred basis (assuming one or more tax rates) with the return on a
taxable basis.
In addition, reports and promotional literature may contain
information concerning the Manager, the Portfolio Managers, or affiliates
of the Trust, the Manager, or the Portfolio Managers, including (i)
performance rankings of other mutual funds managed by a Portfolio
Manager, or the individuals employed by a Portfolio Manager who exercise
responsibility for the day-to-day management of a Portfolio, including
rankings of mutual funds published by Morningstar, Inc., Value Line
Mutual Fund Survey, or other rating services, companies, publications, or
other persons who rank mutual funds or other investment products on
overall performance or other criteria; (ii) lists of clients, the number
of clients, or assets under management; and (iii) information regarding
services rendered by the Manager to the Trust, including information
related to the selection and monitoring of the Portfolio Managers.
Reports and promotional literature may also contain a description of the
type of investor for whom it could be suggested that a Portfolio is
intended, based upon each Portfolio's investment objectives.
In the case of Variable Contracts, quotations of yield or total return
for a Portfolio will not take into account charges and deductions against
any Separate Accounts to which the Portfolio shares are sold or charges
and deductions against the life insurance policies or annuity contracts
issued by Golden American, although comparable performance information
for the Separate Account will take such charges into account.
Performance information for any Portfolio reflects only the performance
of a hypothetical investment in the Portfolio during the particular time
period on which the calculations are based. Performance information
should be considered in light of the Portfolio's investment objective or
objectives and investment policies, the characteristics and quality of
the portfolios, and the market conditions during the given time period,
and should not be considered as a representation of what may be achieved
in the future.
TAXES
Shares of the Portfolios are offered only to the Separate Accounts
that fund Variable Contracts. See the respective prospectuses for the
Variable Contracts for a discussion of the special taxation of insurance
companies with respect to the Separate Accounts and of the Variable
Contracts and the holders thereof.
Each Portfolio has qualified, and expects to continue to qualify, for
treatment as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to qualify for
that treatment, a Portfolio must distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income
(consisting generally of net investment
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income, net short-term 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 gains, then each Portfolio should have little or
no income taxable to it under the Code.
Each Portfolio must, and intends to also comply with, the
diversification requirements imposed by section 817(h) of the Code and
the regulations thereunder. These requirements, which are in addition to
the diversification requirements mentioned above, place certain
limitations on the proportion of each Portfolio's assets that may be
represented by any single investment (which includes all securities of
the same issuer). For purposes of section 817(h), all securities of the
same issuer, all interests in the same real property project, and all
interest in the same commodity are treated as a single investment. In
addition, each U.S. Government agency or instrumentality is treated as a
separate issuer, while the securities of a particular foreign government
and its agencies, instrumentalities and political subdivisions all will
be considered securities issued by the same issuer.
If a Portfolio fails to qualify as a regulated investment company, the
Portfolio will be subject to federal, and possibly state, corporate taxes
on its taxable income and gains (without any deduction for its
distributions to its shareholders) and distributions to its shareholders
will constitute ordinary income to the extent of such Portfolio's available
earnings and profits. Owners of Variable Contracts which have invested in
such a Portfolio might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral. In addition,
if a Portfolio failed to comply with the diversification requirements of
section 817(h) of the Code and the regulations thereunder, owners of Variable
Contracts which have invested in the Portfolio could be taxed on the
investment earnings under their contracts and thereby lose the benefit of tax
deferral. For additional information concerning the consequences of
failure to meet the requirements of section 817(h), see the prospectuses
for the Variable Contracts.
Generally, a RIC must distribute substantially all of its ordinary
income and gains in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. However,
the excise tax does not apply to certain Portfolios whose only
shareholders are segregated asset accounts of life insurance companies
held in connection with Variable Contracts. To avoid the excise tax,
each Portfolios that does not qualify for this exemption intends to make
its distributions in accordance with the calendar year distribution
requirement.
The use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts and entering into forward
contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the income received
in connection therewith by the Portfolios. Income from the disposition of
foreign currencies (except certain gains therefrom that may be excluded
by future regulations); and income from transactions in options, futures,
and forward contracts derived by a Portfolio with respect to its business
of investing in securities or foreign currencies, are expected to qualify
as permissible income under the Income Requirement.
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Foreign Investments -- Portfolios investing in foreign securities or
currencies include may be required to pay withholding, income or other
taxes to foreign governments or U.S. possession. Foreign tax withholding
from dividends and interest, if any, is generally at a rate between 10%
and 35%. The investment yield of any Portfolio that invests in foreign
securities or currencies is reduced by these foreign taxes. Owners of
Variable Contracts investing in such Portfolios bear the cost of any
foreign taxes but will not be able to claim a foreign tax credit or
deduction for these foreign taxes. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign
taxes, however, and foreign countries generally do not impose taxes on
gains in respect of investments by foreign investors.
The Portfolios listed above may invest in securities of "passive
foreign investment companies" ("PFICs"). A PFIC is a foreign corporation
that, in general, meets either of the following tests: (1) at least 75%
of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. A
Portfolio investing in securities of PFICs may be subject to U.S. Federal
income taxes and interest charges, which would reduce the investment
yield of a Portfolio making such investments. Owners of Variable
Contracts investing in such Portfolios would bear the cost of these taxes
and interest charges. In certain cases, a Portfolio may be eligible to
make certain elections with respect to securities of PFICs which could
reduce taxes and interest charges payable by the Portfolio. However, a
Portfolio's intention to qualify annually as a regulated investment
company may limit a Portfolio's elections with respect to PFIC securities
and no assurance can be given that such elections can or will be made.
The foregoing is only a general summary of some of the important
Federal income tax considerations generally affecting the Portfolios and
their shareholders. No attempt is made to present a complete explanation
of the Federal tax treatment of each Portfolio's activities, and this
discussion and the discussion in the prospectuses and/or statements of
additional information for the Variable Contracts are not intended as a
substitute for careful tax planning. Accordingly, potential investors
are urged to consult their own tax advisors for more detailed information
and for information regarding any state, local, or foreign taxes
applicable to the Variable Contracts and the holders thereof.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust dated August 3, 1988, an open-end
management investment company and currently consists of twenty-four
Portfolios. The three Portfolios that are discussed in this Statement
of Additional Information and accompanying prospectus and the
twenty-four Portfolios that are described in additional prospectuses
and statements of additional information are operational. The
capitalization of the Trust consists of an unlimited number of shares
of beneficial interest with a par value of $0.001 each. The Board
of Trustees may establish additional Portfolios (with different
investment objectives and fundamental policies) at any time in
the future. Establishment and offering of additional Portfolios
will not alter the rights of the Trust's shareholders, the Separate
Accounts. When issued in accordance with the terms of the Agreement
and Declaration of Trust, shares are fully paid, redeemable, freely
transferable, and non-assessable by the Trust. Shares do not have
preemptive rights or subscription rights. In liquidation of a
Portfolio of the Trust, each shareholder is entitled to receive
his or her pro rata share of the net assets of that Portfolio.
The All-Cap Portfolio is non-diversified. The Investors and
Large-Cap Value Portfolios are diversified.
On January 31, 1992, the name of the Trust was changed to The GCG
Trust. Prior to that change, the name of the Trust was The Specialty
Managers Trust.
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VOTING RIGHTS
Shareholders of the 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 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
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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, 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, which includes all the operational Portfolios of the
GCG Trust. 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, another
portfolio offered by the GCG Trust, or any successor to such Portfolio.
CUSTODIAN AND OTHER SERVICE PROVIDERS
The Custodian for the Portfolios is Bank of New York, 1 Wall Street,
New York, New York 10286. First Data Investors Services Group of First
Data Corporation, 3200 Horizon Dr., P.O. Box 61503, King of Prussia, PA
19406-0903, provides administrative and portfolio accounting services for
all Portfolio.
INDEPENDENT AUDITORS
Ernst & Young LLP, Two Commerce Square, Suite 400, 2001 Market
Street, Philadelphia, PA 19103, serves as independent auditors for
the Trust.
COUNSEL
Sutherland Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW,
Washington, D.C. 20004-2440 serves as counsel to the Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's Registration
Statement filed with the Securities and Exchange Commission under the
Securities Act of 1933 with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
The Registration Statement, including the exhibits filed therewith,
may be examined at the offices of the Securities and Exchange Commission
in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents
of any contract or other documents referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such
contract or other documents filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
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FINANCIAL STATEMENTS
The All Cap, Large Cap Value and Investors Portfolios are new series
to the GCG Trust. No financial statements exist for any of these portfolios
at this time.
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APPENDIX 1: DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc.'s ("Moody's")
description of its bond ratings:
Aaa - judged to be the best quality; they carry the smallest degree
of investment risk. Aa - judged to be of high quality by all standards;
together with the Aaa group, they comprise what are generally known as
high grade bonds. A - possess many favorable investment attributes and
are to be considered as "upper medium grade obligations." Baa -
considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured; interest payments and principal security
appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of
time. Ba - judged to have speculative elements; their future cannot be
considered as well assured. B - generally lack characteristics of the
desirable investment. Caa - are of poor standing; such issues may be in
default or there may be present elements of danger with respect to
principal or interest. Ca - speculative in a high degree; often in
default. C - lowest rate class of bonds; regarded as having extremely
poor prospects.
Moody's also applies numerical indicators 1, 2, and 3 to rating
categories. The modifier 1 indicates that the security is in the higher
end of its rating category; 2 indicates a mid-range ranking; and 3
indicates a ranking toward the lower end of the category.
Excerpts from Standard & Poor's Rating Group ("S&P") description of
its bond ratings:
AAA - highest grade obligations; capacity to pay interest and repay
principal is extremely strong. AA - also qualify as high grade
obligations; a very strong capacity to pay interest and repay principal
and differs from AAA issues only in small degree. A - regarded as upper
medium grade; they have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories. BBB - regarded as having an adequate capacity to pay
interest and repay principal; whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity than in
higher rated categories - this group is the lowest which qualifies for
commercial bank investment. BB, B, CCC, CC, C- predominately speculative
with respect to capacity to pay interest and repay principal in
accordance with terms of the obligation: BB indicates the lowest degree
of speculation and C the highest.
S&P applies indicators "+", no character, and "-" to its rating
categories. The indicators show relative standing within the major
rating categories.
DESCRIPTION OF MOODY'S RATINGS OF NOTES AND VARIABLE RATE DEMAND
INSTRUMENTS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term
ratings on issues with demand features (variable rate demand obligations)
are differentiated by the use of the VMIG symbol to reflect such
characteristics as payment upon periodic demand rather than fixed
maturity dates and payments relying on external liquidity.
MIB 1/VMIG 1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection are
ample although not as large as in the preceding group.
A-1
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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.
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.
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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."
A-3
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